Sales compensation is crucial for attracting and retaining sales talent in a Business-to-Business (B2B) wholesale distribution business—you want to give the best talent a reason to join your sales team and stay with your company long-term. However, because different businesses have different sales structures, there is no one sales compensation strategy that works for all of them.
The sales compensation plans for a distribution company are a little different. They must be designed in accordance with the company’s distinct sales structure.
In this article, we’ll go over all of the components you’ll need to create a sales rep compensation plan for your distribution company. But first, let’s take a look at what sales compensation is and why you need to plan it.
What is a Sales Compensation Plan and Why It’s Important to Choose the Right One
A sales compensation plan is a well-structured program that determines how much a sales representative is paid based on their performance. It contains information on all aspects of a salesperson’s earnings, such as base salary, commission, bonuses, and benefits.
It’s important to choose the right sales compensation plan because every B2B business is unique, and a well-tailored plan takes into account the specific needs, goals, and dynamics of the business. By selecting a plan that aligns with the company’s sales strategy, target market, products or services, and sales team structure, businesses can optimize sales performance and drive sustainable growth.
The Power of a Packaged Goods Sales Incentive Program
A packaged goods sales incentive program is a dynamic strategy employed by companies in the consumer goods industry to unleash the full potential of their sales force. This program is designed to inspire and reward sales representatives or distributors who excel in achieving specific sales targets or objectives within a defined timeframe.
The goal of the program is to motivate and encourage salespeople to promote the company’s products more effectively and to increase overall sales volume. By offering rewards for meeting sales targets, companies can increase their market share, boost customer loyalty, and drive revenue growth.
Why You Need a Sales Compensation Plan
The following are the benefits of creating a sales compensation plan.
1. It creates a structure within the team
Sales teams are known for their high turnover. The pressures of selling to uninterested prospects, as well as a general lack of advancement opportunities, can cause even the most seasoned salespeople to jump from team to team.
Creating a sales compensation plan that differentiates between junior, mid-level, and senior reps is one way to reduce turnover. This will communicate to the reps that there are opportunities for advancement within the team, and they will not feel compelled to leave.
2. It motivates sales reps
Sales reps will be motivated to sell more if they know they can earn more money. Not only that, but by including additional benefits like an educational stipend, your reps will be encouraged to seek additional training, making them more effective salespeople.
3. It helps you budget better
You can create budgets that better align with your company’s financial standing if you know how much you’ll pay each rep based on their experience and performance. That way, you’ll know how much of the company’s earnings will go toward your sales reps’ pay. This will help you prepare better if the team underperforms in one quarter.
Sales Commission Plan Components for Distribution Companies
Here are five components of a sales commission plan for distribution companies.
1. Base Salary
This is a set monthly fee that you pay to your sales representatives. It can be paid weekly or biweekly. The amount varies according to the sales rep’s profile and experience, the strength of the portfolio, and the maturity of the territory.
2. Commission on Sales
This is a variable amount that you pay based on each sales rep’s monthly cpg bulk sales. The sales commission can be structured in two ways: (1) pay a flat % for the sales and (2) pay based on a scale.
3. Bonuses or Incentives for Special Achievements
Bonuses, unlike sales commissions, are not calculated as a percentage of total sales. Instead, they are an additional sum of money paid to your sales reps in order to meet specific sales or business objectives. The purpose of this component of sales compensation is to encourage sales representatives to exceed their quotas and support the company at specific events.
4. Benefits
This category includes any employee benefits that reduce their out-of-pocket expenses while increasing your cost of sales. Benefits are typically provided in order to attract and retain qualified employees. When offered, it applies not only to sales reps but to all employees, resulting in an additional level of human resource expenditure. This component is typically considered by long-established distributors with a high sales record. Some examples are:
- Gas allowance, tolls, any vehicle-related fees
- Mobile phone data plans
- Mobile sales software
- Health insurance
- Vacation bonuses
5. Demerits
All of the previous elements add up to the sales rep’s earnings. However, there are events beyond the sales rep’s control that could result in merchandise returns and even customer loss, such as:
- Items returned due to expiration
- Damaged items
- Promotional items that didn’t sell
In all of these cases, the sales rep had been paid for the sales of the returned products; therefore, the common practice is to deduct the commission paid for the returned items.
Sales Compensation Structure + Examples
Here are some examples of sales compensation that you can easily implement.
1. Base Salary + Commission
This pay structure combines the benefits of a fixed base salary with the motivation of earning additional commission based on sales performance.
How it Works
Under this structure, sales reps receive a predetermined base salary, typically provided on a regular basis. In addition to the base salary, reps earn a commission based on their sales achievements, which can be calculated as a percentage of the total sales revenue they generate or a tiered structure based on sales targets.
