Sales Compensation Knowledge Hub

Different companies have different compensation structures based on their size, nature, and sales strategy. Developing an effectively designed sales compensation scheme holds significant importance for all businesses, especially in the subscription-based software industry. Nonetheless, devising a plan that not only encourages the sales team but also optimizes revenue generation can pose difficulties but it is equally important too. A survey conducted by Harvard Business Review Analytic Services found that companies with highly effective sales compensation plans are 81% more likely to have salespeople who exceed their quotas than companies with less effective plans. Read more to understand how it is calculated.

SaaS differs from traditional software in its delivery and deployment model. Unlike traditional software, which is typically installed and operated on individual computers or servers, SaaS is centrally hosted and accessed over the Internet. With SaaS, users can access the software application through a web browser or a dedicated client interface, eliminating the need for local installations or complex setups. SaaS providers handle software maintenance, updates, and infrastructure management, allowing users to focus on utilizing the software rather than managing the underlying technical aspects. Moreover, it is often subscription-based, offering flexible pricing models and scalability to meet changing needs. This cloud-based approach provides advantages such as ease of access, rapid deployment, automatic updates, and reduced upfront costs, making SaaS a popular choice for businesses seeking cost-effective and user-friendly software solutions.

A sales compensation plan is a set of rules that details how a sales team is compensated for reaching predetermined targets. Salary, commissions, bonuses, and other incentives are all included. SaaS companies cannot function without sales compensation plans, which incentivize sales teams to meet objectives that advance the company's goals. It can also not work without sales commission management software that helps in maintaining all the commission details for closed deals. Increased revenue and profitability might result from a sales compensation plan that encourages sales representatives to go above and beyond their quotas.

Most of the disputes are caused due to unfair sales compensation calculations. Sales reps feel undervalued and sometimes leave the company. It not only wastes the time of the sales rep in shadow accounting but also the time of the sales leader who tries to solve the issue and the finance team who now has to juggle between month-end audits and compensation calculations. Calculating compensation is a cumbersome task and the finance team thinks that they are doing a thankless job. Well, it is a thankless job. This dispute can be resolved if the sales rep has a better understanding of how they will be compensated and get transparency of the calculations. This can be done by using Sales Commission software which can ease up the calculation job and provide real-time insight into the compensation.

Commissions are typically paid out after the end of the commission period, once the calculations have been finalized and validated. The frequency of commission payouts also varies by organization. Here are a few possible scenarios: Monthly Payouts: In this case, commissions earned during a specific month are calculated and paid out shortly after the end of that month. This cycle repeats each month. Quarterly Payouts: Commissions accumulated over three months (a quarter) are calculated and paid out shortly after the end of each quarter. This cycle repeats every quarter. Annual Payouts: Commissions earned over a full year are calculated and paid out at the end of the annual commission period. This cycle repeats on an annual basis.

A sales quota is a predetermined target or goal set for sales representatives or teams to achieve within a specific period, usually monthly, quarterly, or annually. It serves as a benchmark against which sales performance and success are measured. Sales quotas can be based on various metrics, such as revenue, units sold, profit margin, new customer acquisitions, or a combination of these factors. You can determine quota by Setting overall company targets, Analyzing historical data, Assessing market potential, Considering individual capabilities, Alignment with sales strategy, and Setting stretch goals. Research shows that healthy competition can motivate individuals to perform at higher levels. When reps see their colleagues achieving or exceeding their quotas, it can inspire them to work harder and strive for similar success.

The finance department typically handles tracking sales, calculating commissions, and administering payments. Here are the elements to calculate commission in this case: Percentage of Sales Revenue: A fixed percentage is assigned to each product/service, and salespeople earn a percentage of the revenue generated from each sale. Tiered Commission Structure: Commissions increase as sales targets or milestones are achieved, encouraging salespeople to exceed goals. Different products/services may have different commission rates within each tier. Weighted Commission Rates: Products/services are assigned weightage based on factors like profitability or strategic importance. Commission rates are multiplied by the weightage, resulting in variable commission amounts. Fixed Commission: Salespeople earn a predetermined fixed commission amount per sale or unit, regardless of the product or service. Hybrid Commission Structures: Organizations may use a combination of methods based on factors like profitability, sales targets, or strategic goals.

Sales compensation impacts different departments in different forms including Finance, Customer Success, HR, and Marketing. For the finance team, the inflow and outflow of money is the key factor. They decide their budget based on the sales compensation structure because they need to pay incentives, bonuses, and salaries to the reps as well. Customer Success obviously needs their share of compensation for maintaining the relationship and retaining customers by cross-selling and up-selling. When it comes to the marketing sector they are equally involved in getting leads and compensation helps sales and marketing collaborate together to bring and convert leads. And HR needs sales compensation to attract and retain top-performing employees.