Fixed salary, commission, bonus: how much should a salesperson be paid?

Commission and sales are two words that are often heard together.

While remuneration is naturally a driving force for everyone, it is particularly so in the sales sector, where representatives have to redouble their efforts to win, sell and outperform the competition.

So if a company's success depends in part on its sales force, it needs to offer a motivating remuneration package to boost sales performance.

So what form of remuneration should you adopt: fixed, variable or both?

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How is a sales rep paid? The different types of remuneration

Fixed remuneration

Whether or not they are paid commission, salespeople receive a fixed salary. In addition to sales, their activities include day-to-day tasks such as customer relationship management, in particular updating the CRM database and customer follow-up.

☝️ Naturally, the salary paid to sales staff varies according to their length of service. According to MyBizDev, the salary of an entry-level salesperson (average fixed salary) is €23,000 a year.

Variable pay

In addition to the fixed salary, the company often offers a variable pay plan. This enables them to offer a reasonable fixed salary, supplemented by a variable component that encourages and rewards performance.

Whether it's a sales commission or a target-based bonus, a predetermined percentage or amount is rewarded according to sales achieved or targets met.

☝️ According to UpToo, the average salary in sales in 2021 will be 51,000 euros gross per year, including 13,000 euros in variable bonuses.

Commission or bonus, how do you choose?

To begin with, the good news is that they are not mutually exclusive.

A company can pay commission to its sales staff on the basis of turnover achieved, and pay bonuses based on the achievement of additional sales targets.

Here's how they differ, and when they apply.

Sales commission: advantages and disadvantages

Sales commission is variable remuneration calculated on the basis of results. It may be a percentage of:

• of sales achieved excluding VAT,
• MRR (Monthly Recurring Revenue ), for companies invoicing subscriptions,
• gross margin, etc.

It is suitable for sales people who are responsible for sales from A to Z.

In general, commission is calculated from the first euro of the sale, but some advocate defining a trigger threshold, when there is a fixed salary.

👍 The main advantages of sales commission are :

• it is easy to set up, calculate and understand for both the salesperson and the payroll department ;
• it allows for a significant increase in the variable part of the salary, making it a great motivational lever.

👎 The major disadvantage is that remuneration is based on business volume, which can push sales staff to sell more and more, to the detriment of customer relations objectives, which are increasingly at the heart of strategies.

There is also a risk of inequality between salespeople, with easy pay for those who already have a highly developed portfolio and who can trigger recurring sales (sometimes described as " situation rents").

Target bonuses: advantages and disadvantages

Also known as bonuses, target-based bonuses reward not just sales growth, but the performance of the sales team. They are therefore based on both quantitative and qualitative indicators, unlike commission-based bonuses.

The paradox is that qualitative indicators must be quantifiable. If they can't be measured, it's hard to calculate a bonus!

Example of measurable quality indicators:

• changes in the customer satisfaction rate,
• the proportion of sales generated by new customers.

The target-based bonus is therefore better suited to sales people who are not solely responsible for sales. It is defined over a period, and the target is reset at the beginning of the next period (month, quarter).

It is calculated on the basis of whether a target has been achieved, and sometimes whether it has been exceeded, and can also be capped.

For example: a bonus of €100 per month is awarded if 10 new customers are signed up during the month. If 11 new customers have signed up by the end of the period, the bonus can be calculated as follows: 110% of the target, i.e. 100 x 1, 10 = €110 bonus.

👍 The advantage of the bonus is that it encourages sales development, but also the achievement of other equally strategic objectives.

👎 But the bonus system is more difficult to set up and calculate: who can benefit from it, the sales team, the marketing team too? And according to what objectives? How can we ensure that these targets are motivating but realistic, so as not to have the opposite effect?

How do you define the sales team's remuneration plan?

Defining a remuneration strategy based on objectives

You've understood the advantages and disadvantages of commission and bonuses.

Everything depends on the sales and marketing strategy in force: is it to develop sales or service quality? Volume or value?

