Compensation In Sales
Compensation: Compensation is the entire remuneration, both monetary and non-monetary, granted to the employee by the employer in exchange for the work performed as per the contract of employment. This includes salaries, commissions, bonuses, and any other financial benefits to the salesperson.
Detailed Explanation
Sales compensation is designed to motivate and hold employees. The structures of compensation can vary considerably from industry to company to role of the employee. Components of sales compensation are usually in the following structure:
- Base Salary: A fixed amount paid to employees irrespective of their sales results. This brings a financial security level to the employees and is found in virtually every package.
- Commission: Extra payment that is determined by the salesperson’s sales achievements. Typically, this is a percentage of the sales made and gives direct stimulation for sales efforts.
- Bonuses: Most commonly reward one or more identified sales objectives. Unlike commission, which is usually awarded on every sale, bonuses are often paid quarterly or annually.
- Profit Sharing: This is a mechanism used by companies through which they share profits with their employees based on the performance of the company. It tends to align the interest of the employees with that of the company.
- Benefits: This can include health insurance, pension plans, stock options, and other perks that contribute to the total compensation package.
- Expense Allowances: A common form of compensation given to salespeople, an expense allowance can be used to reimburse travel, meals, or other expenses.
Significance in the Sales Process
A well thought out compensation package is really quite fundamental in sales for so many reasons:
- Attracting Talent: Competitive compensation packages are instrumental in attracting and retaining high performing sales people.
- Motivating Salespeople: Compensation programs designed effectively, with rewards clearly defined and detailed, will always serve to motivate salespeople to work harder and perform better.
- Aligning Objectives: Compensating for meeting or exceeding sales targets ensures the goals of the salespeople are in line with the business objectives.
- Reducing Turnover: A fair and transparent compensation system can reduce turnover by ensuring that employees feel rewarded and valued for their efforts.
Real-World Example
In technology, such a structure might encompass a base salary with 10% commission on all sales above some defined level. For example, a salesperson with a $70,000 base salary would receive an additional 10% commission on all sales in excess of $200,000 per year. They might also have the opportunity for a $5,000 bonus for every $50,000 worth of product they have sold above the $300,000 threshold in a fiscal year. This structure keeps salespeople working not just toward sales goals but going over the goal to realize more in their pockets.