Commission Vs. Salary: The Sales Pay ScaleBy Jim Peduto
Managing sales people is tough. Figuring out how to compensate them is even more challenging.
There are often two opposing schools of thought regarding sales compensation structures: one is the traditional commission-only plan and the other is the practice of paying straight salary. There are people who feel very strongly about focusing solely on one or the other, but I believe the key to a good compensation package is to create a balance of salary and commission. Each pay structure comes with its own pros and cons. It’s a matter of finding the mix that motivates your sales staff and is best for your business.
Commission is the most common and traditional way to motivate and reward salespeople for closing big deals or meeting goals. The chief advantage associated with a straight commission compensation plan is that it gives salespeople major incentive to work very hard on behalf of the company. But commission-based pay leaves employees with compensation uncertainties, so when sales are slow during a downturn, they may be motivated to leave your company for a job with a more secure income.
Business owners lose a lot of control over compensation expenses with a straight commission plan. Commission-driven structures can encourage an environment in which salespeople ignore non-sales-related tasks (customer follow-up, maintaining accounts, collecting payment) and even take on bad business habits to get a sale.
On the other side of the spectrum, offering employees a guaranteed base provides salespeople with the security that, despite the ebbs and flows of business, they can maintain a certain lifestyle. However, a salary alone is not enough.
The biggest drawback of paying a straight, comfortable salary is that it fosters an environment of complacency, eliminating employees’ incentive to perform. Salespeople want to know that if they make the extra effort, they will be adequately rewarded for their hard work. Commission creates a hunger among employees that salary does not.
However, a compensation package that emphasizes salary over commission will allow you to make greater demands on how salespeople spend their time, but that will not drive them to go above and beyond their basic job responsibilities. A pay package that emphasizes commissions will motivate your salespeople to spend all their time selling and securing new accounts, while they ignore other crucial work. Either way, business owners can lose a lot of control over their salespeople and the performance and growth of the business.
Developing a compensation plan with the right pay mix is the best approach for weathering any market condition. A set salary guarantees a minimum level of pay for employees, which shows that you’re invested in them for the long haul, and the added commission incentive rewards employees for high levels of performance, making their hard work worthwhile.