4 Types of Sales and Trading Compensation Plans You Should Know

Base pay, bonus structure, commission rate, accelerators, multipliers - the world of sales compensation plans can be a confusing place. Confusing not only for sales leaders and executives, who have to figure out an effective sales compensation plan to motivate their sales teams, but for the sales reps, too; after all, sales professionals need (and deserve) to know exactly how they're getting paid and why.

That's why we sat down with AJ Bruno. As the CEO and founder of QuotaPath, a leading sales compensation plan SaaS company, AJ's the go-to guy when it comes to all things sales compensation. He outlined the different sales compensation plan examples, as well as exactly how his software helps rally sales reps around company goals and revenue targets by providing extensive sales compensation plans for multiple industries.

What is a sales compensation plan?

Basically, sales compensation is how much a sales rep is compensated - or paid - per year. Although when you take a closer look, you soon realize there's nothing basic about it.

You see, a sales compensation plan isn't just about base salary, but includes the variable pay based on sales performance on top. And here's where it gets complicated; how do you accurately measure 'sales performance' and fairly compensate it?

After all, as a business owner or financial officer, you need to take several key considerations into account:

• Attracting and retaining talent
  You need a sales compensation plan that will appeal to talented sales reps (who may be in demand elsewhere). Plus, you want them to feel their hard work is paying off and continue hitting their sales quota and selling products.

• Fiscal responsibility
  In short, you can't simply woo a sales team with unrealistic sales compensation plans; you need to be able to actually afford to pay it when payday arrives. Cash flow is key.

• Business goals alignment
  Your sales compensation plans have to reflect your larger business objectives and reward the achievements of sales reps which forward that goal.

• Understandability
  Everyone in the organization, not just the sales leaders or the sales reps themselves, needs to understand exactly how their sales compensation plan works. That way, you can avoid difficult objections and your sales team can organize their personal finances more easily.

And this list barely scratches the surface. So, you can see why crafting a great sales compensation plan can give senior roles a headache.

For now, let's explore some of the most common sales compensation plans.

Straight base salary compensation plan

This sales compensation plan does exactly what you'd expect: it pays a sales person a fixed base salary regardless of their sales performance. A sales team on this type of plan will still have team targets and a sales quota, but their total earnings won't change if they fail to meet them (or, indeed, if they exceed them).

The benefits of this sales compensation plan

As you can imagine, a plan of this kind provides a certain level of stability and predictability, but has its downsides, too.

• Stability for sales reps
  With this compensation structure, sales reps don't have to worry about making ends meet and can count on a reliable income. This can be an enormous relief, especially for young sales reps and new hires.

• Focus on customer relationships
  Without the pressure to make an immediate sale, reps tend to spend more time building solid customer relationships, which can often result in higher customer retention rates and larger deals.

The drawbacks

• Motivating reps
  If a sales rep knows exactly how much they're going to make regardless of their performance, what's their incentive to reach organizational goals? They'll make as much money either way, so overall sales may take a hit.

• Employee retention
  Likewise, if other industries or companies are offering higher salaries or more sales compensation of a more competitive nature, a sales rep may be tempted to leave. With that in mind, a base salary alone would have to be very high to retain talent.

Straight commission sales compensation plan

Unlike a straight base salary compensation plan, this compensation structure offers no fixed base salary. A sales rep's income will be tied solely from the total sales they make on the trading floor.

You'll often see this type of structure in fast-paced sales roles with a short sales cycle.

The benefits of a commission-based compensation plan

With its emphasis on individual performance and quick sales, comp plans like these have several key benefits.

• Strong incentive
  When how much sales reps earn depends directly on how much they sell, they'll naturally be motivated to sell more. They'll want to find leads and close deals quickly and efficiently, which is great when it comes to reaching company goals.

• Cost control
  Such plans are also simpler for businesses, too. Say the commission rate is 20%, then it's super simple to calculate sales compensation against revenue.

The drawbacks

• Short-term focus
  When your sales team's focus is entirely on clinching that next sale, they could easily lose sight of long-term company goals and customer relationships. After all, reps don't necessarily get paid to retain customers of build the brand's reputation.

• High turnover rate
  In these types of high-pressure sales roles, employee turnover rates are through the roof. That's because many sales people who struggle to reach pre set targets simply can't compete and opt for more stable incomes.

Salary plus commission sales compensation plan

Seen as a 'balanced' sales compensation plan, combining base salary with a commission rate (sometimes called a 'sales performance incentive fund') allows a sales representative to strive for specific targets without worrying about not receiving a fixed amount.

The benefits for sales reps and companies

Generally speaking, a 'salary plus commission' structure is a great way to attract talent (with a base salary) while boosting a sales team's performance.

• Reduced income volatility
  Sales reps often favor this model as it rewards hard work without punishing mistakes or missed opportunities. They know the absolute minimum their total compensation will amount to (their base salary) and have the option to strive for more.

• Attracts talent
  Let's face it, who wouldn't be attracted to this compensation plan? Most sales professionals will like the security of a base salary and appreciate the chance to make extra money through commissions.

The drawbacks

• Complex administration
  It can take time to calculate base salary plus commission (especially with a tiered commission structure) on an individual basis, driving up administration costs.

• Higher fixed costs
  From an owner's perspective, this sales compensation plan means higher fixed costs due to base pay. So, even if you have a bad month in terms of total sales, you'll still be paying employees the same amount.

Salary plus bonus sales compensation plan

Very similar to the last sales compensation structure is a 'salary plus bonus compensation plan'. The key difference, however, is between 'bonus' and 'commission': whereas a commission rate represents a percentage of each sale, a bonus is a lump sum paid, usually at the end of the year, for reaching specific targets or quotas.

The benefits

• Stability with incentive
  Just like the 'salary plus commission' model, a 'salary plus bonus' sales compensation plan rewards sales and trading success while providing the security of a base salary - even though the variable bonus is not related to each sale.

• Goal alignment
  When businesses are literally paying sales reps to meet company goals, aligning the interests of sales people with business objectives becomes much easier.

The drawbacks

• Payout uncertainty
  The problem with compensating based on targets is that targets are supposed to be challenging. Sometimes too challenging. If a managing director chooses to establish quota plans that reps can't achieve, the bonus effectively becomes void.

• Administrative complexities
  Calculating bonuses on top of a base salary can be a time-consuming task, adding precious dollars to those administrative expenses.

Choosing between different sales compensation plans

The truth is, there's no one sales compensation plan that works for everyone, and this list is by no means comprehensive. Investment bankers will have different requirements to trading associates, and successful sales compensation plan will reflect specific needs and industry standards.

And once you've chosen a sales compensation model, fulfilling it can be highly complicated. That's why so many companies are turning to sales compensation plan software like QuotaPath - this is technology which breaks down sales compensation plans in a super easy-to-follow format and helps sales professionals track exactly how much they're making.

If you want to bring out the best in your sales team, you need a lead generation and sales development plan you can rely on. Leadium helps dozens of companies drive revenue and streamline their sales pipelines every year - why not reach out and see what Leadium can do for you?

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