Example
Suppose the rep has a monthly base salary of $3,000 and is eligible for a commission rate of 5% on all sales made. In a given month, if the rep generates $100,000 in sales, they would earn an additional $5,000 in commission, resulting in a total monthly income of $8,000 ($3,000 base salary + $5,000 commission).
When it’s best
This structure is particularly advantageous for attracting and retaining motivated sales reps who value financial security while still offering the potential for increased earnings based on their sales achievements. It also provides expense predictability and is well-suited for businesses operating in the B2B landscape, allowing for the effective management of non-selling tasks while still driving sales growth.
2. Base Salary + Bonus
This structure offers a combination of a guaranteed base salary and the opportunity to earn additional bonuses based on sales performance, providing a balance between predictability and motivation.
How it Works
In addition to the base salary, reps have the potential to earn bonuses based on meeting or exceeding specific sales targets or performance metrics. The bonus amount can be determined as a flat rate or as a percentage of sales revenue or profit.
Example
Suppose a sales team has a base salary of $30,000 per year, and they are eligible for a bonus of $15,000 if they achieve a certain sales target. If seven out of ten sales representatives consistently meet the quota and earn the bonus, the total bonus payout would be $105,000 ($15,000 bonus per rep * 7 reps). In this case, you can budget $420,000 for bonuses annually ($105,000 * 4 quarters).
When it’s best
The base salary plus bonus compensation plan is a suitable approach when sales representatives consistently meet their pre-set targets. This structure provides a high level of predictability in terms of the base salary, while the bonus component serves as a motivational tool to incentivize sales reps to achieve or exceed specific sales goals.
3. Commission-Only
The commission-only structure, also known as a “straight commission plan,” pays reps a fixed commission whenever they make a sale. Reps do not receive a base salary or the option to increase their commission percentage.
How it Works
In the commission-only structure, sales reps earn a predetermined commission for each sale they make. They do not receive a base salary or have the opportunity to negotiate higher commission rates. The commission is typically calculated as a percentage of the total sales revenue generated by the rep.
Example
Suppose a sales rep earns a 25% commission on every product they sell. If they sell 30 products at $1,000 each, 20 products at $5,000 each, and 15 products at $10,000 each over the course of a year, they would earn $70,000 in sales commissions.
When it’s best
The commission-only structure is best suited for companies that employ temporary and/or contract salespeople, have short sales cycles, and can offer substantial commissions. This structure provides an opportunity for businesses to align costs with sales activities, incentivize sales reps to close deals quickly, and attract highly motivated sales professionals.
4. Revenue Commission
The revenue commission structure is a straightforward sales compensation plan where sales representatives receive a predetermined commission for each product or service they sell. This type of commission structure has gained popularity among outside sales teams due to its simplicity and ease of implementation.
How it Works
In this structure, wholesale distributors sales reps receive a commission based on a set percentage of the total revenue generated from each sale. The commission rate is determined in advance and applied consistently to all sales. This allows reps to know their earnings directly based on the sales they make.
Example
To illustrate, let’s consider a scenario where a sales rep sells the aforementioned service for $500. With a commission rate of 10%, the sales rep would earn a commission of $50 for each successful sale.
When it’s best
The revenue commission structure is best suited for situations where products or services have a set price point. It is particularly favorable for companies aiming to gain market share or enter new markets, as the focus is on achieving larger business goals rather than immediate profit.
5. Territory Volume Commission
This structure is a unique sales compensation plan that distributes commissions based on the sales generated within a specific territory. This approach ensures that the commissions earned within a territory are divided equally among all sales reps working in that territory.
How it Works
Under this structure, the sales generated by all sales representatives within a designated territory are combined and totaled. The total sales revenue is then divided equally among the sales reps working in that territory. Each rep receives a commission based on their share of the total sales volume.
Example
For example, suppose a territory consists of three sales representatives: Rep A, Rep B, and Rep C. In a given period, the total sales generated in that territory amount to $100,000. The commissions earned would be divided equally among the three reps, with each receiving $33,333 as their commission.
When it’s best
The territory volume commission structure is particularly suitable for sales teams operating in regions or territories where collaboration and teamwork are essential. It fosters a sense of shared responsibility and encourages reps to support one another in driving sales within their designated territory.
6. Gross-Margin Commission
The gross-margin commission structure is a variation of the revenue commission structure, where a sales representative’s commission is calculated based on the gross margin generated by each sale. Unlike the revenue commission structure that focuses on the total sale price, this structure takes into account the costs associated with closing a deal, resulting in a more accurate representation of the actual profit.
How it Works
Under this structure, the gross margin is determined by subtracting the costs associated with a sale from the sale price. The commission is then calculated based on this gross margin rather than the total sale price. Sales representatives receive a commission percentage that is applied to the gross margin of each sale they make.
Example
Let’s consider an example where a sales representative earns a 15% commission on the gross margin of each sale. If a product is sold for $1,000, and the associated costs, such as production or distribution expenses, amount to $300, the gross margin would be $700. The sales representative would then earn a commission of $105 ($700 * 15%) for that sale.
