Comparing base salary, commission, bonuses and combinations.
Compensating the sales team is one of the toughest things to get right in your business. If you pay them too little, good salespeople will leave for better opportunities. Pay them too much, and they get complacent and stop growing revenue.
To inspire and motivate top-performing salespeople, you must use the Goldilocks Principle and get the compensation package “just right.” Let’s look at the pros and cons of some popular options.
For most sales positions, some amount of base salary is desirable. If you pay straight commission only, you will likely attract someone who doesn’t need regular income, and that is not desirable. Top-performing salespeople are in demand, and the most attractive positions have stability in the form of base salary.
You want this base high enough to cover expenses for the salesperson to live, but not so high that they don’t need to earn commissions. Typical base salaries can range from $36,000 to $72,000 depending on the experience and expertise needed in the position.
Draw Against Commission
Some companies will offer the salary as a draw against future commissions. This model is very demotivating to the salesperson and not recommended. No one wants to work hard for a company only to end up owing them money at the end of the month.
Commissions are the holy grail for salespeople and for business owners. Commissions typically mean an unlimited upside for the salesperson. As the business owner, commission structures are great, because you don’t pay them unless you make money, and they incentivize the type of business you want.
For example, if you want more new business than repeat purchases, you can give a higher commission on net new sales. Paying per sale—with quick turnaround times on the checks—will drive the instant gratification the salesperson needs to stay motivated.
Typically, commissions are a percentage of net profit or total revenue and will vary greatly based on the profit margin of your business. Ranges may include 1 to 10 percent of revenue or 20 to 40 percent of gross profit. The total commissions for top-performing salespeople should equal the base salary. So, if a salesperson who has a $50,000 base is performing well, that person will be earning another $50,000 in commissions.
Shared Commissions and Bonuses
Shared commissions and bonuses can be ideal for team selling or when the salesperson may not have direct control over the outcome. For example, if the salesperson generates leads, but then turns the leads over to a closer or technical expert, then a commission structure could become frustrating because other people are controlling the salesperson’s income. Shared commissions are ideal for teams, because you can divide up the commission pie based on responsibilities and the behaviors you want to reinforce.
Bonuses can also foster cooperation by encouraging everyone to work together to grow the whole pie, so their piece becomes larger. Bonuses are great for inside salespeople, customer service and recurring revenue producers. Options may include lump sum bonuses based on percentages of revenue generated or when production reaches a certain level.
Usually, a combination of payment strategies will drive the best results. You may also want to make changes over time to encourage the appropriate actions as the salesperson grows or the company changes. Combination packages make this easy to do.
For example, a new salesperson may need a high base salary and low commissions while training, learning the business and growing the book of business. However, an experienced salesperson may need higher commissions and a lower base salary to increase motivation. You will also want to consider how the territory and the product line influence compensation. A new territory or product may need higher commissions during launch.
Creating the perfect compensation package is a process of continuous improvement. You will want to be very frank and up-front with your salespeople. Let them know these packages are subject to change. The goal of changing plans is not to pay your salespeople as little as possible; it is to pay them handsomely for the correct behavior.
Creating a Goldilocks Compensation Package
A great compensation plan will include a base salary during the onboarding and ramp-up time but, over time, the base amount will decrease and the commissions will increase. This ramp-up time should be at least as long as your onboarding process plus your typical sales cycle. Otherwise, your new hires will be under too much pressure to sell too quickly.
Sales is a tough job, and getting the compensation right for salespeople can be the difference between a driven and thriving
team, and a frustrated and burnt-out group of selfish individuals.