Doug Chung in Harvard Business Review wrote a simple 5-step process to design a compensation plan:
1. Set the pay level
2. Balance salary and incentives
3. Design the plan
4. Choose payout periods
5. Consider additional elements
SIMPLE RIGHT? ER, NO.
But what Doug has done is clarified the five essentials you need for any plan. And as anyone who has developed a comp plan knows, it’s tricky, because there are so many variables and methods for compensation.
At one time, sales comp was fairly easy, and most sales leaders got away with a rather simplistic compensation plan for sales, but times have changed: complex client projects with longer sales cycles plus team selling environments have changed everything about comp.
Though there is no one-size-fits-all that works for every business and every rep, here are five creative ways some modern distributors are compensating their promotional products sales teams. We hope you can borrow a few ideas to create your own unique comp structure!
#1: BASE SALARY + % OF GROSS PROFIT
In case you are still stuck in a commission-only comp plan, the industry is trending to base salary + a percentage of sales or gross profit.
According to Deloitte’s research, you should consider more weight on a base salary when:
selling is more of a team effort
the product itself requires little selling effort
the sales job includes many non-sales duties (like research)
when there’s a longer sales cycle
and if there’s an emphasis on relationship management.
Most of these boxes are checked for the promotional products industry.
One distributor pays anywhere from $40,000-$50,000 as a base salary, plus, a target goal that would help the salesperson look forward to achieving $100k+ (salary+commission) as a percentage of the gross profit. The structure is meant to help a rep keep their eye on an overall compensation goal while climbing in earnings based on gross profit. Ultimately, a rep can earn $200k or more, depending on their level of sales and gross profit, but the key is: they start with a solid base and move upwards.
#2: MIGRATING FROM SHORT-TERM BASE TO PERMANENT BASE + BONUS
And the salary trend continues: another distributor radically overhauled their comp plans moving from a base salary of 3 months (only), and after three months, they would then migrate to a 50/50 straight commission split (50% of the gross profit went to “the house” and 50% went to the rep). This model was also a paid-on-paid plan (reps weren’t paid until the client paid, which can sometimes make for a long reward system). But the distributor didn’t like that plan and felt like the house “always won,” and it put the rep in a place to lose more, but moreover, the uncertainty of a straight-commission plan created a weak culture, and compensation “is a reflection of culture and values.”
So they decided to change to a salary+step bonus every month, where, as you hit certain levels of sales, you would gradually increase your pay, first $500 or $1000 a month or maybe $2500 per month, but enough of a bump to keep the momentum high, all based on increased sales or increased earnings.
This same distributor said that “there’s a disparity in most companies, salespeople are getting paid at one level and support at a different level, so we threw out that model.” They now have a comp structure that includes quarterly bonuses for everyone, regardless of position, whether you are in the warehouse, finance, sales support, or sales. The quarterly bonus is generally a small percentage of the total sales (for example: 2% spread out among the team). In addition, they started paying full healthcare (100%) for all employees and their families and adopted an unlimited vacation policy.
“What this model did for us is nothing short of unbelievable. It got the whole team, the whole company, vested and selling. Now, everyone can track the company's progress and calculate their own compensation growth.”
#3: THINK OUTSIDE THE COMMISSION BOX
A third distributor leans heavily into thinking outside the box when it comes to comp. He put it this way, “don’t just think about what a salesperson wants solely in terms of commissions or earnings, think about what they need.”
Example: One rep might be looking to increase their income but what they really need is more support to increase their sales (so that they can … increase their income). Creating the right support structure can help someone leap from $750,000 in sales to $1.5 million in sales. Often, when reps come to us to talk about sales comp, we have to pause a minute, assess progress against future goals, and not just settle for a marginal increase but think through what someone might need to make a significant shift in their sales to leapfrog incremental increases.
