The Nuances of Variable Pay and Commission Business Leaders Need to Navigate
In today’s competitive marketplace, companies are increasingly looking for ways to reward and incentivize their sales teams. Variable pay and commission structures offer an attractive option for many organizations, but setting up the right structure can be challenging. From
- deciding which areas to consider when crafting a compensation plan that is equitable for both the employee and the company,
- to determining whether renewals and upsells should be included, to tackling the tricky problem of discounting products without sacrificing incentives
Business owners need a guide to help them make informed decisions about variable pay and commission. This article post provides that guide, helping you unlock the potential of variable pay and commission for your organization.
Understanding Variable Pay and Why Companies Use It
Variable pay is any compensation that is not part of a standard salary or wage structure. This includes bonuses, stock awards, and other forms of incentive-based pay such as commission. A commission is normally based on the performance of an individual or team in terms of sales revenue generated or achieved goals. It often takes the form of a percentage of sales depending on the company’s unique structure.
Why would a company choose to offer variable compensation? When crafted correctly, variable compensation appropriately incentivizes the behaviors and performance important to your company. Top talent is not so easily poached by competitors, and you prevent high performers from aiming for promotions outside of their skillset as they seek higher pay.
Beyond the Basics: Grasping the Intricate Details of Variable Compensation Plans
When setting up a variable pay and commission plan for your organization, there are several areas to consider when crafting a compensation plan that is equitable for both the employee and the company.
One key area to consider is whether renewals and upsells should be included in commission calculations. Depending on your organization’s needs and goals, it may make sense to reward employees for loyal customers who remain with your company over time. On the other hand, some companies may prefer to focus exclusively on new business opportunities, only offering commissions for new sales brought in by employees.
Another area to consider is how products are discounted when they are sold. Deep discounts can be tempting for customers but can also drastically reduce the potential earnings of an employee through their commissions – leaving them feeling unvalued or under-compensated. To prevent this issue from occurring, organizations should strive to create clear policies about discounts offered on products sold by their teams including who can authorize discounts, and how those discounts should be applied to the employee’s variable compensation.
Preserving Culture: Balancing Variable Compensation without Disrupting Company Values
Finally, it's important to select an approach that matches your organization's culture and values when implementing any variable pay or commission system - this will help ensure that everyone in your team remains motivated while still feeling like they are being fairly compensated for their efforts. An effective strategy here might be to set performance goals at levels consistent with those held by previously successful sales representatives so that everyone knows what they need to do in order to earn higher commissions; however, these goals should also be achievable enough that employees feel like they have a chance at success even if they don't hit every single target perfectly each month.
In conclusion, variable pay and commission structures offer great potential benefits for businesses looking to incentivize their sales staff; however, setting them up correctly requires careful consideration from CFOs and COOs looking to create equitable arrangements that meet both their own organizational needs as well as the expectations of their teams.
By taking into account all the factors discussed above when designing your plan – such as including renewals in commission calculations, setting clear limits on discounting products sold through various channels, and choosing an approach that fits with existing company values – you can unlock the potential of variable pay and commission structures for your organization without sacrificing fairness or motivation among your teams.
At FullFunnel we work with companies of all sizes to help them create a variable compensation plan that is both fair and equitable to their employees while at the same time maximizing revenue growth for the organization. If you would like to learn more about our Variable Compensation consulting offering, schedule a consultation with us.