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 Sales Compensation?
Sales compensation is the amount of money paid to a salesperson per year. A base salary, commission, and additional monetary incentives to encourage salespeople to meet or exceed their quotas are common forms of compensation.
A sales compensation program should encourage high performance in a sales team while also delineating increased salaries for higher-level sales reps and managers.
What is a Sales Compensation Plan?
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.
A sales compensation plan’s purpose is to encourage positive behaviors across your team, set expectations and compensation standards for all salespeople, and drive results to achieve overall team and organizational goals.
About a great Packaged Goods Sales Incentive Program
A packaged goods sales incentive program is a promotional strategy used by companies in the consumer goods industry to incentivize sales of their products. This type of program typically involves offering rewards or bonuses to sales representatives or distributors who achieve specific sales targets or objectives within a certain time frame. The rewards may take the form of cash bonuses, gift cards, merchandise, or other incentives.
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
The base salary plus commission plan is the most common sales compensation pay structure. This structure pays reps a fixed annual base salary as well as a commission. They benefit from the security of a consistent income as well as the economic incentive to sell.
This plan is ideal for distribution businesses because it provides greater transparency into your expenses (due to less variability) and cash flow as well as the opportunity to hire highly motivated, competitive sales reps. Furthermore, because you pay reps a base salary, they are required to perform non-selling tasks such as training new team members.
2. Base Salary + Bonus
A base salary plus a bonus compensation plan is suitable when your reps consistently meet their pre-set targets. This strategy provides a high level of predictability while still motivating your sales representatives to close sales. For example, you could pay $30,000 as a base fee and $15,000 if you sell X amount per year. If you know that seven of your ten employees will consistently meet quota, and their total earnings are $60,000, you can budget $420,000 for bonuses.
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. This structure, however, works best for companies that use temporary and/or contract salespeople, have short sales cycles, and can offer large commissions.
4. Revenue Commission
Every time a sales representative sells a product or service, they are paid a predetermined commission. This type of commission structure is simple, which is why it’s so popular.
5. Territory Volume Commission
This structure is unique. The sales generated within a territory are totaled, and the commissions earned are divided equally among all sales reps working within that territory.
6. Gross-Margin Commission
The gross margin commission structure is similar to the revenue commission structure. The difference is that a rep’s commission is calculated based on the gross revenue generated by each sale rather than the total sale price.
In other words, this commission structure calculates actual profit by evaluating a product’s sale price and the costs associated with closing a deal. Sales reps are then paid a commission based on this figure.
7. Tiered Commission
A tiered sales commission structure is popular among sales reps, particularly those who are top performers and/or highly motivated. In a nutshell, salespeople earn higher commission rates after closing a certain number of deals or exceeding a certain amount of revenue.
8. Residual Commission
The residual commission structure pays sales reps a commission as long as the accounts they acquire generate revenue. As a result, it is in the best interests of sales reps to keep their customers for as long as possible and prevent customer churn.
9. Multiplier Commission
The multiplier commission structure can be difficult to implement, but it allows businesses to create customized compensation plans that truly motivate their sales team to make more sales.
Multiplier plans start with a basic revenue commission percentage that is multiplied by a predetermined figure based on a representative’s quota achievement.
10. Draw Against Commission
Sales reps are guaranteed a certain amount of money each month under this commission structure, regardless of the number of sales they generate for their company. This structure is generally best for new hires, ramp periods, long periods of change and uncertainty, and training.
How to Create a Sales Compensation Plan
Here are the steps to creating a compensation plan.
1. Set goals for your sales compensation plan
Setting goals is the first step in developing a sales compensation plan strategy; laying out your business objectives is an important part of any strategy. For example, you should consider:
- Do you want to expand your market? Or would you rather concentrate on a few key accounts?
- Is it more important to cut costs at this time? Or do you need to create a more collaborative environment for your sales reps?
2. Choose a type of sale compensation plan
Now that you’ve established your objectives, it’s time to decide which compensation plan to implement at your distribution company. Refer back to the sales compensation plan examples above. While deciding which plan is best for your company, consider the following questions:
- What is my overall budget?
- How many sales reps do I have?
- What types of compensation plans do my competitors use?
- What will my sales reps expect out of the plan implemented?
3. Consider roles and responsibilities
Next, consider the members of your team and the roles they are assigned. Sales managers and sales reps, for example, have distinct jobs and responsibilities. It doesn’t make sense to compensate them in the same way.
As a result, you must choose different pay structures for each role. That way, your employees will be fairly compensated for their efforts.
4. Use sales force automation
After determining your plan’s goals and considering your team members’ roles and responsibilities, you can select a sales app or route sales software to aid in the action of compensating your salespeople. The sales force automation software enables you to keep track of your sales reps’ performance, allowing you to see how many deals they close and measure their KPIs.
5. Set quotas and compensation expectations
It’s now time to set quotas for individual sales reps and/or your entire team and establish the best times to pay sales compensation. This will allow you to set compensation expectations with your salespeople so that everyone knows what is expected of them and how they will be compensated.
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.
For more details about our B2B software solution for mobile sales software or B2B eCommerce, please contact Orders in Seconds.