For those new to sales, you will see all sorts of different compensation plans. These are created as incentives and are intended to motivate reps to bring in as much revenue as possible.
The structures can sometimes get complicated as there are often multiple goals that are trying to be achieved by management. Let’s walk through some of the terms you will hear, how they are used and what to keep in mind as you consider them.
Most employers will provide some sort of base pay to their sales representatives. This is because most sales people need to have the certainty that no matter what, they will bring home a paycheck at the end of the week for work provided.
There are compensation plans of 100% commission that do exist. This is for those sales people who are supremely confident in their sales abilities and prefer the upside of larger commission opportunities rather than the security of a base plus commission. Realtors are usually on these plans, as an example.
When you are offered a base, it is an unspoken understanding that since you are being guaranteed a minimum amount of compensation, then your commission rate is lower as a concession.
Truth be told, many small business owners will offer commission only because they do not have the salary to pay someone a base. In their mind there is no cost in offering this to employees and it becomes a sink or swim scenario. If you succeed, they are happy to pay the commission. If you do not, they have not invested any revenue in you.
Being commission usually means ultimate freedom. You are not being paid a salary, so you have no commitment other than closing business. This means no expectations of hours worked, availability or even if you do as a part time side hustle. (So long as it fits into the sales model of when you take meetings.)
If you are considering a position like that, a recommendation would be to negotiate a staged plan where a salary is paid the first few months at a lower commission and slowly reduces as your commission and pipeline increases. There is nothing wrong with eventually being commission only. I just wouldn’t recommend it to start out.
Many sales reps misunderstand the difference between a bonus and commissions.
Most bonuses are incentives that are focused on metrics other than pure revenue. They are often used to adjust behavior. If management believes that more proposals lead to more contracts, they may create a bonus for each sales rep that generates 50 new proposals per month.
It may be that they want to encourage more lead generation and during Q1, whoever makes the most cold calls will receive a brand new iPad. I have even seen companies pay more for one month than revenue justified jut because they wanted sales people talking about the new service that is being launched. So everyone who closes 5 or more contracts that include the new add-on will receive $1,000 in your following paycheck.
What is a spiff?
Spiffs are short term, motivational incentives. They are intended to give instant gratification without complications. In other words, you usually do not have to wait to receive them in your paycheck. An example could be whoever closes the next contract gets a $50 Amazon card. Or everyone that sells five trailers by Thursday can have Friday off.
They are great for motivating activity in a group. They can be a creative way to generate a competitive spirit amongst the employees as well.
How do commissions work?
Commissions are a financial incentive paid to salespeople for closing contracts. They can be a set amount such as five hundred dollars for every deal closed. Most often there is a percentage calculation such as 7% on revenue generated each month.
These earnings can be structured in numerous ways and it is important for you as a sales person to understand these incentives.
You may run into a tiered plan
- 5% paid on monthly revenue up to $49,999
- 8% paid on monthly revenue between $50,000 – $79,999
- 10% paid on monthly revenue over $80,000
As you can see, the incentive is for you to sell as much as possible in one month. You can actually be doubling your commission on every dollar of revenue you generate that is over that $80,000 threshold. The catch is that as soon as the month is over, you start the first day of the next month at zero.
This is why sales people can seem so frantic near the end of the month.
Although I am not a lawyer and you should always read the fine print of your employment agreement, the industry standard is that commissions should be paid to you once you have earned them. This means that if you leave a company, they still owe you compensation for the sales you have closed. I would definitely look for this verbiage in any documentation your employer has you sign.
A bonus is often defined differently and is not a guarantee. So if you have not been paid your bonus before you leave a company, you are unlikely to be paid one when you leave.
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