How to use variable pay in your small business

You can use variable pay to motivate your employees, create a competitive advantage when hiring and reach your revenue goals. How to use it.

  • Variable pay combines bonuses, commissions, and management by objectives encouraging your sales agents to increase sales.
  • Your variable pay can be set up using six different commission structures.
  • Variable pay can be used to establish your competitive edge in hiring and help you achieve your revenue goals.
  • This article is for business owners interested in increasing the variable pay of their sales agents’ compensation.

Around the holidays, employees of all stripes receive bonuses. The extra money is a nice gesture in a season of generosity and gratitude. Sales employees are treated differently, as they often receive dividends or other types of variable pay throughout the year. Learn how employers can use variable compensation to motivate their sales team and determine the initial pay rate.

What is variable pay?

Variable pay is extra pay you give to your sales staff when they reach specific performance targets or sell more. Variable pay is, for example, when your sales agents receive a certain amount extra every time they close a deal.

The term “variable’ reflects that salespeople rarely, if at all, earn the same amount per pay cycle. On the other hand, base salaries are constants and do not vary from one pay cycle to another. The employee’s total pay is the sum of their base salary, variable pay, and bonus.

What are the types of variable pay?

Three types of variable pay are bonuses, commissions, and management by objectives.

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  • Commissions Most employers will reward their sales agents with a percentage of every sale. This is called commission. Let’s say, for example, that your sales agents receive a 2% on their total sales. Say a salesperson makes a sale of $6,000 during this pay period. Then, you’ll add 2%, or $120, to the next pay.
  • Bonuses When commissions are based on the value of a sale, bonuses may be unrelated to sales. You’ll likely give higher bonuses to your top-performing agents than you will your bottom-performing ones, but these bonuses are not necessarily linked to the value of sales. Bonuses are one-time payments that have little direct impact on individual deals.
  • MBOs By setting MBOs, you give your employees goals that they must achieve by a specific deadline. You can provide financial incentives to your team to motivate them to meet these deadlines. You can add a new type of variable wage to your payroll.

What are the various types of commission structures for sales?

You can choose between several different sales commission structures if you want to use commissions as the primary variable form of pay.

Tiered commission structure

In a tiered commission structure, the salesperson’s variable pay increases with their sales total. Let’s say, for example, that your agents earn 3% on all sales. This is an excellent start to a commission program that will motivate your sales team, but adding tiers can make it even more motivating. This 3% commission can be increased to 5% of your total sales to reach $200,000, further motivating your sales team.

Structure of revenue commission

When you think about commissions, you may think of revenue commission structures. This structure is a flat rate for every sale. For example, a 2% commission for a $6,000 purchase. This is the most straightforward structure to track and implement, so it’s a good choice for newer or smaller sales teams.

Draw-against commission structure

The extra wage paid by draw-against structures of commissions is more predictable than any other form of variable pay. The draw-against sum is the additional wage you pay your sales agents, even if they don’t make any sales. This amount can be deducted from future revenue-based commissions. This is an excellent commission structure for new representatives or during economic uncertainty.

Gross margin commission structure

The gross margin commission structure is almost identical to the revenue commission structure. This structure calculates commissions on gross profit rather than revenue.

We’ll see how this structure affects the 2% commission mentioned above on a sale of $6,000. If the expenses for that sale are $500, then the profit on the deal would be $5.500. Then you calculate the commission on this smaller amount, 2% of $5500 or $110. A gross margin structure may be the best option if you want to motivate your team while also maximizing your profits.

Multiplier commission structure

The multiplier structure is a combination of revenue and tiered systems. It’s a complex method. This combined structure will help you track and build your sales pipeline. Calculate each salesperson’s compensation based on how much of their sales target they’ve reached. Employees who are 70% of the way to their quota can earn 1%, while those who have reached their quota in full could make a commission of 2%.

Commission only structure

A salesperson paid only on commission receives no base salary or variable pay. Salespeople may be motivated by removing base salary from their pay package, but stress levels can increase when they do not have a fixed income to fall back on. Working too hard or too long may be necessary, which can lead to burnout.

What is the difference between a bonus and a commission?

Commissions are calculated as a percentage of the total sales made by a salesperson. Therefore, there is no theoretical cap. Bonuses are flat-rate payments made to salespeople that achieve specific goals. This flat rate will ensure that prices do not exceed a certain sum and can motivate your employees while not affecting your profits too much. You can also create a bonus pool and award a portion of the usual bonus to employees that partially achieve a goal.

Bonuses may be more beneficial for older or larger sales teams. These bonuses are also great for those on your team who do not directly make sales. It may be more helpful to pay commissions for groups primarily comprised of employees who generate leads and make sales.

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