Other alternatives to consider: Maybe a rep is tired and fatigued and has worked non-stop and simply needs a break from the grind. Maybe a trip is worth considering, incentivizing sales growth with travel so that they get both an added perk and a break from the bustle. One distributor gets creative with his team with options like gym memberships, gas allowances, golf memberships, etc. Often, particularly in a fast-growth environment, what a rep wants is more money, but what a rep might need is a relief, inspiration, and replenishment!
One key: engage with your finance team to discover different ways you can reward that won’t break any tax rules. The benefit of working with finance is that they might help you uncover spending you’re already doing or new ways you can motivate your sales team through contests or alternative ideas.
Key: Never assume that compensation is solely about money.
This business is a hard business with fierce deadlines and lots of complexity, the stress and pressure it creates might need a wider conversation on how we can help reward and reenergize the whole person.
#4: TALK ABOUT THE TRADE-OFFS
Another distributor suggested this: options. When revising compensation for either sales leaders, team leads, or managers, consider talking about tradeoffs. Ask, “do you want a comp plan based on sales growth and margins or overall team/company profitability? Or a combination of both?”
Communicating the trade-offs creates a negotiation that is done together as opposed to two different views sitting on opposite sides of the (virtual) desk. Coming together over shared goals: margin, increases, profit, can help build a strong foundation that is co-created with your team versus having it created for them. Just one example: Agree to adjusted base pay that is lower to earn a bigger payout at year-end based on overall company or team profitability.
Also, reward with compensation where you want to see growth. Align pay with their goals and the work they want to do. “Money is a mechanism,” said one distributor. For example: in the promotional products industry, when it comes to new sales growth, there are only two ways to grow, through either new logo acquisition (landing new clients), or expansion sales (expanding current client revenue). If your business is not sufficiently diversified and you have too much business with one client or perhaps even in one industry vertical, then shifting your comp plan to reward new logo business would be a smart way to reengineer your efforts toward a holistic goal.
Key: Remember that comp plans are no longer minted once and forever held eternal, comp plans should change as your business changes and should be adjusted based on your goals!
Another distributor holds a salary+ model that easily rewards growth but also provides a sustainable salary as a base. They use a model that allows for a base salary plus 10% of the margin for the first $500,000 in revenue and from $500,000 to $750,000, 20% of the margin, and for sales above $750,000, 40% of the margin. Building an incremental plan with a much bigger commission load on the top end of sales is how to keep an already busy salesperson incredibly motivated. Some argue that the worst thing you can do to a sales rep is cap their earning potential. As a successful coach, you should always look to building up reps just like a coach looks to building an athlete: structure a plan that helps reps meet their goals but also — exceeds their potential, helping them become the star performer you know they can be.
#5: SHAKE IT UP & PERSONALIZE
One of the most unique compensation plans comes from a distributor who stated that “no two salesperson’s bonus structures are exactly the same.” They tailored their comp plan based on individualized pay plans to motivate and incent goals specific to each rep’s unique book of business. Salaries are similar across the board, but commissions and bonuses can fall differently depending on their role, their goals, and their clientele.
A Harvard study, “A Practical Approach to Sales Compensation,” examined the effectiveness of different incentive plans for different types of salespeople (high, mid, and low performers) and found that, although salary + commission equally affects all salespeople, the quota-bonus and the overachievement reward (escalated commission) appeal to different types of reps. An “overachievement reward serves to keep the high performers motivated, even after they have achieved quota. The quarterly bonus is most effective with low performers, as frequent goals keep these salespeople on track. The annual bonus more effectively incentivizes the high performers. Hence, the study reveals that high performers can perform well under long-term, lump-sum goals, whereas low performers require short-term, granular incentives to be effectively motivated.”
For one distributor, an annual salary is guaranteed, but one example of a unique bonus plan is that a quarterly bonus falls into three categories, with 45% of the bonus coming from revenue goals, 45% coming from margin goals, and the remaining 10% is somewhat subjective, based on performance and team ethics (playing well with others). What’s more is that 50% of this bonus is paid monthly, and at end of the year, the rep receives the remaining 50%. And the cherry on top? If you exceed your margin by x%, you could receive another 2%-3% in bonus.
