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.
Base Salary
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 a 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
Commission are the holy grail for salespeople and the 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 them to sell. 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. Typical 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 1-10% of revenue or 20-40% of gross profit. The total commissions for top performing salespeople should equal the base salary.
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 is lead generating, but then turns the leads over to a closer or technical expert, then a commission structure could become frustrating if other people are controlling your 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 when production reaches a certain level or percentages of revenue generated.
Combination Packages
Usually, a combination will drive the best results. You may also want to make changes over time to incentives the appropriate actions as the salesperson grows or the company changes its goals and structure. 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 product line influences compensation. A new territory or product may need higher commissions during launch.
Creating the perfect compensation package is a continuous improvement process. You will want to be very frank and up-front with your salespeople that 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 will ramp-down the base and increase the commissions over time. 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.
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