Job security and longer-term salary stability? Or motivation and increased incentive for higher earnings? What exactly do your sales employees want in a job? What might be the best way to motivate them, keep them happy, and stimulate increased sales for the company? For many CEO´s and sales managers, finding the “sweet spot” between base salary and commission can be one of the hardest decisions to make in terms of managing your sales employees. With too much focus on a stable and established base salary, you might be undermining the drive and incentive that is so important to getting the most of your sales team. On the flip side, a hard focus on commission might drive away quality sales employees who are in need of a bit more stability in their financial lives.
Designing and implementing a compensation structure for your sales team that balances the need for job stability and fixed incomes with a motivational/incentive approach through commission requires significant more oversight and active participation with your sales team. Here at Scalingsales.com, our research and experience confirms that by treating the salesperson as their own CEO, companies are setting the foundation for a genuine accountability system that rewards salespeople for the quantity and quality of the sales and for the true value they create for the business. Part of this shift in accountability, responsibility, and empowerment of the sales team starts with a transparent and well-thought-out balance between base salary and commission.
In this article, we will take an in-depth look at how CEOs, sales managers, and small business owners can design and implement a compensation and wage structure that offers the best of both worlds for their sales team. We believe that a compensation and incentive approach based on the “salesperson as CEO” foundation holds the key to increased productivity for your business while also ensuring a secure and productive environment for your team of salespeople.
We will also briefly explore how the solutions offered by Scaling Sales can help CEO´s, sales managers, and others find the best strategies for motivating and incentivizing a sales team.
Understanding the basics: wage, salary, and commission
Let´s start with some basic definitions and descriptions. In the sales world, base salary is the fixed amount of money that your sales reps will earn regardless of their sales results. Even if an individual on your sales team makes zero sales during a certain month, he or she will be guaranteed a certain amount of income through their base salary.
Commission, on the other hand, refers to the varying compensation that your sales reps earn based on the amount of sales that they generate for the company. Commission can be dependent on the number of sales, the financial volume of the sales generated, or other similar sales performance indicators. Usually, the commission structure is dependent on the sales employee accomplishing specific targets or quotas that have been previously agreed upon in agreements between management and the employee. As stated above, these quotas are generally connected to total sales revenue, unit sales or similar volume-based metrics.
Lastly, as a definition, “wage” refers to a fixed, regular payment that an employee receives. Thus, commission payments are not technically part of an employee´s wages. Commission is more correctly identified as part of the total compensation or remuneration of a salesperson, whereas their fixed wages are dependent on the base salary structure.
Pros and cons of a base salary
As a general rule of thumb, the base salary for your sales team is seen as providing stability, security, and predictability for your sales reps. However, it might play a role in reducing their drive, motivation, incentive, and accountability. Let´s take a quick look at some of the pros and cons of a base salary for your sales team.
Pros of a base salary
A higher base salary will give your sales employees more financial stability and security.
For companies whose product or service generally involves a complex, consultative, and extensive sales cycle, higher base salaries may be an important aspect of maintaining knowledgeable sales reps who are able to stay on the trail and see the sales cycle through to the end.
Cons of a base salary
In many cases, a high base salary can act as a deterrent for incentive for your sales team. If there is not extra financial motivation to increase sales, the sales employee may be encouraged to do the minimum. In fact, the Incentive Research Foundation (IRF) found that 90 percent of top-performing companies utilize incentive programs to reward their sales associates.
For companies whose product or service is relatively simple and low-value, and where the sales cycle is short and transactional in nature, reducing base salary is generally the best way to increase motivation and encourage high volume/high velocity sales.
Pros and cons of commission-based compensation
A substantial focus on commission-based remuneration for a sales team by and large provides motivation, incentive, and encouragement for your sales reps. When well-designed through a consultative, fair, and transparent quota system, commission-based compensation will also tend to align your sales employees with your company´s mission, revenue-based goals, and other long-term growth targets. On the other side of the coin, a top-heavy focus on commission (especially commission structures that are not well designed) may lead to unhealthy competition, stress, and financial uncertainty within your sales team.
Pros of commission-based compensation
Designing a compensation structure for your sales team that is largely based on the profits they create for the company tends to create a culture of excellence.
When commission structures and quotas are collaboratively designed and easily understood, sales teams are generally more motivated to increase the volume of their sales.
Incentive programs, together with fair and transparent commission structures, can be specifically designed to motivate different members of your sales team. For example, recent research finds that there may be different expectations for incentive programs based on the different generations/age groups of your sales team.
Cons of commission-based compensation
A compensation structure that is highly focused on commission may discourage valuable sales reps who need more financial stability in their lives.
