Finding the balance between salary and commission may be your ticket to loyal, motivated sales employees.
Your business is growing, and you've realized you can't do it all yourself. Because you want to focus on growth, you're preparing to hire your first salesperson.
Once you find the right candidate--and that's a subject in itself--how do you plan to compensate your salesperson?
Sales compensation is a tricky business; there are a number of payment models to choose from. You can pay 100 percent salary, 100 percent commission, commission with a draw or some combination thereof. Each method has its pros and cons.
A rule of thumb: Commissions motivate employees to sell harder, while salaries create loyal employees.
Before you can choose the right compensation model, you should weigh several factors, including the type of salesperson you want, the kind of product you sell, your target customer and the length of your sales cycle.
There are different types of salespeople, and they excel in different selling situations. In short, it all depends on what you're selling and who you're selling it to. See the article, " Finder, Minder or Grinder: What's Your Sales Style? "
Generally speaking, if you're paying 100 percent commission, you'll attract aggressive, independent "hunters." On the other hand, if you're offering a large base salary, you'll attract more security-oriented "minders." They may not be as driven, but they may excel at service and building relationships.
When compensation is largely commissions, salespeople tend to feel ownership of "their" accounts. As a result, they may be more prone to leaving you, taking your customers with them. In contrast, a salaried salesperson will not be as dangerously possessive. If you do base compensation on commissions, be sure to have a strong non-compete clause in your employment contract.
The Draw and its Drawbacks
Many small businesses start out by paying new salespeople a draw against future commissions. Theoretically, this operates like a safety net, tiding rookies over until they get their feet wet.
However, the drawback is that if your salesperson never gets up to speed, he or she will accumulate a large negative draw. How will he or she ever pay it back? As the situation spirals downward, that salesperson will either quit or be terminated. Either way, you're the one stuck with the deficit. And you not only lose the amount of the draw, but also your employee and the time invested in training.
If you do choose to use a draw system, be sure to cap the amount you will advance and set a time limit. Structure it as a declining draw, with the amount decreasing at scheduled intervals--say, every 30 days, with the draw eliminated after 120 days of employment.
Consider Your Sales Cycle
Employers like commission-structured compensation because it rewards employees purely on results. But beware: The longer your sales cycle, the less attractive commission-based compensation is for employees. When lengthy sales cycles prevent workers from maintaining an even cash flow, even top performers won't stick around.
While it's easiest to measure sales performance in terms of dollars sold, this doesn't work with protracted sales cycles. Often, it makes more sense to measure new salespeople in terms of their activity: how many calls they make, how many proposals they generate and how well they follow them up.
In fact, this also works well with salespeople collecting large base salaries. Identifying specific activities and creating measurable goals helps keep workers on track. It also makes it easier to measure their performance, a must regardless of your compensation method.
Striking the Balance
For most employers, offering a base salary with commission is the best solution, because it motivates performance while building company loyalty.
What's the ideal balance of salary and commissions? Studies suggest that a 50/50 or 60/40 split gets the best results. Of course, any formula should be tailored to your business or sales cycle. And whatever formula you choose, keep it simple and straightforward. A complicated incentive formula actually works as a disincentive.
A winning compensation formula will benefit both your company and your salespeople. It will inspire individual achievement, while strengthening your organization as a whole. When it comes to sales compensation, the best approach is to strike a balance.
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