When it’s best
This is particularly suitable for B2B businesses that want to incentivize sales representatives to focus on generating sales with higher profitability. By basing the commission on the gross margin, rather than just the total sale price, it encourages reps to prioritize deals that have better profit margins and consider the associated costs in the sales process.
7. Tiered Commission
The tiered commission structure is a widely used commission plan that rewards sales reps with higher commission rates as they achieve specific performance milestones.
How it Works
Under the tiered commission structure, sales reps earn different commission rates based on their performance levels. As they meet or exceed predetermined thresholds, such as closing a certain number of deals or reaching a specific revenue milestone, their commission rate increases for subsequent sales. The higher the tier they achieve, the greater their commission percentage.
Example
Let’s consider an example of a tiered commission structure with three tiers. In the first tier, sales reps earn a 5% commission rate on all sales. Once they reach a certain sales target, they move to the second tier, where they earn a 7% commission rate. If they surpass an even higher target, they enter the third tier, where they receive a 10% commission rate. This tiered approach motivates sales reps to strive for higher performance and be rewarded accordingly.
When it’s best
The tiered commission structure is best suited for companies looking to incentivize sales reps to achieve and exceed specific performance milestones. It provides a clear progression path for sales reps, giving them a tangible goal to work towards and rewarding them with higher commission rates as they demonstrate exceptional sales performance.
8. Residual Commission
This structure is a commission plan that rewards sales reps based on the ongoing revenue generated by the accounts they acquire. Unlike other commission structures that focus solely on one-time sales, the residual commission structure ensures that sales reps receive commissions as long as the accounts continue to generate revenue.
How it Works
Under the residual commission structure, sales reps earn a commission based on the recurring revenue generated by the accounts they acquire. This commission is typically calculated as a percentage of the ongoing revenue generated by those accounts.
Example
Suppose a sales rep earns a 5% commission on the recurring revenue generated by the accounts they acquire. If they acquire an account that generates $10,000 in monthly revenue, the sales rep would earn $500 in commission each month as long as that account continues to generate revenue.
When it’s best
The Residual Commission structure is particularly suitable for B2B businesses that rely on recurring revenue streams and prioritize customer retention. It incentivizes sales reps to not only focus on acquiring new customers but also on building strong relationships and providing exceptional customer service to ensure long-term revenue generation.
9. Multiplier Commission
The multiplier commission structure is a dynamic compensation plan that allows businesses to customize their commission rates based on sales representatives’ quota achievement.
How it Works
In the multiplier commission structure, a basic revenue commission percentage is established as the starting point. This percentage serves as a baseline commission rate for sales reps. However, the actual commission earned is determined by multiplying this baseline percentage by a predetermined figure that corresponds to the representative’s quota achievement.
Example
Suppose a sales rep has a baseline commission rate of 5% on all sales. The predetermined multiplier figure based on quota achievement is set at 1.2. If the rep achieves 100% of their quota, they would earn the baseline commission rate of 5%. However, if they exceed their quota by 20%, their commission rate would be multiplied by the predetermined figure of 1.2, resulting in a commission rate of 6%.
When it’s best
This structure is best suited for businesses that want to create customized compensation plans that motivate their sales team to achieve higher sales targets. This structure encourages sales reps to surpass their quotas and provides additional financial rewards for exceeding expectations.
10. Draw Against Commission
The Draw Against Commission structure provides sales representatives with a guaranteed amount of money each month, regardless of the number of sales they generate for the company.
How it Works
Sales reps receive a fixed amount of money as a draw or advance on their future commissions. This draw serves as a guaranteed income that helps cover their living expenses during the initial stages or challenging periods of their sales career. The draw is typically deducted from the commissions earned by the reps in future periods.
Example
Suppose a sales rep is guaranteed a monthly draw of $2,000. If their commissions for a particular month amount to $1,800, they would receive the guaranteed draw of $2,000, and the remaining $200 would be carried forward as a negative balance against future commissions. In subsequent months, when the rep’s commissions exceed the draw amount, the negative balance is gradually repaid until it reaches zero.
When it’s best
This commission structure is particularly beneficial for new hires, ramp periods, extended periods of change and uncertainty, and during training phases.
The draw against commission structure provides a safety net for sales reps during challenging periods and helps mitigate the risks associated with variable commissions. It ensures a predictable income stream, enabling sales reps to maintain their motivation and focus on their sales activities without excessive financial pressure.
Final Thoughts
Remember that no sales compensation plan is perfect—your priorities are constantly shifting, your reps are constantly looking for new loopholes, and your prospects’ preferences change on a regular basis. Follow the best practices above to create a sales compensation strategy that is tailored to your distribution business needs and resources to help drive bottom-line success.
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