Financial sales incentives are a crucial tool for keeping your sales team motivated and productive. Just look at some of these stats:
- A survey by the Aberdeen Group found that sales reps achieved 27% higher individual quota attainment with a sales incentive program
- The Society for Human Resource Management reported that an effective sales incentive program increased revenue by 20% on average
- According to research published in the Journal of Marketing, sales reps offered financial incentives outperformed their non-incentivized counterparts by 22%
In study after study, the evidence is clear, financial sales incentives have a significant impact on sales productivity.
What are financial sales incentives?
Financial sales incentives are rewards paid to sales professionals for achieving a specific sales goal or objective.
These incentives can take many forms, including:
- Bonuses- Bonuses are financial rewards paid out at predetermined intervals (monthly, quarterly, annually) or after a salesperson achieves a specific milestone or target.
- Profit-sharing- Profit-sharing programs reward employees with a portion of the company’s profits based on their role and performance.
- SPIFFs- SPIFFs are a type of financial incentive that rewards sales reps for achieving specific goals or objectives within a defined period.
- Commissions- Commissions are financial rewards tied directly to sales, the value of which is often represented as a percentage of the sale.
- Activity-based incentives- Activity-based incentives reward salespeople for performing sales-related tasks such as making calls, sending emails, and booking or performing demos.
In this article, we are going to take a closer look at commissions, weigh their pros and cons, and provide advice on using them effectively.
For a deep dive into the differences between SPIFFs and commissions, check out our article — Rewarding Sales Success: SPIFFs vs. Commissions.
What is a commission?
A commission is a financial sales incentive tied to performance, usually calculated as a percentage of the total sales made by a sales rep. Commissions are intended to reward revenue generation, encouraging sales professionals to upsell products and close more deals.
Some common features of commissions include:
- Performance-based- Sales commissions are directly linked to sales performance. The more sales a rep makes, the more they can earn from the commission.
- Flexible structure- Commissions can be structured in various ways, allowing businesses a lot of flexibility when instituting a compensation plan. The two most common commission structures are:
- Straight commission- With this commission structure, sales reps are paid only in commissions and don’t receive a base salary.
- Base Salary plus commission- The most common commission structure, this model sees a sales rep earn a commission in addition to a base salary.
- Flexible rates- Commission rates can be based on a percentage of total sales, or they can be rewarded as a fixed amount per sale.
Rates can vary based on product or category.
Rates can scale, increasing or decreasing based on total sales in a given period.
- Flexible payment schedule- Commission payments can be made at regular intervals such as monthly, quarterly, or annually, or they may be paid out after a specific sales period.
The benefits of financial incentives
Financial sales incentives, such as SPIFFs and commissions, can provide several benefits for your company and your sales team. Some of these benefits include:
- Improved motivation- Financial incentives can motivate salespeople to achieve and exceed their sales targets.
- Better alignment- When financial incentives are tied to an organization’s goals, the objectives of the sales team better align with those of the organization.
- Employee retention- Financial incentives can boost employee loyalty and retention because they naturally reward experience and expertise.
- Skill development- Financial incentives can motivate sales reps to develop their skills and learn effective sales strategies.
Transparent incentive structures with results-driven reward distribution are crucial for getting the most benefit out of financial incentive programs.
Choosing an incentive structure: Asking the right questions
The benefits of financial sales incentives are clear. That said, creating an incentive structure that works for your business can be challenging because there are a lot of factors to consider.
Asking the right questions is a good place to start.
- Goals and objectives
- What are the short-term and long-term goals of your company?
- Which goals take priority?
- Do these goals align?
- Sales process
- What tools does your sales team use?
- How long is your sales cycle?
- Are you primarily focused on new customer acquisition or key account management?
- People and culture
- What are the motivational preferences of your sales team?
- Does your sales team prefer to work collaboratively or autonomously?
- What is the level of engagement and buy-in within your sales team?
- Products and services
- How many different products/services do you sell?
- How simple/complex are the products/services you sell?
- What are the profit margins on the products/services you sell?
Choosing an incentive structure: Weighing the pros and con
Different financial incentives will produce different results. By evaluating the pros and cons of the financial incentives you are considering, you can make informed decisions that align with your sales goal, sales process, and company culture.
The pros and cons of commissions
Let’s examine the pros and cons of commissions.
- The pros
- Rewards improvement- Commissions are performance-based, encouraging your team to develop and grow their skill set in order to achieve greater rewards.
- Alignment with revenue generation- Commissions are tied directly to revenue, thus promoting greater revenue generation for your company.
- Clear and consistent- Commissions offer a transparent and consistent reward structure that correlates directly with sales results. This allows you to set clear expectations that leave little room for dispute.
- Long-term thinking- Commissions reward salespeople for building and maintaining long-term customer relationships because repeat sales lead to ongoing commission earnings.
- Rewards improvement- Commissions are performance-based, encouraging your team to develop and grow their skill set in order to achieve greater rewards.
- The cons
- Rewards seniority- Many businesses assign leads to sales reps based on potential deal sizes, with tenured team members receiving the higher value leads.
This can cause discontent among newer team members who may feel they have lower earning potential.
- Encourages high-volume sales- Many cost structures offer discounts for high-volume sales. Overemphasizing these “bargain prices” can lead to lower profit margins, especially when commission payouts are factored in.
When to choose commissions
Commissions are ideal for companies looking to align sales compensation directly with revenue generation and for creating long-term performance incentives that reward repeat business.
Commissions are well suited to sales teams motivated by internal competition and personal development
You should choose commissions for:
- B2B sales
- Customizable products/services
- Subscription-based products/services
- Products with complex/lengthy sales cycles
Commissions require a significant financial commitment from the company because they are directly tied to sales revenue and impact overall compensation costs.
A CRM is the best tool for managing your financial incentive programs
A CRM (customer relationship management) platform can help you manage your financial incentive programs effectively and efficiently.
Some ways in which a CRM system can support the management of these programs include:
- Performance Tracking- A CRM system enables a sales manager to track and monitor individual and team performance in real-time.
You can see revenue generated, deals closed, and sales targets achieved.
What’s more, you can share these results with your team through personalized dashboards and custom reports.
- Reporting and analytics- CRM platforms offer robust reporting and analytics capabilities that allow you to generate comprehensive reports on the performance of your sales incentive plan.
With these insights, you can identify trends and highlight areas for improvement.
You can use this information to make data-driven decisions, refine your sales incentive plan, and optimize its impact on sales performance.
- Automated calculation- A CRM system can automate the calculation of incentives based on the predefined criteria you set.
This eliminates manual calculations, reduces human error, and ensures timely and accurate incentive payouts.
Plus, this information can be updated in real-time, allowing your team to track their progress towards incentive goals.
FreeAgent CRM can help you manage and improve all your financial incentive programs
FreeAgent CRM is designed for today’s world of work and our robust toolset is ideally suited to supporting the varied work processes of modern businesses. FreeAgent is:
- Easy to use: FreeAgent works like you expect modern apps to work, providing a user experience that feels fresh and familiar. Teams love working in FreeAgent, leading to high adoption and greater ROI.
- User-configurable: FreeAgent can be configured by you to work the way you do. This means you don’t need outside support to add a form field, adjust a CRM automated workflow, or try out a new process.
- Customizable: With FreeAgent, apps, forms, and configurations are all completely customizable, allowing you to capture and connect your data in any way you like.
To see FreeAgent in action, get a demo, and discover for yourself how FreeAgent can help you have workdays full of impact.
