Businesses are changing dynamically in this modern age. Innovations you do today can become outdated in just a couple of months. Customer demands and market needs are constantly changing and it has become necessary for businesses to keep up with these changes to stay relevant in the long run.
Company strategies are changing to fulfill customer expectations and this has warranted a change in the sales process as well. Since salespeople are important for the sales efforts of any organization, terms like incentives, variable compensation, and rewards are becoming more and more common. They help in improving the performance of sales representatives and earning more revenue for the company. But what is variable compensation and how does it improve the efficiency of salespeople? Let’s have a look.
What is Variable Compensation?
A number of companies offer their employees a salary structure containing a mixture of fixed pay and variable compensation. Variable compensation in business is an incentive that is paid over the base salary of an employee and is often given to motivate, reward, and retain employees. This variable compensation largely depends on the employee’s performance and is given when the employee achieves a certain quota or hits a milestone.
Variable compensation in business can also be referred to as different terms such as variable pay, commission, or incentive pay. There can be different ways in which an organization can provide variable compensation to its employees. These include:
- Commission: Commission is a part of the revenue that a salesperson receives from each successful deal they perform.
- Profit-Sharing: Instead of giving a commission for every deal, organizations can reward their employees with a portion of the annual or quarterly profit in addition to their base salary.
- Bonus: Bonus is an unspecified amount that can change as per the employee’s working level and that year’s results for the company. It is given as a lump sum amount to every employee and is usually given once every year.
- Stock Option: Some companies also offer stock options as an alternative to cash compensation to not just new employees but to top-performing existing employees as well. Stock options allow employees to purchase company shares under certain circumstances.
Sales commission structures create a plan for disbursing base salary and variable pay to the employees and is a great way to ensure transparency and efficiency in compensation. A tiered commission plan is the most common commission structure under which sales reps earn a percentage of sales until a certain target is reached. Once reached, the percentage is increased to encourage sales reps to close even more deals and improve the compensation percentage.
Benefits of Variable Compensation
It is common to think why companies offer variable compensation and why don’t they just pay the sales reps upfront for any sales or efforts they put in. The answer to this is that variable compensation plans are designed to reward the daily activities of an employee and is a great way for small-budget companies to grow their business at the start. They can’t pay the employees a lot upfront but can easily make up for the low base salary by giving compensation from the sales they achieve.
1. Aligns the Organization
The right goals and KPIs for providing variable compensation to the employees can help in aligning the organization and its different teams to work towards a common goal. When everyone in the organization knows what their responsibilities are, what targets they are bound to achieve, they tend to get in sync with each other and work together to achieve that target.
2. Steer Salespeople Strategically
Sales reps have a simple objective – do as many sales as possible. While this is great for a company to generate revenue, it can sometimes lead them astray from the output desired by the organization. Relevant KPIs and targets for variable compensation calculation for sales can help organizations in steering their sales team to focus on selling certain products, services, tending to specific customers, or working towards long-term company needs. This brings the sales team together to work on a common goal and add more revenue for the company.
3. Motivates Sales Representatives
Perhaps the biggest and most obvious benefit of variable compensation is motivating the sales team. A sales rep can undertake a lot of different activities right from the first contact to final conversion and these activities can discourage them to put in more effort. But with some extra monetary reward on the line, sales reps are ready to go the extra mile to contact more leads and convert them into prospective customers. It also helps in increasing the top-line growth and decreasing the bottom-line reduction.
4. Enhance Customer Satisfaction
Salespeople tend to lose motivation to serve customers as they start closing more deals. For them, a successful deal marks the end of the sales process and that is why they don’t put a lot of effort into after-sales service. With the help of variable compensation, they get financial incentives to not just complete more deals, but to serve customers better in order to get more compensation. Satisfied customers are more likely to do repeat business with the company and that gets added to the compensation plan of an employee.
5. Important for Talent Management
While a mundane working routine can be boring enough for sales reps, or any other employee for that matter, to stop trying at their jobs, it can drive them to leave the organization as well. An attractive variable compensation plan can work very well in retaining existing employees and decreasing employee turnover. Apart from keeping people in, it can be helpful in attracting new talent as well. For a sales rep, their job is going to be more or less the same in any organization: make contact with a lead, converse with them and turn them into a customer. What differentiates your organization from others is the benefits and perks you can offer a new joiner.
