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Commission Versus Bonus: Which Way Do You Go?

183:906269490 • July 12, 2022

Things to consider when planning variable pay.

When putting together a compensation package for your new salesperson, you generally want a mix of base pay and variable pay. Obviously, you can also opt for a 100% base pay or 100% variable pay plan. However, the choice should be made with caution as it will severely limit your access to talent (and their expectations). 


Focusing on the majority of sales functions and the significant component of the total compensation, which is variable pay, there really are only two types of sales plans to pick - a commission plan or a bonus plan. 


When deciding on the type of variable plan to select, you need to first look at your future goals and present situation as a company. A couple of questions to get you started are:


Are you an established company with a history of financial performance? Have you had sales quotas in the past? Were they validated by customers or prior sales employees? Are you currently capable of paying a salesperson at labor market levels? Are you a growing company looking to aggressively scale by motivating your salesperson through accelerated goals?


Here are the differences between Commission Rate Plans and Bonus Plans:


Commission Plans


What is it? A rate of pay against the financial objective established under your sales plan. It’s usually a percentage of revenue, bookings, or margin the salesperson earns for each unity of financial measure selected. Examples include 3% on actual revenue or 5% on projected gross profit.


When does it work best? When you know the amount of money your company can pay per unit sold, and you want to clearly align compensation to the sales person’s direct performance.


When is it less effective? When there is little advantage to performance past the point where the quota has been reached.


Bonus Plans


What is it? A plan that establishes an amount of pay associated with delivering on an objective or quota. This is a fixed amount of pay regardless of the size of the goal.


When does it work best? When you have an established business with clear expectations on performance levels and can compensate your salesperson based on the current labor market levels.


When is it less effective? When you don’t have history to establish realistic quotas or if you can’t afford the same levels of variable pay as your competitors.


Deciding on a variable pay option is all part of the overall plan mechanics of building a sales compensation program. 


To get a more comprehensive overview of the process of preparing to hire a salesperson, check out my book on the subject here. And be sure to check back as we continue to expand on this topic in the blog.

By 183:906269490 December 16, 2024
In my first Best Practices post, I talked about the importance of knowing what you can pay for your sales roles before worrying about what the market is saying. In my second post, I covered ways to utilize culture in a sales organization . The following Best Practice in sales compensation involves job content. Job content plays several roles in your compensation plan: 1. It gives your salesperson a guide to what success looks like in their role. 2. It gives you a guide to evaluating the performance of your salesperson. 3. It rationalizes differing levels of variable pay outcomes for varying performance levels. 4. It provides your organization with the structure needed to comply with any reporting, pay transparency, or other regulations. Hopefully, that’s enough to convince you of the importance of taking the time to define your new roles and revisit the definition of your existing roles. Now, here’s how job content actually does those things. Defining the job The first role of job content is to define the who, what, where, when, and how of the function. It can be tempting to borrow a job description from LinkedIn, Glassdoor, etc., with the assumption that the content will be similar enough to fit your needs. However, the way a specific role performs is unique to the organization it’s acting in, which is why it’s important to take the time to define the job from scratch. Here are the questions you should be answering in your job content: What does the person need to do on a daily basis? How does this individual pursue sales, and in what segment or with what type of customer? Where should they focus their time and attention when building a pipeline of deals? Who should they be interfacing with, both internally and externally? When do they engage with customers and/or prospects? What portion of the sales process do they own or support? How do they interface with and influence decision-makers? Now, even though I said to write your job description from scratch, that doesn’t mean this is the time or place to get too creative. Job seekers are going to be searching by job title or category, so it’s essential to stick to the common vernacular regarding industry jargon and expected job titles. Job Description: A Byproduct of Job Content Another positive outcome of creating job content for your roles is that you will have generated much of the information needed for a job description if or when you’re ready to hire. Information such as: Job duties and responsibilities that clarify the type of work and engagement with customers. Qualifications/Requirements that are both minimum and desired. Those include education, knowledge, skills, capabilities, and competencies. Performance measures of the role include items like achieving sales targets, new logo acquisition, development of pipeline, accuracy in forecasting, etc. With all of this information on file, it will not only be easier for you to prepare to hire for the roles you want, but it will also be easier to evaluate existing employees in those roles. Beyond all of that, you’ll be well prepared for competitive market research and establishing your variable pay program. I’ll be posting more best practices on the blog, but if you’re anxious to dive deeper into the subject of sales compensation, you can grab a copy of my book Starting Simple: Sales Compensation and consider working through the companion Workbook to build a sales compensation plan from scratch.
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