Whereas commission-only or straight sales commission plans are a traditional way to compensate sales people, a base salary plus commission plan dominates with most sales organizations these days.
The commission portion of every compensation plan shapes up a little differently.
The combination of a base salary with commissions is the most common sales compensation structure. But every sales organization that uses this structure finds its own unique blend of salary to commission, usually somewhere around 50% salary and 50% commission.
The commission portion of every compensation plan shapes up a little differently too. A company has the option of awarding a commission on every sale, determining commission based on revenue or profit, or even basing commission rates on quota attainment.
How an organization approaches its compensation structure and commission distribution entirely depends on the company, its industry, size, location, and several other factors. If you’re looking to evaluate or even reevaluate how your company pays the sales team, we’ve provided an overview of how base salary plus commission plans could work (or not work) for you and your team. (For more info on how to structure your commission plan overall, visit our Complete Guide to Sales Commissions.)
What Is Salary Plus Commission?
When sales organizations opt to pay a combination of salary plus commission, it means salespeople earn a steady, yearly, predetermined salary but can add to that by earning a commission on their sales. In many cases, the salary will make up more than half of the employee’s on-target earnings (the total amount a commission-eligible employee can earn if they meet their quota) while potential commission earnings make up the rest.
As an example, a sales compensation plan arranges for salary to compose 60% of an employee’s on-target earnings and commission earnings, 40%. In that case, a salesperson with on-target earnings of $60,000 per year will receive an annual salary of $36,000 and the potential to earn $24,000 in commission with an average sales cadence.
Where to Start with Salary Plus Commission?
As with any sales commission plan, the first place to start is by determining what a good salesperson should be earning in total. Several details factor into this, including industry, territory, and what competitors are paying.
Once that number has been calculated, the next step is determining how much of those on-target earnings should be base salary and how much should be potential commissions. We generally see organizations arrange plans so that salary makes up at least 50% of the total to provide some security for salespeople.
Benefits of Salary Plus Commission
- Attract Better Talent: The promise of guaranteed earnings looks a lot more appealing than commission-only options. Being able to advertise a base salary will definitely widen the pool of candidates who apply for a position and give you the opportunity to choose the best individuals for the job.
- Provide Security for Employees: When an employee doesn’t have to worry whether or not they’ll earn a paycheck, it provides a sense of security they may not get elsewhere. It also gives them the freedom to focus on more important things, like selling products and earning more money.
- Drive Sales and Good Sales Tactics: While commissions incentivize sales and encourage salespeople to close more deals, the security of a base salary allows them to carry out those sales without hounding prospects or adopting overly aggressive practices out of desperation. This will also make prospects feel more comfortable as they transition into customers.
Drawbacks of Salary Plus Commission
- Adds Risk for Company: Even if sales do not meet company goals during a pay period, the organization will still be on the hook to pay salary to the sales team. If failure to hit goals continues, it can definitely hit the bottom line and even risk financial insecurity for the company as a whole. For this reason, the organization needs to ensure that they can financially afford to pay salaries with reasonable cash on hand.
- Draws Apathy: Some salespeople may take a base salary as an excuse to lay off sales. It could also result in a few lazy salespeople taking advantage of their situation. This is why it’s important for sales organizations to pay close attention to each salesperson’s performance and address low sales patterns as soon as they’re recognized.
Tips for Salary Plus Commission
- Keep It Simple: Can you explain your sales compensation structure to anyone without a doctorate in mathematics? If it takes more than a paragraph to summarize how commissions are awarded and how much of on-target earnings the base salary composes, you may consider simplifying your plan a bit. If your salespeople can’t understand how it works, it won’t successfully incentivize them to sell.
- Clearly Communicate: Tell candidates how compensation works, include it in employment contracts, detail it in training resources, bring it up in sales meetings. Take every opportunity you get to reiterate how the sales team earns money to ensure they understand how to earn as much as they can. Remember: when they earn money, you earn money.
- Set Reasonable Quotas: If commission rates are based on how much of a quota your salespeople attain, set reasonable quotas. Consider all the factors, such as opportunity within the territory and competition, before determining how much a salesperson needs to earn to reach a specific rate of commission. If a quota seems unattainable to the salesperson, it will discourage rather than incentivize sales.
- Distribute Commissions on Time: Pay commissions on time to reestablish that security your employees gained with base salary. When employees can’t rely on their employers to pay them accurately and on time, they may seek other opportunities where that is guaranteed.
If you’re implementing a base salary plus commission plan — or any sales commission plan — to pay your employees, we can help you automate the process. Contact us for more information or set up a demo and we’ll show you how we’ve been helping sales organizations of all sizes simplify sales commission management.