Sales commission structures:

Different ways to provide value and incentive to salespeople

Salesman make the world go round. It takes a certain type of person to find the motivation to get out there, take the risks, and put in the effort to connect customers with the products/services they need. Without these people, there would be no business, at all.

The question is, how do you incentivize these people to sell your product or service, and pursue it with passion and determination? How do you instill in them a hunger to make a sale so that they’ll do whatever is required (ethically, of course) to close your most valuable leads?

Competing for the best sales people

The obvious solution to being more competitive is to offer more money. The obvious problem with that, though, is that offering more money cuts into your margin. Luckily, the more somebody sells, the more you have to offer them. That’s part of the beauty of commission-based compensation.

Another reason commission-based compensation is important is that sales is a job that demands resourcefulness and motivation. Sales people have to take risks, deal with rejection, and put in a lot of effort without a guaranteed return. The nature of the work is such that traditional salary doesn’t work for most sales positions – there’s no reason to really put yourself out there if your salary is guaranteed, anyway.

Still, even on commission, you can only offer so much before it becomes risky or even unprofitable todo business. So how do you remain competitive? The first step is to do some outside-the-box brainstorming and get creative about how to structure financial compensation.

There are various structures, which we will explore below. The ideal package for your business is likely a blend of several tried-and-true principles.

100% commission vs base salary, and everything in between

The most basic form of compensation is just a base salary. The limitations of this are obvious. There’s no incentive for a salesperson to get out there and sell.

The most basic form of commission-based compensation is what’s referred to as 100% commission, meaning that the salesperson makes 100% of their income from commission on their sales.

This is tempting because it seems like the ultimate way to motivate people, and it gives the company reassurance that they won’t have to pay for an under-performing sales rep. It appeals to newer companies that have yet to establish positive cash flow.

But there’s a reason that 100% commission has lost popularity, both with talent and organizations. Experienced and competent salespeople who have tried different structures know the upsides and downsides to them all, and the good ones don’t want to work for 100% commission. They want a company that is willing to invest in them, and offering a little security is a good way to invest.

For some insights on why 100% commission is not your best option, you can see this forum.

What’s becoming standard is a balance of guaranteed and commission-based income. This is sensible and fair, as there are some parts of being a sales rep that are not “performance-based”. For new sales members, having that base salary means that they are not going to be broke until they establish a client base. For tenured reps, it means they don’t need to fear poverty if they lose a major account, or when weathering a company/market downturn.

Get creative about how you structure compensation

Some companies give options to their reps, letting them choose between different balances of commission and salary. This raises the ceiling for your most talented sellers, and gives your less experienced reps an opportunity to grow without suffering financially.

There are different ways to structure the commission aspect, too. The obvious method is a percentage of all sales, commonly referred to as a gross margin commission. You can go one step further to incentivize volume by offering a higher percentage for all sales beyond a certain threshold, known as tiered commission.

One more way to look at it is to structure commission percentages based on how valuable a sale is to your company. You can attract your salespeople’s interest to certain regions, industries or customers by offering a higher percentage on certain sales. Alternatively, you can offer better percentages on the products or services that you most want to sell. Determining which sales to prioritize all comes down to identifying your most valuable sales.

Expand your definition of compensation to include more than money

The next step is to really consider everything you have to offer that will 1) incentivize people to sell your product instead of somebody else’s, and 2) empower them to sell a lot of it. Think of this the same way you think of sales. It comes down to more than a dollar amount; it comes down to value. What is your Value Proposition when it comes to competing for talent?

Besides money, here a few things you can offer:

Flexibility: Things like remote working, the option to set your own hours, PTO.

Autonomy: Your top sellers may have developed their own sales strategies over the years, and they may know more about how to sell than you do. Of course, there is a degree of consistency you want to set across the board, and you don’t want to let sellers you don’t trust run rampant. But any good salesman should be able to sell you on why they should be allowed to do things differently. You have no obligation to give in, but it’s in your own best interest to hear them out.

Fairness: New sellers will look at what the top sellers are making, and top sellers will look at what the bottom sellers are making. Structure compensation and privileges in a way that appears fair to both parties. The last thing you need is to lose a talented salesperson who was otherwise happy because “I had to earn that privilege” or “it seems like tenured people get special treatment”

Opportunity: Give your employees more than a job; give them a future. The opportunity to make more and move up in the world, to get on an even better pay plan, to earn more time off, to learn new skills, to earn shares in the company.

A valuable business starts with a great team

If you’re just beginning the journey of building your team, there are a few other things to think about which you can read up on in this article. As you go about growing your business, it’s important to think about the company as a product in its own right

You will, eventually, need to exit the business. This is easier and more profitable if you’ve built it with its market value in mind every step of the way. This our specialty at Free Vector Advisors. See our blog  for various topics about building and selling your company.

For legal and business consultation, you can contact us here. Flexible payment can be arranged. Free Vector Advisors works with businesses of all types and sizes.

 

 

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