A client asked us for guidance in setting a compensation plan for his sales department. Our reply, below, may be helpful for others, too.
There is no standard commission structure. It depends on your product or service and the aspect of your business that you want to grow.
If you want to train the salesperson to find new customers, provide incentives for the process of the sale (sales calls) and again for the close. However, if you’re hiring a mature salesperson who has proven his(her) record of success in similar products, provide incentives only for the attainment of the goal. With that in mind, here are factors that may affect your discussion of compensation:
- What type of salesperson do you want to attract and retain?
- Hunter: The amount of base pay should allow the salesperson to pay his/her bills. Offer a liberal commission on an escalating scale based on volume. The commission rate resets each month, quarter, or annually. Set high goals and based on sales, happily, pay hefty total compensation!
- Farmer: Base pay set at 90-100% of the salesperson’s compensation expectation. Commission or bonus of 10-20% based either on salesperson’s goals, or company goals, or a combination.
- Complexity of the sale
- Commodity product with a short lead time, where the buying decision is made by one person: Pay a low percentage of commission per unit of sale.
- High difficulty of sale with multiple buyers who are often initially unknown, sold through a corporate bureaucracy: Pay a high commission rate per unit of sale. Also, if the sales cycle is longer than one year, consider that element and set a higher base salary than defined in item 1a, above.
- Technical expertise required to complete the sale
- Does the salesperson function only as a door-opener and a presenter? If yes, pay a lower salary and a lower rate of commission.
- If the salesperson doesn’t need support from engineering, pay well. This is an extremely valuable team member!
- Duration of the customer’s order
- Does the job require the salesperson to remain involved after the sale? If yes, pay commission on residual business.
- Does someone else from your company take over responsibility for the account after the sale? Don’t pay commission on residual business.
- Does the salesperson have responsibility to set margin and price? Pay a higher commission rate based on margin of profitability.
- Does his employer fix the price of the product? Pay a lower commission rate.
- Limited or unlimited commission
- If you’re hiring a HUNTER, why limit?
- For team selling situations, commission is often shared by the entire team, and a cap on individual earnings is more appropriate.
- When commission is earned
- Is the salesperson not responsible for collection? Pay commission when the customer places an order
- Is the salesperson responsible for collection? Pay commission paid when the customer pays.
The commission plan is a tool for mutual success of the employer and the salesperson. Use it wisely!