How to Optimize Sales Using Commission-Based Pay

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A major challenge for businesses expanding rapidly (e.g., startups) is fairly compensating employees when income has yet to stabilize.

Sometimes these companies pay their sales employees a commission only, in hopes they’ll excel at their jobs and continue to close deals while raking in new clients.

From a leadership perspective, commission-based pay makes sense in terms of driving sales while boosting the company’s revenue. However, many people won’t be attracted to a position that pays a commission only, perceiving it to be too risky. Those that do take the challenge may find themselves eventually (or quickly) discouraged.

Regardless, your company’s future depends on how well your employees meet their sales goals, so what’s the best compensation plan for optimal employee performance?

Designing a compensation plan for top sales performance: Meaning, motivation, and measurement

An effective sales compensation strategy should pair a competitive salary with a commission schedule. Pairing fair base pay with commission ensures your employees can focus on work without worrying about meeting basic living expenses. At the same time, however, the commission provides strong motivation for the employee to meet and even exceed sales goals.

A meaningful compensation structure will reflect the challenges of the job. In other words, the commission will be appropriate for the difficulty of each sale. In addition, your sales employees should view the commission as a reward worth working toward.

Finally, any good compensation plan will include a way for success to be measured objectively.

Balancing salary and commission-based pay is key to an effective compensation plan. Company executives in Sales, Operations, and HR should work together to develop a strategy aligned with your short- and long-term business goals, pay philosophy, and cash resources.

Writing up your sales and compensation plan

Your discussions with team members may have yielded a clearly defined compensation plan, but you still need to get the policies on paper and distributed to your sales team.

Your written policy should include:

  • The sales goals for the entire team for the time period in question (e.g., per month, per quarter, per year)
  • The significance of these goals to the company
  • The sales goals per employee and how success will be tracked
  • The system for measuring individual performance
  • A description of the performance review process
  • How salary and commissions will be paid and the formulas used to calculate bonuses
  • Company objectives, performance metrics, and payout management

Best practices for follow up

Once your compensation plan is on paper, be sure and follow your company policy regarding the approval process. Does your Board of Directors need to weigh in? How about an attorney?

New hires should be provided a copy of the plan during the onboarding process, with the employee’s manager explaining the particulars.

If the new plan pays less in salary than your current employees earn, you may want to consider “grandfathering” these employees in, to ensure the smoothest transition to the new payment structure.

Review the results of your plan on a regular basis and use the data to make improvements as needed. Ultimately you’ll want to work with your sales team to create a plan that gets your company the best results while maintaining employee satisfaction.

Interested in learning more? Read “Salary or Commission? Making the Case for Sales Compensation Planning.”

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