Understanding Variable Pay: Boosting Sales Team Motivation

Employees across various sectors often get bonuses during the holiday season. This additional compensation can serve as a significant gesture during a time marked by generosity and appreciation. However, the mechanism is somewhat different for sales employees. They earn bonuses or other types of variable pay multiple times throughout the year. Continue reading to discover how employers can use variable pay effectively. This motivates their sales teams. It also helps establish their initial pay rates.

What is variable pay?

Variable pay refers to supplementary compensation that sales employees receive when they reach specific performance targets or make extra sales. For example, your sales agents earn extra pay for each sale they complete. This additional income is classified as variable pay.

The term “variable” highlights that sales employees rarely earn the same amount of this compensation each payroll cycle. If they ever do, it is a rare occurrence. In contrast, base salaries remain constant and do not fluctuate between pay cycles. Together, an employee’s base salary and variable pay constitute what is referred to as the employee’s pay mix.

Editor’s note: In search of an appropriate payroll service for your business? Complete the questionnaire below to connect with our vendor partners about your requirements.

Variable pay is the additional money that sales agents earn above their base salaries upon achieving set performance metrics.

What are the different types of variable pay?

Variable pay can be categorized into three types: commissions, bonuses, and management by objectives (MBOs).

• Commissions: Many employers reward their sales agents with a percentage of the sale’s value, referred to as commission. For example, sales agents receive a 2 percent commission on all their sales. If one agent makes a $6,000 sale during the pay cycle, an additional $120 is added to their next paycheck. This amount is 2 percent of $6,000. 

• Bonuses: While commissions fluctuate based on the sale amount, bonuses can be independent of sales. Although higher-performing salespeople generally receive larger bonuses, the bonus amounts are not necessarily tied directly to sales values. Instead, bonuses are awarded as one-time payments, with individual sales having only an indirect effect. 

• MBOs: When you assign MBOs to your employees, you set specific goals for them to achieve within a designated timeframe. Financial incentives can be provided to encourage timely accomplishment of these objectives, thereby introducing another form of variable pay into your payroll system.

What are the different types of sales commission structures?

If you select commissions as your primary type of variable pay, several sales commission structures are available for consideration.

1. Tiered commission structure

In a tiered commission structure, a salesperson’s variable pay percentage increases with their overall sales volume. This means they earn more on each sale as their total sales grow. For instance, if agents earn a 3 percent commission on all sales, they could receive a 5 percent boost. This occurs after surpassing $200,000 in total sales. This change further motivates your sales team.

2. Revenue commission structure

Revenue commission structures are the classic model associated with commissions. This structure consists of a flat-rate commission for each sale—such as the previously mentioned 2 percent on a $6,000 sale. This method is straightforward to implement and track, making it a suitable option for smaller or newer sales teams.

3. Draw-against commission structure

Draw-against commission structures yield extra wages that tend to be more predictable than other variable pay forms. The draw-against amount refers to additional wages given to sales agents. These wages are provided regardless of sales made. They can be deducted from future revenue commission payments. This structure is particularly advantageous for new representatives or during uncertain economic times.

4. Gross margin commission structure

Gross margin commission structures are similar to revenue commission structures. However, they are based on the gross profit of a sale instead of its total revenue.

For example, if a sale of $6,000 incurs $500 in associated costs, the gross profit would be $5,500. The commission calculated on this amount would then yield a payment of $110 (2 percent of $5,500). Gross margin structures are beneficial if your objective is to motivate your team while maximizing profits.

5. Multiplier commission structure

A multiplier commission structure integrates elements of both tiered and revenue models into a more intricate approach. This configuration aids in tracking and nurturing your sales funnel. Commissions are based on the percentage of the sales quota achieved—an employee at 70 percent of their quota might earn a 1 percent commission, while one who meets their quota could receive a 2 percent commission.

6. Commission-only structure

In a commission-only structure, a salesperson earns solely through variable pay, with no base salary. This method may motivate salespeople; however, the absence of a steady salary can lead to increased stress without a safety net. It may also force employees to overwork themselves, potentially resulting in burnout.

What’s the difference between a bonus and a commission?

Commissions are calculated as a percentage of total sales and can theoretically have no limits. Conversely, bonuses are flat-rate payments awarded to salespeople who meet certain performance criteria. This flat rate ensures that payments do not surpass a designated amount, aiding in motivating employees without overly impacting profits. Additionally, you can establish a bonus pool. You can allocate a portion of typical bonuses to employees who only partially meet their goals.

Given these differences, bonuses may be more suitable for larger or more experienced sales teams. Commissions might be a better fit for newer teams. These teams are predominantly comprised of employees who generate leads, close sales, and engage directly with customers.

Bonuses are more advantageous for larger, seasoned, and less sales-driven teams. On the other hand, commissions are percentage-based. They work well for newer, sales-focused teams.

How do you implement variable pay?

Identify if a commission, bonus, or MBO variable pay plan aligns best with your small business. Then, take the necessary steps to implement it. This process is generally straightforward, although it does require tact and attention to ensure fair execution. Here are four important considerations to keep in mind while setting up your plan.

