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.