Does your ad sales team know what they’ll earn for each successful sale?
A well-structured commission plan can motivate your team and incentivize them to achieve better results. However, creating an effective sales commission plan requires a lot of thought and strategy.
We sat down with a few industry experts to discuss how they approach commissions with their teams.
In this article, we’ll explore insights into structuring a sales commission plan effectively, emphasizing the importance of understanding your team’s dynamics and market conditions. From ramp times to payout structures, you’ll gain valuable knowledge to help you craft a commission plan that is fair, easy to understand, and motivating for your sales team.
Understanding the Basics of Sales Commission Plans
To start, let’s examine the basics of ad sales commission plans. Simply put, this is a compensation structure in which employees receive a percentage or fixed amount of each sale they make. It is common in advertising, real estate, and many other industries.
There are several types of commission plans that you can choose from, including:
- Straight Commission: This is when the salesperson receives a percentage of the total sale value. For example, if a product sells for $100 and the commission rate is 10%, then the salesperson would earn $10 for that sale.
- Tiered Commission: In this structure, the commission rate increases as the salesperson reaches certain milestones or targets. For instance, they may earn 5% for reaching $10,000 in sales and 7% for reaching $20,000.
- Base Salary Plus Commission: This is a combination of a fixed base salary and a commission on top. It provides some stability for employees while incentivizing them to make more sales.
- Profit Margin Commission: This type of commission is based on the profit margin of each sale, not the total sale value. This can motivate salespeople to focus on higher-priced products with a better profit margin.
- Draw Commission: Draws are set up to provide stability for the employee while also covering the employer’s risk. Effectively, this guarantees the employee a fixed amount of pay per period in exchange for future commissions.
Each option has its own benefits and drawbacks. It’s important to think about your business goals. Also, consider the type of sales you are making when choosing a commission plan.
Factors to Consider When Structuring Your Plan
When designing a sales commission plan, there are several factors that you should take into account. These include:
1. Industry Standards
It’s important to understand the industry standards for commission plans in your field. This can give you a benchmark for what other companies offer their employees and help you create a competitive plan.
2. Business Goals
Your commission plan should align with your business goals. For example, if you want to increase overall sales volume, then your plan should provide incentives for high-volume sales. If you want to focus on selling higher-priced products, then a profit margin commission plan may be more suitable.
3. Individual Performance
Consider how your sales team is performing individually and as a whole. Are there any top performers that you want to reward? Do you have any struggling employees that could benefit from a different commission structure?
4. Motivation and Retention of Sales Team
Your commission plan should motivate your team to work hard and achieve results while also retaining top-performing employees. It’s important to strike a balance between fair compensation and incentivizing high performance.
Ramp Time and On-Target Earnings
Ramp Time
Ramp time refers to the period it typically takes for new sales representatives to reach their full earning potential.
Experts suggest that a realistic ramp time can vary significantly depending on the complexity of the product being sold, the sales cycle length, and the individual salesperson’s skill level. For instance, in tech sales, a ramp time of six months is often standard, allowing reps to fully understand the product and market.
During this period, it’s important for sales managers to provide adequate training and support to accelerate the learning curve. An effective ramp plan should set clear milestones, with incremental targets leading up to full quota attainment.
On-Target Earnings
On-target earnings (OTE) represent the total expected compensation for a sales representative when meeting or exceeding sales targets.
Several factors influence OTE, including market conditions, competition, and the specific industry. For example, OTE in a competitive, high-growth market may be higher due to increased earning potential.
Sales managers must consider these factors when setting OTE to ensure it is motivating yet achievable. Experts recommend benchmarking against industry standards and adjusting plans based on market fluctuations.
Additionally, regular reviews of OTE structures can help maintain competitiveness and attractiveness to top sales talent.
Percentage of Team Hitting Quota
A high percentage of team members hitting quota indicates that the goals set are achievable and well-aligned with the team’s skills and market realities.
However, if too many team members consistently exceed quotas, it may suggest that targets are set too low, potentially impacting motivation and profitability. Sales managers should regularly assess quota attainment rates and make necessary adjustments to keep challenges balanced. Insights from industry experts reveal that periodic goal recalibration, informed by data-driven insights, can optimize performance and drive growth.
