“What you have put into the kettle comes afterwards into your spoon.” Turkestan Proverb
Commission income suggests opportunity for some and frightens others. From the beginning of the industrial revolution in the Eighteenth century, when salespeople were called “drummers,” to the 1950’s, commissions were the common method of payment. It was believed that the fear of failure and the desire for money was enough to drive a salesperson to succeed.
Today, there are firms that view salespeople as “drummers,” such as real estate brokers, investment brokers, telemarketers, and a variety of direct sales organizations. In these companies, if you sell, you make money, and the more you sell, the more you make. A simple arrangement; your worth to the company is your earning power. In David Mamet’s play: “Glen Gary Glen Ross,” there is a scene where the sales manager is berating the sales force; he tells them they are worthless human beings unless they can “close” their customer leads. He brags that his wristwatch is worth more than the cars they drive. Not a very pleasant image of the selling profession.
How do you pay your salespersons? Here are some choices to think about:
The commission only plan is a stipulated percentage paid on every sales dollar. The commission rate varies by industry, type of business, and product. If you choose it, find out the rate for your type of business before writing your help-wanted ad. The prime advantage of commissions is the minimization of your risk as you are obligated to pay your salespeople only on actual sales, and in some cases only after the customer has paid you.
Another advantage is the focus on incentive – attracting those who seek dollars, not security. Salespersons seeking large incomes will look for companies that offer such opportunity. It also attracts people who wish to be semi-independent – who dislike direct supervision.
A disadvantage is lack of managerial control. You cannot insist on non-selling activities, such as lengthy sales reports or market research, you cannot manage their activities as you do your other employees. Another drawback is the possibility of “runaway commissions.” If you are fortunate enough to have a surprisingly successful product or service, you may wind up paying hefty commissions – even more than your paycheck.
Contrary to commissions, with the emphasis on selling, straight salary plans are preferred when sales representatives have little control over concluding actual sales. For example, a representative may find a potential customer, make the initial contact, be assisted by engineers or other members of the firm, and finally rely on a team for the final negotiations.
Straight salary is used in low-level selling positions such as detail people who call on stores, take inventory and write orders for replacement merchandise. In such situations, the sales person has no control over the actual sales of the product at the retail level. It is more a service function than selling.
Straight salary plans have the advantage of limiting selling expenses, permitting control over the daily activity of the sales representatives, and appealing to their security. However, there is no incentive to sell. It attracts those more concerned with security than selling. If you need aggressive people with initiative, straight salary is not for you.
Combination Salary and Commission
Today, the combination salary and commission plan is the one most commonly used. Structured correctly, it contains the advantages of both salary and commission without the shortcomings. The salary is the base income, providing a degree of financial security, and establishing the person as an employee, not an independent agent. It assumes managerial control over the representative’s activities, and recognizes seniority and non-selling, semi-managerial activities with periodic reviews and base salary increases. The commission income provides the incentive and rewards selling efforts.
Combination plans can be simple or as complicated as you wish. Usually the base salary represents approximately 60 percent of the person’s income, with commissions the balance. With this plan, you can control income levels by varying the commission rate. You can avoid excessive commission earnings as your business grows by reducing the rate. With combination plans, you can equalize income levels among sales territories by establishing different commission rates.
Keep it Simple
But whatever you do, if you wish your compensation package to work, keep it as simple as possible. I have seen some programs so complicated all they did was cause confusion and misunderstanding. A salesperson who feels cheated over a misunderstanding or confusing rules, will not be in your fan club. When you design your plan, make sure it rewards effort – that it rewards those activities the sales force has control over, not luck or circumstance.
(C) Copyright 2001 Dr. Paul E. Adams. Syndicated by Paradigm News, Inc.