Wages or Commissions? This 3-Step System Helps You Decide.

Wages or Commissions? This 3-Step System Helps You Decide.
Image credit: Mark Allen Miller
Magazine Contributor
2 min read

This story appears in the July 2016 issue of Entrepreneur. Subscribe »

In my experience, the best plan includes a mix of both. When you offer salary and commission, you’re motivating your sales team while minimizing the chances that they’ll feel disgruntled and underpaid. But there’s no one-mix-fits-all. To find the right system for your business, follow these steps:

Step 1: Look at how your industry works. 

If most companies in your field follow one particular model, you may not have a choice. The best salespeople in the business will be used to that model; they’ll expect it and likely won’t work any other way. 

But if there’s no status quo, take a look at how your sales operate. If your industry has a shorter sales cycle -- that is, the time between getting a lead and closing the deal -- then your salespeople are likely to be happier with commissions. But if you’re selling, say, heavy equipment, and it can take months to close a sale, then straight wages can work better. No salesperson wants to wait months to get paid. 

Step 2: Beware the draw.

As you do your research, you may hear about companies offering draws. It’s a complex system: A salesperson is paid a set salary, with the understanding that their commissions on sales will repay the salary. If they repay the salary in full and still have commissions left over, that money is paid to them as a bonus.

I’ve never seen this work. Truly great commission-motivated salespeople would rather have higher commission percentages. Meanwhile, draws just protect bad performers, which wastes your time and money. There’s only one case for which I’ll use a draw -- and that’s for brand-new salespeople. I’ll offer it only for a few months, depending on the sales cycle, and diminish it every month until the draw is phased out. 

Step 3: Get the ratio right.

The pay plans that seem to work best have a 60/40, 50/50 or 40/60 split of commissions/salary. From there, I like to set up plans that provide for four scenarios:

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