1. Tie incentives to what your sales agents can control.

If your sales team directly interacts with customers, establishing a commission structure would be straightforward. Simply multiply each agent’s total sales by the commission rate.

If your team primarily engages in business-to-business (B2B) sales, reconsider your commission strategy. Your team also handles business-to-consumer (B2C) sales influenced by effective storefront placements. In this scenario, tying commissions to B2C purchases may not motivate your team. Instead, create your commission strategy on the B2B process. Focus on selling B2C products in bulk to retailers. This approach gives your agents a fair chance to earn variable pay.

2. Offer variable pay based on individual (not team) performance.

A team with a weak overall performance may still have standout individuals. It is essential to reward these high-performing agents with their own variable pay instead of linking pay to the team’s collective output.

3. Provide greater variable pay to those with more direct sales impact.

Consider a sales team where members handle distinctly different roles: lead generation, initial outreach to prospects, and deal closure. Each role has varying degrees of influence on the sale. Lead generation typically has the least direct impact, followed by initial outreach, and closing conversations hold the most sway. Your company should structure variable pay accordingly.

For instance, if a $10,000 sale involved three people—one generating the lead, another making initial contact, and an account executive finalizing the deal—you might pay them commissions of 1 percent, 2 percent, and 3 percent, respectively. This would yield totals of $100, $200, and $300, equaling $600. This amount is less than the $900 (3 percent for all three) but reflects their specific contributions more accurately.

4. Utilize payroll software.

As your sales team increases transactions, tracking sales and individual commissions can become increasingly complex. Payroll software can reduce these errors while streamlining commission calculations and payment processes.

The best payroll software for managing variable pay

Managing variable pay can be challenging without the appropriate tools. To assist, we’ve pointed out some of the top payroll services that can navigate the intricacies of variable compensation.

• OnPay: OnPay enables simple additions of commissions and bonuses to employee salaries. It automatically calculates these payments and integrates them into your payroll. OnPay also offers unlimited payroll runs, efficient payroll tax management, and smooth integration with various accounting software. Discover more about this software’s capabilities in our OnPay payroll software review.

• Paychex: This payroll software is designed to handle variable pay structures effectively. It is an optimal option for managing commissions, bonuses, and other complex pay models. With customizable dashboards and all-encompassing HR services, Paychex simplifies payroll management while streamlining tax filings to ensure compliance and reduce administrative burdens. Explore how this software can enhance your business’s payroll management in our Paychex payroll software review.
  
• Gusto: Gusto’s user-friendly interface adds to its advantages beyond payroll processing. When it’s time to process payroll, simply enter any variable pay formats. These may include bonuses or commissions. Gusto will manage the rest to ensure smooth payment processing. For additional features and benefits, check out our Gusto payroll software review. Compare Gusto with other comprehensive payroll services in our QuickBooks vs. Gusto comparison.

• QuickBooks: Renowned for its direct deposit features, QuickBooks also offers various options for adding variable pay. You can either execute a standalone bonus-only payroll run or incorporate variable pay into standard paychecks. Discover more about QuickBooks in our Intuit QuickBooks payroll software review.

Many payroll software programs come equipped with automation features. These features allow payroll processing to be completed in a matter of minutes.

What are the benefits of implementing a variable pay structure?

Variable pay structures not only incentivize employees to work harder for increased sales but also provide additional advantages.

By offering variable pay, you create a competitive edge over other companies vying for sales agents. This benefit can be advantageous both during the hiring process and in retaining a strong existing team. Employees may be less inclined to leave if their pay mix is more favorable than what they might find elsewhere.

Furthermore, variable pay can influence your team’s sales strategies. If you aim to direct your team to specific objectives, align their variable compensation with their effectiveness. This alignment should focus on meeting these targets. Variable pay significantly impacts your ability to achieve revenue goals. A team that meets your expectations is more likely to achieve your financial goals. This makes variable pay beneficial for both employees and the organization.

Incentives that maximize performance and growth

You have a variety of options available. You can identify the variable pay structure that best aligns with your team dynamics. It should also fit your business scale. Providing a mix of base salaries with supplementary incentives creates a strong compensation package. This package makes your company more appealing to potential hires. It motivates current team members to pursue their goals. This motivation contributes to the overall success of your business. This strategic approach elevates employee performance while simultaneously fostering business growth.

Employees, especially in sales, often receive variable pay, which includes bonuses and commissions, as incentives tied to performance. Variable pay differs from base salaries, offering extra compensation for meeting specific sales goals. It falls into three categories: commissions, bonuses, and management by objectives (MBOs). Various commission structures include tiered, revenue, draw-against, gross margin, multiplier, and commission-only models. Implementing a variable pay structure can enhance employee motivation, assist in recruitment, and align team efforts with company goals. Utilizing payroll software like OnPay, Paychex, Gusto, or QuickBooks simplifies managing variable compensation effectively.