Sales Compensation Plans: Step 7, Commission & Bonus Structure
Guest Article for the EcSELL Institute by Bob Malandruccolo
The seventh step is determining whether the plan should be based on Commission or Bonus or both. These are some common principles for a commission and a bonus plan.
A commission plan is paid based on a percentage of sales results such as 2% of sales or a payment per unit such as $.05 per unit sold. Some common considerations: If you cannot set goals at the sales rep level, a commission plan is usually appropriate. If territories are relatively balanced, meaning all territories have similar opportunity to earn, commission is usually appropriate. If you have a high number of customers, such as in the thousands, and a short selling cycle, such as less than 90 days, commission is usually appropriate.
On the other side, a bonus plan is paid as a percentage of a sales quota or a specific objective. Some common considerations of a bonus plan: If you can establish goals at the sales rep level, bonus is usually appropriate. If territories are not balanced, a bonus is more appropriate compared to a commission plan. If there is less number of customers, such as less than a hundred, and the selling cycle is long, such as greater than 90 days, a bonus is usually appropriate.
I have a client that struggled with an existing bonus. The issue about the plan was that it was not fair for sales reps that had large books of business. We developed a bonus up to 100% quota and a commission plan above 100% quota. In this case, overachievement allowed a closer correlation between pay and performance. That is an example of a combination of commission and bonus.
If you select a bonus, this describes the three different types of bonus plans.
You could use a standard bonus. That means that every sales rep in the same role would have the same sales goal or quota. This would be appropriate if all assignments or territories have similar opportunity to earn at similar levels.
You could use individual quotas if assignments or territories are different in terms of earning levels.
You could use Management by Objectives (MBOs). MBOs would be used for long sales cycles and augment other results-based measures. The caution around MBOs is that they could turn into entitlements. One of my clients used MBOs to provide pay for sales reps that were not achieving their goals. If you are using MBOs, follow S.M.A.R.T. guidelines. Make sure that they are Specific, Measurable, Attainable, Realistic and Timely.
The first step is defining the Sales Compensation Philosophy. It is developed by the Steering Committee and the philosophy guides the Design Team during the design process.
Step 2 is determining which Eligible Roles are included for sales compensation treatment.
Step 3 is selecting the Total Target Pay Level for each sales role. This represents the mid-point pay level for target performance.
Step 4 is determining what the Pay Mix should be for each sales role. Pay mix is the ratio between base salary and incentive pay at target performance.
Step 5 is choosing the amount of Upside of incentive pay for high performers.
Step 6 is selecting Weights & Measures that are linked to incentives for the plan.
Step 7 is determining whether the plan should be based on Commission or Bonus or both.
Watch for Steps 8-10 in up coming Sales Leadership Blog posts.
Step 8 is defining the Structure Details of the plan including threshold and excellence levels and the payout curve.
Step 9 is choosing the Frequency of Payouts for each measure.
And finally, Step 10 is determining the Administrative Details included in the plan.
Learn more about the Compensation/Recognition/Rewards Pillar
About EcSELL Institute
We provide professional development resources and educational events specific to sales management. The EcSELL Institute is an exclusive membership community of Sales Managers who share best practices, research, and fact-based information on a perpetual basis in order to help each other find new and better ways to maximize the performance of their teams. All EcSELL Institute members have a commonality; improve how they lead, coach, and manage sales teams, hence driving more revenue for their company.
Bob Malandruccolo is the founder and principal owner of Sales Force Effectiveness Consulting. With over twenty-five years of practical business, management and consulting experience in sales and marketing, Bob has worked with a broad range of clients from Fortune 100 corporations to small, closely-held firms with special emphasis on sales and marketing process implementation. He has worked closely with his clients through hundreds of successful engagements and implementations across multiple industries (manufacturing, engineering, distribution, software, healthcare insurance, medical products, healthcare, automotive, telecommunications, retail, information handling, media).