6. Creates a Culture of Performance
Since variable compensation depends on the number of sales a sales rep is able to complete, it creates a culture of performance inside the organization. Everyone aims to work harder for closing more deals and increase their variable compensation which ultimately pushes the bottom line of the organization. Variable pay correlates with performance and an employee earning less than their colleagues will help them quantify their performances and bring improvement to earn more. This not only increases the end salary for an employee but also helps in increasing the productivity of the organization.
How to Implement a Variable Compensation System?
With so many benefits of variable compensation, it becomes important for organizations to learn how they can implement a variable pay system in their existing employee benefits policy.
1. Set Target for Variable Pay
The first step to giving incentives to your employees is to decide on the metrics for which the employees will be getting variable compensation on top of their fixed salary. This target can be anything depending on your business and what objectives you want to achieve in the short-term and long-term.
Consider the example of an insurance company. To achieve a certain revenue mark, you can direct every salesperson that they’ll receive a percentage of every policy they sell successfully and after hitting a certain mark, say 50 policies, they’ll receive a bonus and their compensation percentage will increase as well.
2. Make the Policy Clear and Transparent
Try to make your variable pay plan as transparent and explicit as you can. You won’t want your sales reps to be confused about when and how they’ll get paid. A well-structured variable pay plan will show what every salesperson needs to do to get variable compensation and what is the eligibility critters for such payment.
While drafting the pay plan, explain to your employees about:
- The maximum variable pay they can earn for every order or upon achieving/exceeding their targets.
- What do they need to do to get the variable pay?
- How and when will the compensation be paid to them.
- How is the variable compensation aligned with the company’s overall sales.
- What can the salesperson do to increase their variable compensation.
3. Track Employee Performance and Pay on Time
Now that you’ve set up the conditions for paying variable compensation to your employees, it is time to figure out when these payments will be made. A great solution to this is to establish an employee performance review process and keep track of an employee’s progress towards that goal. Set up regular meetings, analyze employee performance, create intuitve and visual dashboards for sales people, their managers, sales leaders to track performance and pay the variable compensation on time.
Let’s take the example of the insurance company again. Take a look at the sales tracking software to see which employees have reached their target and how many sales they have done in total. Not only will this help in calculating the final commission of every sales rep, but it will also determine whether they’ll be receiving a bonus or not.
There are several payroll softwares and incentive calculation softwares that can help you in reconciling payments to the employees regularly.
4. Incorporate Employee Feedback
Feedback from your employees is crucial in understanding whether your variable pay structure works or not. If your employees don’t feel motivated with the variable compensation or think that they are being undervalued for their efforts, you’ll be wasting money.
For instance, if your variable compensation plan includes a bonus at the end of reaching a target but your employees prefer a per-sale compensation, the compensation plan will have no effect on their motivation or end results.
How to Perform Variable Compensation Calculation?
Being a percentage of the total compensation given to an employee on top of their base salary, there can be different ways for variable compensation calculation depending on the company and how big is their business.
Variable compensation will also depend on the type of compensation being given to the employees. If it’s a cumulative bonus at the end of each sales cycle, the amount will be different from giving a small percentage of every successful deal. If it’s based on a profit-sharing basis, the compensation will change according to the company’s profit that year.
Variable pay also changes as per the job stage of an employee. Since employees at the lower level require more incentive to stay in the company and achieve their target, their percentage of commission is higher than some of the top executives.
How Incentivate Helps in Variable Compensation Management?
Variable compensation management is doable if you have a handful of sales reps working for your company. However, the more sales reps you employ, the tougher it will become to manage variable compensation manually with spreadsheets. Incentivate is a new-age, enterprise-grade sales performance management and analytics platform that helps clients across industries and sizes with their variable compensation calculations and management.
It is a no-code platform that can be easily used by your sales team. Incentivate can easily integrate with various sources such as CRMs, ERPs, HRMS softwares to pull relevant information to calculate variable pay associated with key sales & operational metrics with the click of a button.
Incentivate provides interactive and visual reports that make it easier for all the stakeholders to understand the outcome of different business processes and to accurately identify actionable business insights. Performance curves of different employees give an idea to the sales manager how every employee is performing and whether they are an asset to the company or moving towards being a liability.
With the help of an intuitive user interface and innovative design, the implementation times can be reduced from months to a couple of weeks. Faster implementations, higher operational efficiency, and quicker changes lead to a lower cost of ownership for the organization as well. Incentivate supports every role in an organization and can seamlessly scale as per the strength of the company.
Incentivate meets international guidelines and requirements for security and compliance and ensures that your data remains secure on cloud. It is a useful solution for calculating variable compensation and presenting it in an intuitve and visual manner.