Effective Sales Compensation Bonus Plans: Examples and Best Practices
In the fiercely competitive world of sales, effective bonus plans formulated for your team will drive performance and align individual efforts with organizational objectives. Carefully designed bonus plans will help you retain your best employees and enable you to recruit top talent to be sure your sales force is always on par. This article discusses the various bonus structures, a few of the ways they may be operationalized across roles, and best practices in putting up a bonus structure.
The Role of Bonus Structures in Sales Compensation
Bonus structures are a very important part of sales compensation programs, and they are being used as monetary incentives for achieving predefined performance targets. These incentives act as motivators not only to the sales reps for them to achieve their individual goals, but also to set their activities in tune with the company’s broader objectives. Companies that have an established bonus structure have reported up to 50% higher employee retention, hence indicating the importance of this incentive for maintaining a motivated and loyal workforce.
Within the SaaS vertical, where good salespeople are hunted by competitors, a compelling bonus structure can be that one aspect that will differentiate keeping skilled professionals from losing them to the competition. A balanced plan will consider different roles within the organization in a way that bonuses reflect the contributions each position makes.
Types of Bonus Structures
There are a number of different bonus structures that firms can utilize to motivate their sales teams. The determination of structure should rest upon the organizational goals, sales process undertakings, and key metrics that the firm finds valuable. Here are a few basic ones:
1. Performance-Based Bonuses
This type of bonus is given when one meets or surpasses targets. These are results-oriented and are directly related to quantifiable outcomes; hence, they have always been a favorite in motivating the sales rep to deliver desired business goals. Some of these include:
- Single Rate Bonus: An absolute dollar amount paid for every closed deal regardless of its size. For example, a sales rep will receive $200 for every deal closed.
- Single Rate Attainment Point Bonus: A bonus paid per quota attainment point. For instance, a rep may make $50 for every percentage point over goal, resulting in a $5,000 bonus for 100% attainment.
- Milestone Bonus: A lump sum paid upon achieving a specific goal, such as monthly quota, which is typically used to motivate on-going performance.
2. Spot Bonuses
Spot bonuses are one-time rewards for the accomplishment of some performance or result. These bonuses are generally rewards for outstanding performance or going beyond the call of duty. Examples of such would be:
- Signing Bonus: A bonus given to new employees as an enticement to work for the company.
- Achievement Bonus: A bonus is given for the achievement of some specific goal, such as closing most deals in a quarter.
3. Profit-Sharing Bonuses
Profit-sharing bonuses are based on the company’s overall profitability. A percentage of the profit, generally quarterly or annually, is distributed among the employees. This bonus structure aligns an employee’s goals with that of the company and is often used for management and higher-level positions.
Bonus Structures by Role
Different roles within the sales team require different types of bonuses to reflect their unique responsibilities and impact on the company. The following are some examples of bonus structures according to specific roles:
Sales Reps
- Quota Attainment: Bonuses associated with reaching or surpassing sales quotas; these could usually even be on a tiered commission rate by percentages as that attainment grows higher.
- Revenue Generation: Bonuses linked to the total revenue created by the rep over a specific period.
- New Customer Acquisition: Bonuses for acquiring new customers, encouraging the reps to expand the number of customers in the company.
Sales Managers
- Team Performance Bonus: Bonuses in relation to the team’s performance, where the sales manager’s team must hit a certain percentage of the quota.
- Milestone Bonuses: A milestone bonus given to one that hits significant sales milestones, for instance closing a big deal in selling and entering a new market.
Customer Success Managers
- Customer Retention Bonuses: Given for achieving a high rate of customer retention, stating that a long-term relationship with the client is key.
- Upsell/Cross-Sell Bonuses: Provide bonuses for both upsell and cross-sell based on transactions made with existing clients, in addition to generating new clients for growth in revenue.
Best Practices in Designing Bonus Structures
If the bonus structures are to be really useful in achieving organizational objectives, then you need to go through the following steps:
1. Establish a Budget
To establish a bonus structure, make sure whether there is really space in the company’s overall budget for compensation. Make sure that the bonuses are financially feasible for the company and do not cut away profits.
2. Test Payout Scenarios
Use past data on compensation to test various scenarios the bonus structure might find itself under. Doing so protects you from overpaying by a certain percentage of the company’s revenue and ensures that the plan is still fair and effective.
3. Make Bonuses Attainable and Competitive
Bonuses should be challenging yet achievable. Check industry standards and try to mould the Quota:OTE calculator tools to implement competitive and motivational bonuses.
4. Seek Team Feedback
Involve your sales team in the bonus structure design. Get feedback and try as much as possible to have these bonuses be part of the motivation and drive of the kind of desired behavior.
5. Communicate Clearly
Once the bonus structure design is final, be very clear about communicating it to your team. There should be full explanation and elaboration on such plans in several formats in order for understanding and their willful adoption.
Conclusion
A well-built bonus structure is an effective driver of sales performance to achieve the business goals in an organization. Through an understanding of the different types of bonuses available, as well as how to award them in a fashion that meets the specific needs of your team, you will create a compensation plan to motivate, retain, and reward the highest performers. Remember to apply best practices in the design and implementation of the structures in order to ensure their effectiveness and sustainability.