“What you have to embrace is that having different plans for different groups of people is okay,” he stated. Pay equity is still maintained through comparable jobs, roles, types of sales activities, and more.
“The business has changed, there is now more support going towards clients.” One distributor might have a director of sales, an account rep, a project manager, and a CSR on one or two clients, and to successfully motivate everyone requires a bonus structure that rewards team effort based on individualized client goals.
WRESTLING WITH COMP IS TOUGH BUT MORE THAN THAT: PROFITABLE
The attrition rate for salespeople is high in any industry, 3x as high as any other profession, with some estimating an average tenure of 1.5 years. Xactly revealed that almost half of B2B sales organizations have turnover rates above 30%, and it takes an average of 6 months to fill an open sales position. But for the complex promo industry, a business with a long learning curve and high-pressure stakes, sales attrition is a leader’s top concern.
The bottom line on comp: Wrangling options is worth it. In a previous article, we pointed out that according to McKinsey, “adjusting the mix of commissions, quotas, salaries, and bonuses for the salesforce … has been found to have a 50% higher impact on sales than changes in advertising investments.”
Though it might seem daunting to play with comp options, remember, changing your sales comp model can have a 50% higher impact on your sales than changing your marketing strategy!
If you enjoyed this article on comp, check out our other three articles in this series:
Why a Target-Based Compensation Plan is Ideal for the Promotional Products Industry
4 Compensation Rules Meant to Be Broken (How to Rethink Compensation Plans for Your Promotional Products Business)
7 Trends That Are Changing Sales Compensation Models in the Promotional Products Industry
Some additional compensation basics for those that might be new to the business (some of these are from Anne Coughlan’s, "Handbook of business-to-business marketing”):
Salary: Fixed annual compensation irrespective of performance.
Commission: A percentage paid on gross margin, gross profit, or gross sales, typically paid monthly.
Bonus Paid Individually: Paid for sales over minimum quota or hitting/exceeding growth goals, usually paid monthly, quarterly, or yearly.
Bonus Paid Individually, but Cumulative: No one I know in the industry uses this model, but it’s worth considering. Why? Because ultimately, what we are trying to do is increase overall annual client growth, year over year.
Bonus Paid Collectively: Paid for sales over minimum quota, usually paid monthly, quarterly, or yearly. Many in our industry are using a group bonus to share growth and profits with support teams that are not in primary sales roles.
Tiered commission: From Indeed, “Tiered commission In the tiered commission model, salespeople earn a certain percentage of commission on all sales up to a designated amount. Once they achieve their revenue goal, their commission increases. This encourages them to exceed sales goals and close more deals.
Residual commission: From Indeed, “One of the most common structures in agencies and consulting firms is a residual commission.” And even though we don’t refer to it as that in our industry, that’s what it is: “The residual plan benefits salespeople with ongoing accounts or clients. As accounts continue to generate revenue, commission payments continue. The structure encourages salespeople to retain their customers or develop repeat business. This structure is most common in agencies and consulting firms that handle long-term accounts.”
Cumulative quarterly bonuses: If you increase sales from quarter to quarter, you increase the bonus percentage. Where this might impact your sales in our industry is, “Under a cumulative system, the rep needs to have cumulative (year-to-date) sales of 600 units to get the second-quarter bonus, regardless of his first-quarter performance. Cumulative quotas do a better job of keeping reps motivated during periods in which they’re showing poor results because reps know that even if they’re going to miss their number, any sales they can squeeze out will help them reach their cumulative number for the next period. In fact, even before we made our recommendations to the company in our study, managers there decided to move to cumulative quotas.”
Other terms:
Paid on Paid: A sales rep is paid when the client pays their invoice
Paid on Billed/Invoiced: A sales rep is paid when the client is billed.
Paid on Booked: A sales rep is paid when the order is placed with the factory.
Here are some additional blog resources to help you manage your team: