Choosing a sales compensation formula
After identifying your sales goals and spelling out the vision of success for your sales staff (see my article Setting up a sales compensation plan), you need to figure out how your business will compensate the sales force. Some companies pay their salespeople with straight salaries; others put them on 100% commission. Those are the extremes.
A straight base salary guarantees that valued sales staff members are compensated even during an economic downturn, when low sales are attributable to factors outside the salesperson’s – or the company’s – control.
Variable pay such as commission incentivises salespeople to work harder to land new accounts and drum up new business, since they will see the results of their hard work in their pay packets.
The vast majority of businesses opt for a middle ground. A recent survey found that a mix between base salary and variable pay were the most prevalent forms of sales compensation:
- 18% of respondents used a mix of 80% salary and 20% commission.
- 16% used 70% salary, 30% commission.
- 14% used 60% salary, 40% commission.
How you decide to structure your pay formula should depend on a variety of factors, including the four outlined below.
1. The role of the salesperson
The degree to which a salesperson influences a customer’s decision to buy should be at the top of your list in deciding your pay formula. In some industries, products sell themselves. In others, customers need to be courted and sold on a product or service.
If a salesperson plays a critical role, you should recognise that in a fairly rich pay mix that drives their behaviours to be optimised in terms of sales. Conversely, if you have a more collaborative sales process that involves a number of people – for example, the salesperson, a business development person and an application engineer – then you may want to lower the commission ratios and have a less aggressive compensation formula.
2. The kind of selling
If you’re driving new account sales, you may also consider being more aggressive in your pay mix and basing more on commission. If you’re trying to encourage a salesperson to go after brand new accounts, you want them beating the bush. You want them to generate leads and follow up on them. At the same time, you may want to use a more conservative pay mix for growing sales to existing accounts.
In addition, if your business has put a lot of focus on selling new products, you may want to award higher commission for selling those new products than you do for selling older products.
3. The sales cycle in your business
You should also factor in the type of business you’re in and its sales cycle when you are determining the pay mix. Companies that sell airplanes have a long selling cycle, during which business is booked as much as a decade in advance. This may necessitate less focus on commission and more on steady pay.
But if your business is selling paper, you may be making sales and landing new accounts multiple times in a given year.
Factors to consider would be:
- whether you are selling systems versus commodities
- long versus short selling
- complicated high-tech versus lower-tech sales.
4. The impact on your customers
While a high risk/reward incentive programme may be necessary to attract your ideal salesperson, you need to think through the possible (and sometimes unintended) consequences. One factor often overlooked in setting the amount of at-risk pay is its impact on a customer’s experience.
A salesperson with too little incentive may not get up from behind the counter or make a compelling sales call. Conversely, a salesperson with a disproportionately high at-risk earnings opportunity may be too aggressive about closing the sale – a tactic that often backfires and alienates customers.
Understanding the impact of at-risk earnings on your business can help you determine the level of risk/reward that best motivates the sales force, while safeguarding your company’s long-term interests and reputation.
In my next article, I will cover the difficult task of implementing a sales compensation plan. For tailored advice in the meantime, contact me on 020 7099 2621.
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Terry Irwin is the founder and CEO of TCii Strategic and Management Consultants. Born and brought up in Wales, he studied Economics and Marketing at university, followed by an MBA.
Before setting up TCii, Terry spent over 20 years in the corporate world with GSK and Henkel, managing consumer goods and services businesses, living...