There has been a long-running debate over the best way to reward salespeople for the job they do. While the majority of salespeople will be on a base salary plus commission model, there are advocates for both 100% commission salaries and 0% commission strategies within sales. Of course, there are many factors to consider when determining how to pay a sales team, such as industry conventions, talents of the sales team, financial situations, but it is valuable for companies to consider all their options.
There was a time when 100% commission salaries were popular with both employers and salespeople. For a good salesperson, they offered much higher earning potential and greater freedom. For employers, they offered a low risk sales team, as no sales meant no salaries to pay. However, there are also large disadvantages for both employers (potential low sales and high turnover) and salespeople (no guaranteed income). Furthermore, it is not conducive to the kind of consultative sale that is frequently required by companies now, as 100% commission salary salespeople are less likely to be willing to spend the time required developing a relationship; they will generally be more interested in quick wins.
The rise of consultative selling has even prompted some companies to take a 0% commission approach to their sales team. It is hoped that this will produce a sales team who are motivated by the desire to help customers rather than greed and who will be genuinely dedicated to offering solutions to their clients. Salespeople in these roles may still be recognised for their contribution to the company in the same way any other employee may be recognised, but these rewards will not be directly tied to their sales figures. This allows them to focus their attention on delivering value to their clients, rather than worrying about targets or obsessing over how to gain the most commission possible.
Would you consider working in a 100% or 0% commission sales role?
A company needs to ask itself the question of why it is employing salespeople. And the package structure should reflect this motive exactly.
ReplyDeleteIf the answer to the question is purely to increase revenue generation, and essentially improve the profit for the shareholders, owners etc. then the package should match that motive by rewarding the salesperson directly by their results.
If the motive is not purely about the increased profitability of the business (and to be honest I think I have only come across a couple of businesses where it is not) then there is an argument to align the package with these other factors, and low or zero commission package could be considered
I suppose the question could be applied to the existing sales staff. Is the most valuable salesperson in your organisation the one who generates the greatest profit. Is that value reflected in what they are paid?
The core benefit of any commission structure should be to increase sales, motivate the team, and create an appealing environment to the best salespeople that are available on the Job market. if you can get all these benefits without commission, then you do not need to pay it.
I have had to appeal to not only the best sales people on the Job market, but some of the best business savvy entrepeneurs on the market. These people expect a good basic and a good commission structure. And following 18 months of success they are usually looking for share options or other equity based recognition.... if they are not, then they're not the sort of people I would want. But before I get heckled for over generously recognising sales staff. The package always closely matches the needs of the business, and if they do not perform then its bye bye, so a rigorous recruitment process is necessary
Sales people are no differant to anyone else in that their compensation plan will affect how they will behave.
ReplyDeleteDepending on the type of sales sale role you should consider differant ratios. Business development people should have a high commison element ratio to that of an account manager.
For a direct employee, I would never consider 100% commision. Based on my expeience working with my clients, where there is a 0% commison element, there is a lack of drive and accountability in the sales community.
I am also a great believer that commisions should never be capped as it will hinder over-performance with people reducing or stopping sales activity once they have achieved their maximum commision.
I have included a subset of white paper I wrote based around helping my clients develop their complans, I hope it helps
Why the Right Compensation Plan is Important
A well designed sales compensation programme can provide dramatic improvements to sales results and motivation. They ensure the right focus and desired behavior in achieving corporate goals and objectives. In addition to setting clear objectives for people, they reward good performance, the better the performance, the greater the reward. This in itself can help Companies retain its best people and recruit top professionals from outside the organisation while encouraging average performers to get better. Through Special Incentive Programmes (SIP’s), which are discussed later, dramatic results can be achieved for focused campaigns.
Compensation Plan Best Practice
When designing compensation programmes there are some basic principles which need to be followed.
1. Plans should be aligned throughout the hierarchy – as with individual KPI’s, to drive the desired results, everyone should be working towards the same goals. The only way to achieve this is to align the plans throughout the hierarchy so results contribute to the master plan. This is normally facilitated through a top down plan, where the corporate goal filters down through the organisation.
2. There should be 1 plan for each job role – Sales compensation follows sales job design. The plan should support the sales management objectives and KPI’s for each sales position. The number of unique sales compensation plans should be equal to the number of unique sales jobs.
3. Plans should support corporate and customer goals – People typically behave in the way they are rewarded. The compensation plan should reward individuals for exhibiting the right behavior required to achieve corporate goals. Given that “world class” sales organisations focus their activities around helping the customer achieve their goals, compensation plans should include reward for developing excellent relationships with, and a deep understanding of customers.
4. Plans should drive corporate results – whilst the most successful sales organisations are customer centric, the best plans drive the behavior and activities required to achieve you corporate results. In line with setting job role KPI’s in line with corporate strategy, compensations plans should also focus on a small number of these KPI’s to really focus the sales force on the critical elements.
5. Compensation plans should be self-funding – a mature plan will ensure that while top performers can earn large amounts of money, it is only a proportion of the additional revenue they generate for the corporation.
It's an interesting debate: commission v. salary. Having spent years in the professional sales industry, I have seen the results of this inbalance. Yes, good and great sales professionals want and strive to get the big numbers (and drive revenues) because they are motivated to go the extra mile if being paid on results. However, in particular with long lead cycle products, it can take months or longer to properly cultivate lucrative sales. Sales professionals if on commission only not only absorb all of the costs to make those connections and subsequent sales, they also incur a higher tax rate on commission income, particularly if a 1099 "independent contractor". Going for the necessary long stretches of time in order to create the lucrative cash flows for the company can create undue financial and motivational distraction which leads to turnover. Typically, there exists a cyclic situation whereby sales people will go to commission only then salary then back and so forth in order to help alleviate that emotional and financial rollercoaster that is created by such plans. I am a strong advocate for the base plus commission, and stepped up commission upon hitting quota/plan as it provides that very necessary foundation for security and also creates incentive for the strong performers to achieve goals. The benefit to employers is that they not only increase longevity and experience in their salesforce, they also harness the attention of the sales force to focus on hitting goals rather than worrying about from where the next mortgage payment will materialize. Longevity and experience in sales professionals leads to increased customer satisfaction, referral business and increased revenues. Keep them hungry, but don't starve them.
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