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What is Variable Pay in Sales Compensation?

When it comes to driving your team’s performance and increasing revenue, your sales compensation strategy is your company’s entire game plan. Your sales compensation plan covers all aspects and details of your salespeople’s pay, including base salary, commission, and any bonuses or benefits they may be eligible for.

The portion of sales compensation that is depending on employee performance is referred to as variable pay in sales. When employees achieve their objectives, they are offered variable pay in the form of a bonus, incentive pay, or commission (aka quota). The base salary, on the other hand, is determined and paid irrespective of of whether employees meet their goals.The base salary, on the other hand, is set and paid regardless of whether or not employees achieve their objectives. The pay mix refers to the combination of variable pay and the base salary.

But what do different payment structures look like, and how do you determine which one(s) is right for your business? Find out in the next paragraphs.

Reps can be motivated in a variety of ways. A commission plan is the most prevalent form of variable remuneration. Your goal should be to promote employee performance and encourage sales agents to meet their quotas, regardless of the type of variable pay you use.

  1. Sales commission structures

Sales commission systems set out the road to variable remuneration for sales reps and workers. Representatives often receive commissions as a proportion of the sale they close. These structures might be set at a fixed fee, based on gross margin, or based on quota completion percentage (multiplier structure).

A tiered commission structure is the most prevalent commission structure. Reps earn a percentage dependent on the number of sales they close under this variable compensation system. However, when salespeople close more deals and work toward quota, they progress through the commission tiers.

  1. Bonus versus Commission

Some companies opt for a bonus structure instead of a commission structure. There are various distinctions to be made between bonus and commission. Commissions, for example, are usually paid in addition to base income in each pay period. Bonuses may be paid every pay period, quarterly, or annually, depending on how bonuses are set up.

Furthermore, bonuses and commissions are frequently tied to performance. Bonuses, on the other hand, are usually a set sum, whereas commissions might vary from rep to rep depending on individual performance.

  1. Management by objectives

MBOs, or Management by Objectives, assist employees in setting personal goals to earn incentive compensation. This is a common method of earning variable pay for non-sales or non-commission personnel.

Individual employees and their managers generally set these goals for how they can contribute to their work and/or extend beyond their day-to-day responsibilities. MBOs frequently stimulate collaboration and accept fresh, creative ideas that will aid the organization in achieving its objectives.

How to Put Your Compensation Plan into Action

Sales compensation variable pay should drive sales reps to close agreements since money motivates them. You may make a direct link between outcomes and pay by rewarding or paying for rep performance. Which is one of the most effective ways for firms to push sales teams to reach targets.

More crucially, to meet company objectives, your variable pay structure must encourage the correct sales behaviors. Variable compensation pay is a fantastic motivator, but without appropriate execution and the right pay mix, it can fall flat.

If your sales staff is offered an opportunity that is overly reliant on incentive compensation. You risk encouraging salespeople to work autonomously. And possibly avoid taking risks for the company. If sales personnel aren’t compensated based on their performance, they may not be motivated to work hard enough.

When it comes to figuring out your compensation strategy and designing sales compensation plans, here are a few pointers to keep in mind:

  1. Incentive-Based on a Salesperson’s Degree of Control

When salespeople seek the support of other employees or your brand’s positioning. Accomplishes the majority of the selling, incentive compensation may be smaller than. When reps influence a sale solely via their own efforts.

 

  1. Individual achievement-based variable incentive compensation

Sales representatives should be held accountable for items they can influence. Putting an individual’s income on the line depending on team performance may not be regarded as fair, and it may result in a greater turnover.

  1. Stay away from a skewed variable-pay system

The level of variable pay incentives is frequently determined by the role of the sales team. When you have more control over your results, for example, variable pay is higher. Because the account executive (AE) has a greater direct influence on the deal closing than, say, a customer success person, the AE will normally have the highest variable pay level on the team.

Your team consists of a diverse set of resources. Because no two sales roles are alike, variable pay should be based on the responsibilities of each. While they all share the same overall objectives, they are not all in charge of the same tasks. Compensation based on job function allows companies to focus on the capabilities of each position. This allows you to more successfully incentivize each individual by focusing their rewards on behaviors and metrics that they can influence regularly. This motivates, engages, and inspires your team to achieve your objectives.

Conclusion:

Winning businesses recognize the value of incentive pay. And strive to provide competitive remuneration to reduce turnover and retain top people.

It’s all about striking the right balance. Your incentives (variable pay) must encourage salespeople and drive the proper sales behaviors. But they must also be designed in a way that allows you to meet your revenue and growth targets while also driving profitability.

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