It’s also essential to foster an environment that encourages feedback, allowing for continuous improvement in goal-setting processes.
Commission Structures and Payouts
Determining the right commission structure is vital for motivating sales performance. Let’s take a look at some of the ways publishers are structuring commission plans and payouts:
Percentage Payouts
This approach encourages reps to focus on expanding the customer base while maintaining existing relationships.
Additionally, offering higher payouts for bundling specific product combinations can drive strategic selling behavior.
Sales managers should tailor these structures to align with company objectives and market dynamics, fostering a culture of performance and innovation.
Commission-Only Salespeople
Defining appropriate commission ranges is crucial for attracting and retaining talent for commission-only salespeople. Industry experts suggest a typical range of 10-15%, which provides an incentive for high performance while balancing the company’s cost.
Companies should ensure that commission-only roles are explicitly defined, with clear expectations and support mechanisms in place.
By doing so, sales managers can create an environment where commission-only reps thrive and contribute significantly to revenue growth.
Annual Bonuses
Incorporating annual bonuses based on total sales revenue can further incentivize long-term performance. This approach rewards consistency and encourages reps to focus on both short-term wins and sustained growth.
Examples from successful companies demonstrate that well-structured bonus programs can enhance motivation, loyalty, and overall team morale.
Sales managers should consider implementing bonus plans that align with company priorities, such as revenue targets, customer satisfaction, or strategic initiatives, to maximize their impact.
Challenges in Sales Commission Plans
Dynamic Percentage Plan
One common pitfall in sales commission plans is implementing a dynamic percentage structure, where commission rates change with sales volume. While intended to motivate higher sales, this approach can lead to complications, such as gaming the system, demotivation at certain thresholds, and even complete confusion.
Experts recommend simplifying commission structures to avoid ambiguity and ensure fairness. A clear, consistent plan allows sales reps to focus on performance rather than navigating complex calculations.
Regularly reviewing and refining commission plans based on feedback and performance data can prevent potential issues and enhance effectiveness.
Controlling Discounting
Discounting can erode margins and impact profitability, making it essential for sales managers to implement strategies to control this practice.
Experts suggest setting clear guidelines on discounting policies and incorporating them into commission plans. One effective strategy is to tie commission rates to deal profitability, encouraging reps to prioritize value over volume. Additionally, addressing clients not current on their bills within the commission structure can deter risky sales practices.
By aligning incentives with company goals, sales managers can promote responsible selling behavior and maintain healthy profit margins.
Client Distribution and Lead Generation
Client Distribution
Deciding on the commission percentage for national versus local clients is a strategic decision that can impact sales focus and company growth.
Paying the same commission rate for all clients may simplify the plan but could lead to an imbalance in sales efforts.
Evaluating the strategic importance of different client segments and adjusting commission rates accordingly. For instance, offering higher rates for national clients can drive expansion efforts, while lower rates for local clients can encourage consolidation and deepening of existing relationships.
By considering client distribution in commission planning, sales managers can align efforts with broader business objectives.
Lead Generation
Effective lead generation is the backbone of any sales strategy, and incorporating it into commission plans can enhance performance. Highlighting successful campaigns, such as expert Mike’s lead generation initiative, can inspire and guide sales teams.
Sales managers can incentivize lead generation by offering bonuses or increased commission rates for self-sourced leads. Encouraging collaboration between marketing and sales teams can also improve lead quality and conversion rates.
Fostering a proactive lead generation culture allows companies to ensure a steady pipeline and sustained revenue growth.
How Should You Structure Your Ad Sales Commissions?
Structuring an effective sales commission plan is both an art and a science, requiring a deep understanding of market dynamics, team capabilities, and company goals.
By incorporating expert insights into ramp times, OTE, and commission structures and addressing common challenges, sales managers can create plans that motivate and drive performance.
Additionally, aligning incentives with strategic priorities and fostering a culture of continuous improvement can enhance overall effectiveness.
Leveraging data-driven insights, industry benchmarks, and expert advice can provide a competitive edge for sales managers looking to refine their commission plans.
Explore further resources and connect with industry peers to continue learning and evolving your sales strategies.
