Commissions are a method used by many companies to incentivize their salespeople, and for good reason. Commissions help salespeople to feel ownership over their own careers and success, and allow you to reward those who do exceptionally well without destroying your payroll budget in the process.
Putting together the right commission plan for a new sales team can feel daunting for managers who are more comfortable with traditional salary and hourly pay rates. If the idea of assembling a commission structure makes you break out in hives, here are some guidelines to help.
Start with solid base pay.
There are sales “jobs” that pay only commissions, but the practice is often seen as scammy and can be illegal. Good quality salespeople, including both those who are highly experienced and those who are newer to the field, understand that a base salary (or wage) needs to be reasonable, regardless of the commission plan.
If an employee were to fall sick for a week and make no commissions at all, would they be able to function? Will your new salespeople be able to support themselves in the initial weeks of their employment when they are in training and learning to do their work effectively? Will salespeople be compensated for doing key parts of their job that aren’t selling, such as recordkeeping?
Think about what you want to reward.
Commissions are monetary rewards for accomplishing desired outcomes. Those precise outcomes, however, depend on your precise goals and the type of salespeople you’re working with.
Per new client. Any new client brought in by a salesperson results in a bonus.
Per sale. Any sale made by an employee, regardless of whether or not the client is new or returning, results in a bonus.
Per dollar. Employees get a certain amount of money based on the money they bring in. One large sale or multiple smaller sales could amount to the same commission.
Per goal met. Employees receive no extra pay until certain goals have been met. They they receive additional money for sales in excess of this goal.
Variable rates. Employees receive smaller amounts of money for sales up to a certain point, then larger amounts once they meet certain milestones.
Residual commissions. When a salesperson brings in a new customer, they continue to get a commission on their sales for as long as they remain a customer, regardless of whether the salesperson continues to be actively engaged in the process.
It’s worth thinking through the potential pros and cons of each type of compensation. If you are rewarding salespeople for each new client, will they bother trying to upsell when they’ll get paid more for closing each sale as quickly as possible and moving onto the next prospect? On the other hand, if you’re hiring new salespeople to expand your customer base, rewarding them for focusing on a handful of surefire clients may be counterproductive.
Know what you can afford.
Commissions are useful for many things, but they should not be used as a way to shore up an ailing budget. Promising massive commissions for salespeople under the assumption that you should magically be able to afford them once the sale comes in is playing with fire.
If a sale is made, but then the cost of raw materials goes up, or a formerly reliable customer goes with a competitor, or your company’s tax burden increases, you still need to be able to pay your employees as promised. It’s wonderful to want to reward high-performing sales people by offering sky-high commissions. But if all you can afford is a meteorite, don’t promise them the moon and hope that the money will be around.
Do keep in mind that this means reining in commissions because of the budget. If you’re doing so for the sake of ego (to prevent sales employees from making similar pay to C-suite leaders, for example), this is likely to result in attrition, especially among top performers.
It’s normal to tweak things as you go.
Startups in particular are known to be hotbeds of trial and error. If you feel like your commission structure isn’t doing justice to your best performers in some way, it’s okay talk about how to make it more fair and in line with your company’s ultimate goals.
Just as excellent salaried employees might receive unexpected raises, top-notch salespeople will show you where your commission structure could be stronger. (And struggling ones will show you where your hiring, training, and mentoring processes should be bolstered.)
Empowered salespeople grow businesses.
Worried about how to hire the best? We have you covered. Start by getting your free copy of The Employer’s Guide to Hiring Salespeople, and if you still have questions, you can always get in touch with our hiring experts at SelectOne.