How to Pay Your Sales Staff

Do you think paying sales people is just a matter of deciding what level of salary and/or commission the whole staff should receive? Think again. It’s a mistake for a business to stick to an “old school” method of sales compensation out of an unwillingness to consider more creative options. An effective compensation plan can serve a many functions — most notably, it can motivate the sales staff. As veteran business owners know, a well-motivated sales team can make or break a company. When assessing the effectiveness of your company’s current sales team compensation plan, there are several issues to consider. Is your plan motivating your sales team to produce the results you want? Does the compensation reward the performance that you need and want your sales representatives to focus on? Is the sales team enthusiastic and satisfied? Are you able to attract and retain top sales talent? If you answered no (or even maybe) to any of these questions, you should explore other options.

To begin, let’s look at the four traditional approaches to sales compensation that most businesses have used with varying degrees of success: The “straight salary” plan that doesn’t pay commissions promotes attention to the customer and a degree of sales rep loyalty, as long as the salary is competitive. However, it neglects those reps who thrive on competition and individual achievement. Often, the most successful approach to using the straight salary plan is to combine it with an effective bonus program based upon corporate profits.

“Salary plus commission” is another common compensation strategy that offers sales reps a guaranteed base salary and commission. Generally, businesses offer relatively high base salaries only to seasoned reps who they feel can hit the ground running and quickly sell enough to earn their keep. Commission percentages will vary based on a number of factors including gross profit, cost of sales, length of sales cycle and the complexity of the sale.

Similar to salary plus commission is “salary plus draw.” This plan advances a predetermined amount of commission to a rep each month with the hope that the rep sells enough to reimburse the company. The recoverable draw method is where a rep is responsible for paying for shortfalls in commissions out of future commissions. Nonrecoverable draw doesn’t require a rep to reimburse the company. Recoverable draw offers less financial exposure to a company, but non-recoverable draw is more attractive to reps, who will have increased earnings stability during their first months on the job.

The “sink or swim” sales compensation plan, also known as “pay for performance,” is the fourth approach. Most companies realize that although there is no direct financial exposure, it may be difficult to attract qualified reps without offering any salary. Also, by not having any financial leash on reps, it is difficult to direct sales efforts. Although all of these approaches are widely used, there are also effective, alternatives that can drive your sales team to new heights of success.

It is critical to remember that sales reps are generally unhappy about having their sales compensation plan changed without ample notice and participation. Ask for input and, if possible, make this a group process. Your sales reps should also have easy access to their sales data so that they know where they stand. Your new plan should help you recruit and motivate well-qualified reps, decrease sales staff attrition and continuously improve your company’s competitiveness.

There are several factors that you should take into account before deciding on changes. For example, you should review the complexity of the sale as well as the length of the sales cycle. Do your reps have the opportunity to earn results-driven compensation within a reasonable time frame? What is the tenure of the current sales team? How you pay them may depend on whether they are a seasoned group of veterans or are more junior and in need of hand-holding and training.

Make sure the company rewards the sales team in a way that supports the corporate growth plan. For instance, if sales reps have an incentive to grow their existing account base, then they will endeavor to cross-sell and introduce new products and services. If this effort is not rewarded they might be more prone to become “order-takers” rather than “order-makers.”

It’s critical you understand your firm’s operating expenses and required profit margins so sales compensation does not become a financial hardship. It is equally important to do thorough projections on how much a salesperson is expected to generate in revenue, and what they would earn based on the proposed compensation plan. Once these things are in place you can get creative with compensation. The table below provides some ideas on compensation strategies for different situations. One option that can be easily instituted is a compensation cafeteria plan, similar to the cafeteria plans some companies offer for their employee benefits. This plan allows your reps to select their package based upon their lifestyle and financial circumstances.