For companies where the sales cycle is long and complex, a top-heavy focus on commission-based compensation might create financial and emotional stress for certain members of your sales team.
When a commission structure is not overtly clear, simple, transparent, and perceived as fair by your sales reps, they may find it difficult to reliably track their earnings and goals. This can act as another deterrent to incentive and negatively affect your overall sales for the company.
Finding the right balance: combining base salary and commission
Here at Scalingsales.com, we believe wholeheartedly that CEOs should be in control of their sales and sales results. When they're not, it drains their time, energy and focus. When they are, they and their companies are set up to succeed. A top heavy focus on base salary tends to diminish a CEOs control of sales volume and results as this compensation structure eradicates incentive structures, which are the best way to motivate and encourage your sales team. However, when commission structures are not properly designed and implemented, this can demotivate and frustrate your sales team.
The perfect balance between base salary and commission will depend largely on the industry you are in, the market you are looking to exploit, the sales cycle and strategy, and the overall company culture you are trying to create. Though there is no “one-size-fits-all” solution, here are a few questions that a CEO or sales manager should ask themselves when searching for that “sweet spot” between base salary and commission:
What are the overall objectives and expectations for each sales role on your team?
Which metrics do you want to measure and incentivize through commission-based remuneration?
What skills do your sales reps possess and how can those skills be encouraged through incentive structures?
What preferences and specific motivations can be individually tailored towards your sales reps to create a company culture of empowerment, ownership, and belonging?
What market rates and overall trends for sales compensation exist in your region or in your industry? How can you go above the benchmark as an extra incentive measure to attract the best sales reps for your industry? According to one study, 93 percent of companies report using compensation survey market data when designing salary structures.
Factors to consider when deciding between salary and commission
When designing a fair, transparent, easy to understand, and motivating compensation structure for your sales team, it is extremely important to the following factors into consideration:
The roles and responsibilities of the different members of your sales team: Not everyone on your sales team is necessarily going to be doing the same job tasks, and the balance between commission and base salary should reflect these differences. For example, if you have a sales development representative who spends the majority of her time generating leads and/or qualifying prospects for the rest of the sales team, a higher base salary might make sense. This doesn’t mean, however, that you should not collaboratively come up with different incentives that encourage best practices leading to more sales for your company. Account executives who are specialists in closing deals, on the other hand, will most likely have a compensation structure based much more heavily on commission-based incentives.
The sales cycle and deal size of your company´s product or service: The sales cycle refers to length of time it takes from first contact with a prospect to the final closure of the sale. Deal size, in comparison, refers to the average amount of revenue generated from each sale. Your compensation structure needs to take into account the length and complexity of the sales cycle and the amount of the deal size when balancing base salary and commission compensation structures. For companies with a short sales cycle and a relatively small deal size, a top-heavy focus on commission can incentivize higher volume sales for your sales team through the potential to maximize their earning potential. For companies with longer sales cycle and high-value deal size, a higher base salary might make sense. However, there still needs to be commission and other incentives to keep the sales employee motivated as they move through the sales process.
Identify and clearly state your performance metrics: Lastly, it is extremely important that every member of your sales team clearly recognizes the strategic performance metrics that align with the sales objectives of the company. Your sales team needs to understand how their commission and other incentives are dependent upon these metrics. Depending on your industry, company culture, and other contextual factors, these performance metrics might include total generated revenue, customer retention rates, new customer acquisition, etc. The process for outlining these key performance metrics should be collaborative in nature so that every member of the sales team understands what is at stake. The “four sales meetings” approach outlined by Scalingsales.com outlines the best way to ensure that every member of your sales team is on board with this process.
Finding the sweet spot between salary and commission
An effective and successful compensation plan is one that simultaneously incentivizes and rewards results for your company, your clients, and your sales team. Here at Scalingsales.com, we help you identify the root causes of your sales issues, clarify where you want to be, and create a plan to bridge the gap between the two. We are also one of the few coaching and consulting programs that offers free consultations where we can help you gather a clear and concise picture of your issues, a plan to solve them, and in many cases we can even start working on an immediate sales problem you're experiencing such as sales compensation and incentives for your sales team. We can also help you determine the perfect balance between base salary and compensation for your specific sales team.
Our innovative and effective coaching and consulting program is designed to put the CEO and their team firmly in control of converting prospects into new customers and onboarding and leading their salespeople. Together, we can come up with innovative solutions to create a compensation plan that incentivizes and rewards results for your company, your clients, and your salespeople.
If you´re ready to get to the root of your sales issues, schedule a call today with Steve by following this link. You can also use this step-by-step checklist as your first step to attracting more customers, wining more deals and getting control of your revenue.
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