Published by : Paul E. Lafleur
Though quite a few sales compensation models exist, the three most commonly used ones are:
- Base salary,
- Commission and bonuses, and
- A mix of both.
An informed leader will consider industry, growth, and risk as factors which will influence which model they choose.
Industry and growth
A company's industry plays an essential role in determining an effective sales compensation plan for your salespeople, but which models encourage and motivate the reps to serve your business better?
Whether you’re a start-up or a well-established company, in a high-growth or stagnant market, the plans you offer your employees have a significant impact on the success of your business.
A rep whose job is mostly account management, maintaining relationships, and who is servicing more than selling, will not benefit from a commission-based salary. Usually, these reps will want a high base salary, and low commission as not much activity is happening, and they have little impact on profit.
If, on the other hand, your reps are doing a lot of hunting and trying to grow the business, then you’ll want to establish a bonus and commission structure. In some situations, for example, if you’re in a highly competitive market and you need an experienced rep, a base salary with a high commission would guarantee a satisfied and loyal employee.
This type of compensation is prevalent in the world of finances. They’re making enormous salaries and enormous bonuses, sometimes doubling or tripling their salary. It’s a market where there’s tremendous competition and in which industry and product knowledge, as well as contacts, are essential. There’s a significant upside to hiring these people, which is why businesses are willing to pay these high amounts.
The 100% commission model is still used today to generate more growth. If you’re using this model, you’re in an industry in which there’s a possibility of making a lot of money. If your rep works from home, you want to make sure they’re driven, so you might pay them 100% commission with advance.
How is risk a factor for compensation?
Employers must evaluate and take into consideration the level of risk that their salespeople are taking.
The more significant the risk the rep is willing to take, the larger the risk you must also take. If your rep has a lower base salary and is bringing in high numbers, then you should share in that risk and be willing to pay more in the achievement of that risk.
The impact of ramp-up time on sales compensation
If you want to offer a straight commission job, always take into account the ramp-up time and the length of your sales cycle when determining compensation for new hires. Dave Kurlan's formula is helpful:
length of your sales cycle + length of your learning curve + 30 days
"If it requires 90 days to teach the new salesperson your business and your sale cycle is another six months, your ramp-up time would be 10 months. That means that for a straight commission plan to work, you must subsidize the new salesperson for the first ten months prior to transitioning that individual over to straight commission."
How do you determine the rate of commission?
The commission rate, again, largely depends on your industry. If your salesperson can make a huge difference in the success and growth of your business, then you must up the ante and offer a high percentage on commission.
However, make sure you’re able to fund these amounts! Start-ups may be tempted to offer high a commission to push the growth levels, but find themselves unable to keep up with the numbers they offered their reps.
In high-growth markets, such as software, media, etc., salaries will be typically higher because there’s a higher demand.
Should reps get the chance to choose their compensation plans?
Reps should always be given the opportunity to choose the compensation plan which most suits them. The choice, however, may not be between commission or no commission, but rather, how much commission?
If you’re doing 100% commission with a guaranteed advance on commission, the higher the advance, the lower the commission rate. For example, the rep will take a smaller advance on commission but will get paid higher commission in the end, at the same achievement of objectives.
The rep may choose a higher advance, with lower commission rate, and so on…
The role of motivation
As the table above demonstrates, elite salespeople are either extrinsically or intrinsically motivated. Strong and serviceable salespeople tend to be more intrinsically motivated.
High commissions won't necessarily motivate your best salespeople, so compensation plan options are crucial.
Where you usually see leaders fail in terms of compensation is when they consider only the bottom line. Business leaders, especially ones in mature industries, must not underestimate the impact an individual can have on their success and must be willing to compensate in ways that will motivate their employee, and take into account the company's industry, risk and growth.