Confusing terminology is inevitable on almost every professional blog. At times, it can seem nearly impossible to separate industry knowledge from meaningless clutter. We understand this process is a waste of your time, which is why we have created this one-stop shop to define all of the basic (and not so basic!) sales terms you need to know.
Sales Terms
Commission rate: The simplest of them all. This refers to the percentage of a sale given to the rep.
Quota: In sales, a quota is a goal or target. Quotas can refer to dollar amounts or it could refer to new customers, the number of products sold, etc.
Quota Retirement: This is the amount of progress made toward one’s quota. Typically this is recorded as a percentage of the quota, a dollar amount, or the number of sales qualified leads.
Sales Qualified Lead: A sales qualified lead (SQL) is a lead that has not only been captured by the marketing team or business development representative but also verified by the sales team. These leads are much more real and have traction behind them.
Accelerator: Once a rep reaches a specific threshold (typically a percentage of their quota for the quarter) higher, or accelerated, commission rates are paid out on subsequent deals.
Clawback: Many sales commission plans use clawbacks as a way of encouraging reps to stay connected with their clients. Clawbacks are often used for subscription-based models to take back a certain percentage of a rep’s commission. Customer retention goals usually trigger clawbacks. For example, a clawback may be enforced if a customer cancels his/her subscription in less than 12 months.
SPIFF: A sales performance incentive fund represents additional bonuses or incentives that are offered for closing deals of a specific type or for meeting specific criteria. Examples of this might be closing deals that sell a specific high priority product, achieving a certain percentage of multiyear deals, or for generating a certain number of SQLs in a specified time period.
Extra kicker: Additional incentives offered for alternative products or services (usually not the primary or secondary product).
Cap: When a rep closes a deal, the highest possible amount that can be made. For example, if a company has a 20% commission rate with a cap of $10,000, a $20,000 deal would net the rep $4,000 in commission, while an $100,000 deal would be capped at $10,000 (10% commission rate).
Floor: Reps need to close a minimum number of deals (or a minimum associated revenue) before they are paid any commissions. This minimum threshold is a floor.
Commission Held: These are commissions that have been earned but not yet paid to an employee. This typically occurs when companies agree to pay commissions only once the customer has paid some or all of their invoice.
Commission Release: This relates to the criteria agreed upon around when employees earned commissions are paid such as when the customer pays or when a customer signs a contract.
Sales Hierarchy: Typically, managers are paid based on their employee’s performance. As a result, many businesses choose to manage their sales quotas compared to the aggregate of their team’s performance.
Draws: Draws are typically minimum sums of money paid to new or newly re-assigned employees. Draws are often paid to new employees while they establish themselves in order to supplement commissions.
Types of Compensation Plans
The mini sales dictionary above is a good start, but these sales terms don’t hold much weight without properly understanding how and when to use them. Here are a few of the more common types of sales compensation plans:
Base Salary + Commission Plan
Again, let’s start simple. Sales teams use this is the type of plan most commonly. It has the obvious benefits of providing financial security while creating healthy competition to become a top earner. Especially in businesses where sales reps will spend some percentage of their time outside of direct sales (i.e. onboarding new members), the idea of a base salary makes a ton of sense. While this plan is easy to manage, one potential drawback is clearly defining what commission rate makes the most sense.
Commission Only Compensation Plan
When using a commission only sales compensation plan, employees are only paid when they achieve specific goals, such as closing a deal or achieving a customer renewal. This plan promotes an environment of growth and competition as employees compete to be paid.
Base Salary + Bonus Compensation Plan
The base salary plus bonus compensation plan pays employees a base salary as well as a bonus if they achieve certain goals in a specified time. When using this compensation plan, an employee’s base salary is left unchanged as the bonus is only supposed to act as extra pay and not supplement one’s salary.
Relative Plan
Many sales compensation plans revolve around reps reaching quotas for designated products. A relative plan is an example of such plan, where commission values are matched based on the amount of product sold. For example, a rep might have a $40,000 commission attached to reaching a $100,000 quota, which would then be added onto base salary to determine OTE (on target earnings).
Straight-Line Commission Plan
Similar to a relative commission plan, a straight-line commission plan pays employees based on how much of their quota they hit. The main differences are that there is no base salary to supplement earnings and that if employees outperform their goals they earn extra earnings.
Gross Margin / Profit Plan
A gross margin plan rewards reps based on the amount of profit, not revenue, they provide the company. This type of plan can work great for startup and early stage companies with low liquidity and high margins. Another potential benefit of this plan is its ability to naturally distinguish between multiple products and incentivize sales of a particular product. For larger sales teams, this approach is often harder to justify.
‘Draw Against’ Commissions Plan
A draw against a commission plan is a compensation plan that is based completely on commissions. During each pay period, the employee is guaranteed a sum of money, and then depending on the agreement, a draw is deducted at the end of the commission’s cycle.
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