Pros and cons of sales commissions

Compensation is an necessary topic in any organization. In some corporations, compensation might be a complicated topic, while in others it stays easy. Sales commissions can further complicate a company’s compensation structure, but it is necessary to get this part of compensation right.

As Kent Plunkett writes in his book, “Pay Properly”: “Organizations view compensation as a budgetary and business decision. Employees see it differently. For employees, compensation is much deeper and more complex than just money for work. Compensation is personal.”

While it will probably be difficult to determine the right pay structure and discuss it with employees, it is necessary to get it right.

Finding the best compensation plan for salespeople is even harder. On the one hand, you ought to find a strategy to pay your salespeople that rewards them for their performance. On the other hand, you don’t need to set goals so high that they turn into unattainable. But never lose sight of the proven fact that your organization’s sales department is one of the most vital parts of your organization. After all, your sales reps are the ones who bring in money and recent customers.

Types of compensation

Before we get into the details of the right way to best compensate your salespeople, let’s take a look at the basic compensation structures for sales employees.

• Fixed salary: This plan does not offer commissions. Employees receive a regular salary with each paycheck.
• Salary plus bonus: This plan provides a fixed salary and bonuses when company-defined goals are achieved.
• Base salary plus commission: Under this plan, employees receive a salary and a small commission.
• Simple commission: This plan compensates employees strictly on a percentage of sales. There is no salary, and employees do not receive income based on hours worked.
• Variable commission: This plan is much like a regular commission, but the rate changes based on whether the salesperson meets or exceeds sales goals.
• Draw against commission: This plan provides an worker with a set amount of money income each pay period by paying the worker a set amount that is deducted from commissions earned in future pay periods.
• Remaining commission: Businesses with repeat customers can decide to pay under this plan. Merchants receive a commission on a customer’s first sale and can normally receive a smaller commission on future orders.

Choosing the best plan

To select the best strategy to compensate your organization’s sales staff, you could consider two areas. First, you could consider the type of startup you’re in. A retail store relies heavily on its sales staff, while a company like a research lab could be driven more by scientists and medical researchers. Second, you could determine what your sales goal is.

Setting sales goals

Sometimes, setting compensation incentives strictly based on sales does not align with the company’s sales goals. Here are some examples of sales goals your organization should want to focus on:

• Adding recent customers
• Increasing the size of the average order
• Improving customer retention
• Selling products with higher profit margins

Pros and cons of commission

While commission plans have advantages for employers and employees, additionally they have drawbacks. When deciding whether a commission plan is right for your sales force, keep in mind that sales goals have to be achievable.

Advantages

Here are some of the positive points of commission plans:

• You pay for results: Commission plans reward performance. Paying when your sales team hits their financial goals makes it easier to remain on budget.
• Attracts top sellers: Because commission selling has higher earning potential than a salary-based system, it attracts top salespeople who know they have the skills to earn a good income.
• High level of motivation: Commission sales normally motivate sales staff to work harder to earn the most income. It encourages friendly competition among employees.
• Flexible schedule: Commission salespeople are inclined to set their very own schedules, which improves worker morale and satisfaction.
• Easy to grasp: The system is easy to grasp and calculate.
• Better value: With commission-only plans, you pay employees based solely on their sales, which is ultimately cheaper for the company. This makes it a good plan for startups without a regular money flow.

Cons

Here are some of the disadvantages of commission plans, especially commission-only plans:

• Aggressive selling: Commission selling can result in aggressive behavior from salespeople, which causes them to make use of high-pressure selling techniques. This can scare away customers and damage your organization’s fame.
• Aggressive environment: While commission selling can result in friendly competition, it will probably also cause aggressive competition that may result in an uncomfortable working atmosphere.
• Extreme pay gaps: Commission selling could cause significant fluctuations in sales staff income.
• Denial of skilled advancement: Highly compensated salespeople could also be reluctant to take available management positions because it might involve a pay cut.
• Neglected duties: Salespeople may neglect any aspect of their job unrelated to selling, including customer support responsibilities.
• Low job security: There is no guaranteed income for employees. An economic crisis can mean a loss of income for salespeople, causing high turnover.
• Stress: The stress of uncertainty associated with commission sales can result in worker burnout.
• Deterring employees or potential employees: We mentioned earlier that commission sales attract the best salespeople, but the flip side of the coin is that it will probably scare away talented salespeople who do not like working under pressure or cannot afford to take on a job without a guaranteed income.
• Profitability: Paying salespeople a flat commission on revenue implies that larger sales are just as profitable as smaller ones, which hurts the company’s bottom line.
• Difficult to pass: Should you pay by bill or receipt? Paying by bill implies that the seller can make sales without taking into account the customer’s ability to pay. On the other hand, paying by bill is harder to manage and can result in the worker attempting to collect the money from the customer.

How much to pay

If you have chosen a salary plus commission plan or already have one, it’s possible you’ll wonder what is an appropriate level of compensation and how much is too much. Unfortunately, there is no one right answer for all situations.

A standard mistake business owners make is copying a competitor’s plan and adapting it to their very own budget. Your company’s compensation plan ought to be unique to your organization’s products and services, in addition to Your budget.

Let’s look at a few examples to offer you a start line. If you pay salary plus commission, start with the total compensation you think is appropriate for a sales rep. Keep in mind that experienced salespeople may command higher compensation, while a rep just starting out could also be completely satisfied working on commission alone.

If a company has few competitors and is well-known, it might determine to separate base salary and commissions 50/50. An organization in a highly competitive industry may offer a 20/80 mix or switch to a commission-only plan.

Many organizations add bonuses to the mix to further motivate sales staff who meet profit targets. The bonus can come in the form of money, travel, gift cards, or other expensive items. The nice part about these types of bonuses is the earnings of the employees who fund them.

Finally, determine whether you ought to offer a fixed or variable commission structure. A hard and fast rate is normally reserved for less profitable products, while a variable commission is used to motivate sales staff to sell the company’s best-selling or core products.

The best plan

Ultimately, the best commission plan is the one that works for your startup. Make sure your commission plan is consistent and easy for employees to grasp. Keep the lines of communication open with your sales team and explain your earnings to them on a monthly and quarterly basis. Finally, it’s a good idea to debate your commission plan with a lawyer or other skilled to work out the finer details.