What Types of Sales Compensation Plans Are Generally Available, and How Do I Know Which One is Best?

Before accepting any sales position, it’s highly recommended that you understand the basics of your overall compensation plan. This is especially true if you’re moving from one sales position to another. It goes without saying that you should become very familiar with your compensation plan if you’ve already started a new position.

One of the benefits of understanding your comp plan is that it will help you to identify where the company wants you to focus in the products you offer.   For example, assuming all of the products you offer are of equal benefit to your client base, if your commission plan pays 5% when you sell a particular product or service versus 15% on everything else, this is a clue that your company does not want you to focus on selling the product or service that pays only 5%. This could be for a variety of reasons. Also, there is usually a bonus level that pays more when your sales reach a certain amount. This level tells you what level of production your company highly values from its salespeople.  

Types of Compensation Plans

Most compensation plans fall into one of three categories: commission-only, straight salary, or a combination of the two with or without additional incentives.  

Commission-Only – This type of position pays only when you make a sale, which means that the amount of money you earn is completely dependent upon your ability to close new business with either new or existing clients. There is no pay arrangement for effort or time worked on a sale.   In this type of arrangement, you will receive a percentage of the sale price or gross profit of your product or service once a sale is made. If you sell more than one thing, the percentage may not be the same for every item. America’s top salespeople love Commission-Only compensation arrangements because they usually have the most lucrative terms of payout and potential upside. It is the closest of the three types to being in business for yourself. It is often said that it is like being in business for yourself, but not by yourself. Therefore, only entrepreneurial and highly driven individuals need apply to these types of sales positions.   In order to attract more salespeople to apply, several organizations employ minimum guarantees of income within their Commission-Only plan. Essentially, this gives the company the opportunity to pay on effort and time spent in selling their product even when there are little or no sales that have been closed.   This form of compensation is the most attractive to the salesperson, but the company will be much more discerning about who they hire for this arrangement since their upfront investment is significantly larger than the other two plans.  

Straight Salary – This form of compensation was rarely used for many years, but it has been employed more in the past ten years. In this age of the savvy consumer, some companies go as far as advertising that their salespeople are not paid commissions at all. This has been used in many retail environments such as department stores, furniture stores, and auto dealerships.   It is, by far, the least used method of compensation for salespeople. Many companies dislike this arrangement because it can make for unmotivated salespeople! Top producers do not like this arrangement because it severely limits their ability to earn a substantial income. This leaves the mediocre or subpar salespeople as the only interested applicants, which can make matters worse for increasing sales. It is an arrangement that offers little incentive to exceed the bare minimums.  

Salary Plus Commission – This is probably the most popular and common compensation plan for salespeople. It allows for a bit of security, while also giving salespeople the incentive to continuously improve and make more sales.   It is very easy to get comfortable with having a salary, but be careful that your salary is not so high that it restricts your ability to earn high levels of commission. When comparing one plan with another, the plan with the highest salary is not usually the best for top producers. This is because by default, many of these plans with high salaries overpay mediocre or low producers at the expense of the top producers.  

Perks – Does your firm offer other types of incentives, such as bonuses, a leased car, an expense account, contests, or advances? These must also be taken into consideration when comparing compensation plans.    It may be difficult to determine at the outset if a firm’s compensation plan will be the most advantageous to you, but make a special effort to understand it in order to plan your finances. Don’t leave it to chance. Understand the principle aspects of your compensation so that you can create a viable budget and avoid living beyond your means.