What's more, in some companies, the sales team may be divided up according to distinct missions and commercial objectives:

• The SDR (Sales Development Representative) is responsible for generating sales opportunities (leads), qualifying them and then prospecting.
  ▶ ️ A bonus should be set according to the number of qualified leads sent to the Æ.
  
  
• A customer account manager, or Æ (Account Executive), converts the prospect into a customer.
  ▶ ️ He makes the sale. He or she may receive a commission calculated on the basis of sales excluding VAT generated, or a bonus based on the number of contracts signed.
  
  
• The CSM, Customer Success Manager, is the sales person who accompanies the customer after the sale, from onboarding to support, to ensure that the customer is satisfied.
  ▶ ️ This professional's bonus can be valued in relation to the loyalty rate, or the NPS for example (recommendation rate).

Determining the remuneration system

Depending on your business model, whether you are just launching or in a long-term situation, think about these questions. Is it better to :

• mix fixed salary and commission on sales, or pay solely in commission?
• Should you opt for capped commission, or offer tiered commission?

Fixed salary and variable salary

▶ ️ A fixed salary pays for the salesperson's skills. If it is too low, it can not only complicate your recruitment, but also undermine the salesperson's motivation. If it is too high, it can also reduce their involvement in developing the customer portfolio or sales.

Be careful: even if there is an element of variable pay, the fixed salary must not be less than the minimum wage.

▶ ️100% variable pay does exist, but it is risky for the quality of the customer relationship and the effort that the salesperson will invest in it.

It only applies to self-employed or outsourced salespeople, who are more likely to want to sell a lot quickly than to sell well. A salesperson paid on commission may also feel financially insecure, which will sooner or later lead them to find more comfortable and less stressful remuneration elsewhere.

Capped or tiered commission?

▶ ️ Commission is a remuneration system that rewards performance to motivate salespeople to close as many sales as possible.

Capped, it can be an interesting way of avoiding a "gold rush", and enabling the company to estimate and control the budget dedicated to remunerating salespeople.

However, it can put the brakes on sales performance once the target has been reached. But the time they don't spend looking for new sales can also be used to pamper their customers, and trigger new sales later!

▶ ️What about tiered commission? How does this work?
For example, a salesperson receives 100% of the commission if they reach between 80% and 100% of their target, and 125% if they reach between 100% and 150% of their target. The risk here is that they will be satisfied with reaching 80% of their target in order to receive their full commission.

How do you calculate the commission system or plan?

1. Define the basis for commission: certain products or services with low margins may be excluded from the commission plan, so you need to draw up a list of those eligible for commission.
   
   
2. Define the commission rate: this may be fixed, but it may also vary according to the difficulty of selling a particular product, in which case a commission scale should be drawn up.
   
   
3. Choose capped, tiered or progressive commission: commissions can be capped, but they can also be increased once a certain turnover has been achieved. It's up to you to see what motivates your troops the most, and adjust accordingly.
   
   
4. Choose the commission period: monthly, quarterly? Weekly? Periods that are too long are not effective, as salespeople need to see the results of their work on a regular basis.
   
   
5. At the end of each period, calculate the amount to be paid to the sales rep, based on the commission base, multiplied by the applicable rate or rates, if there are several.

☝️ To save time and avoid errors, we recommend that you use sales management software such as EBP Gestion Commerciale. This tool enables you to optimise your entire sales chain, including the management of your sales staff: it takes into account your commission scale and the type of commission (based on turnover achieved or collected, etc.) to remunerate your sales team easily.

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How much commission should a salesperson earn?

Here is an example of a remuneration scale for salespeople working in the online software sector, based on the 2021 trends observed by UpToo:

Defining commission is more complex than a simple percentage, because it also depends on the fixed salary offered. The key is to find the right balance between sales performance and employee well-being, so as to encourage commitment over the long term.

Whatever the remuneration system, be transparent with your team. The pay and commission scale needs to be clear and communicated to achieve the desired motivating effect.