Traditionally, a salesperson’s remuneration consists of a base salary and variable commission for an obvious reason: sales commission supports sales behavior; motivates your sales team to work hard and go the extra mile (it literally celebrates the hard work done). Besides these immediate positive effects, having a sales commission plan helps you to retain the sales team, therefore saving you money. This makes it a top priority.
Of course, there are various ratios and models of sales commission plans, and they all serve their purpose. Below, you’ll find a basic division based on your business type, the usual mistakes to avoid, and the best practices to follow, when creating a sales commission plan.
What is really important but often neglected when creating a sales commission plan?
If you read the introduction, you now know why the biggest mistake would be not to have a sales commission plan at all. So, as you start re/creating one, make sure you make it:
- Easy to follow
Don’t go for too many KPIs - this will result in confusing your sales representatives. Or they’ll focus on just a few of them.
Examples of KPIs you can measure:
- Revenue from new business
- Upsell - Revenue from existing customers
- Deals won Vs lost
- Churn rate
- Easy to calculate
The math should be easy. Seeing the exact amount of money keeps your team motivated, both positively and negatively.
Set it up in a way that sees 70% of your sales organization achieve it. Your sales team needs to know it’s possible, so they aren’t demotivated. While for example, Microsoft has been around for many years, setting up sales targets is, compared to startups, a piece of cake. On the other hand, unrealistic sales commission plans are usually found in young companies lacking the experience or, let’s say, the base to set it up. Sales plans need to be evaluated often - is it the markets’ or the sales representatives' fault if it is not fulfilled?
How to set up a sales commission plan for your sales team
Once you hire, we strongly recommend not making the sales representatives’ salary a 100% base. Rather look at what the industry benchmark is. In SaaS, salespeople usually get between 50-100% of their fix on commission, based on the nature and belligerence of the business. The common ratio (fix:bonus) in the EU is 2:1, for US 1:1. Make them want to achieve the numbers/money.
Best practices to follow:
When setting up your sales commission plan, you have to consider many inputs to define the right structure:
- What is the company goal
Did you hire salespeople to make acquisitions, retention, or upsells? You always need to set and evaluate clear KPIs. E.g, your sales representatives’ goals are acquisitions. Firstly, you give them the revenue amount they’re supposed to bring. Secondly, you give them enough space to work on it. Don’t assign them excessive ad hoc tasks. If, for example, you want them to take care of current customers, too, and it takes up a big portion of their time, it should be rewarded.
- Stick to the KPI
When the KPI is to close a deal, that logically stems from creating an opportunity first, you still can’t reward the sole opportunity creation if they didn’t close it in the end.
- What is the sales cycle
Quick sales (14-day sales cycle, a high volume of inbounds) could let you make your team work mostly on commission. However, it’d be foolish to try to impose the same structure to targets of salespeople doing enterprise sales, where the sales cycle can take a year or more. They won’t be waiting. There are very few businesses that can pull this full-commission setup off, so don’t really consider it an option for your company.
- Whether you’re setting it up for juniors or seniors
This goes hand in hand with the kind of sales they’re supposed to do. Pick up the phone and schedule a meeting for senior colleagues? Or pick up the phone and close several months later, making complex A-Z deals? This reflects on the type of KPIs(number of meetings scheduled VS amount of revenue brought) and on both their base and variable salary.
- Setting up commission plans for the entire sales organization
The company goal should be broken down among the entire team. The sales supervisor should have a target, just like your BDRs or AEs.
If the company goal is 40k EUR, for the team it means completing 5 average-sized deals, 10 opportunities, and 40 sales qualified leads. The BDR’s responsibility is to create those 40 SQLs, the Account Executive will need to turn them into 10 opportunities and generate the revenue further, with the help of the sales leader. Their plans are complementary, they work on the company goal together, all are motivated, and pull together.
The math of setting a sales commission plan up:
You need to consider your own country, industry, and position standards, but we’ll project this example into quite a common scenario; a 2/1 ratio of base to variable salary, in a Saas business. In setting up a sales target, a good ratio is between 4 to 6 times more than on-target earnings.
If you’re paying your sales representatives 3.000EUR in the base and let them earn about 1.500EUR in commission, yearly they make roughly 54k EUR. The yearly target should be set somewhere between 216.000EUR (54.000 x 4) to 324.000EUR (54.000 x 6).
You can also introduce specific rules, such as that the commission is paid after reaching a minimum of 60% of the sales target. There should be no cap on the commission once the target is fulfilled.
Think about what happens once the sales representatives are about to go over their target: they simply won’t go beyond what they’re expected to deliver. If they did, next year they’d have to cope with a higher target. To sum it up: For free, they’d make their job more difficult. If they deliver their target three months before the term’s end, they’ll lose motivation and end up having a 3-month “vacation”.
Instead, after reaching 100% of the target, the commission should be coming in even easier.
Manage your sales commission plan after it’s set.
Test and evaluate what type of sales commission model works best for you. We run into an interesting set of commission models here. Don’t be afraid to change your model if it doesn’t work. You should evaluate and change/increase it every year, either way. Young companies will probably experience several rounds of fine-tuning, and that’s alright.
The plan should be evaluated on a monthly basis, and to save you some work, paid off quarterly. Should you have a quick-close business or the salary consists mostly of commission, then you need to pay the commission monthly.
Check how to interpret the sales results and how to evaluate them in this article.
Wrapping it up:
If this is your first time setting up a sales commission plan, brace yourself for a lot of fine-tuning. That’s natural. But give as much time and effort as possible in setting them up realistic. Impossible to reach targets will spread a very toxic mood among your sales team members. The bottom line? Stick to best practices and don’t forget to re-evaluate from time to time.