Which way does the compensation pendulum swing in your company?
Have you been frustrated by under-motivated salespeople who are paid a handsome salary for selling to legacy clients and maintaining easy business?
Or are you being plagued by turnover issues based on no one being able to “make it” on commission only?
Sales management professionals are being challenged by the compensation dilemma as they experiment with both ends of the spectrum to find the right solution. An important starting point is to understand your company’s “ramp-up” time. No matter what your industry is, you have to give a salesperson a salary during that period to get trained and ramped up.
Most industries average between three and six months for this “ramp-up” period. This practice takes the risk out of a talented salesperson from leaving a good job to come work for a potential employer. The flip side of this is not to get carried away with paying a salary for too long, because even “star” salespeople know they have to deliver results within a reasonable time. Beware of the salesperson demanding a guarantee that exceeds your normal ramp-up time.
Once your sales person is “ramped up,” the next factor to consider is the sales cycle. If the sales cycle is less than three months, then the commission-only route is best way to go.
If the sales cycle is between three and six months, then a small base salary is in order. The percentage of fixed income (salary) should be one third of projected income. The balance should be based on variable income (commission).
If the sales cycle is greater than six months, then the percentage of fixed income should increase in proportion to the increase of the sales cycle. At this point, I am afraid to say that the exact number is as much an art formas a science.
Type of Sales
The last thing to understand is the type of sales the person will be doing: new business development versusaccount management.
In the case of new business development and the degree of self generation involved in this position: If the person has to self generate his or her own leads, and is only doing new business development, then a case can be made for a larger percentage of base salary even though the sales cycle might be shorter.
In the case of account management, you can make a case for all commission or a smaller salary even though the cycle might be longer due to the existing accounts and legacy business.
These two types of sales and compensation are driven by the degree of risk and uncertainty.
The last thing I will leave you is a compelling research finding. Dave Kurlan, a leading sales author, sales blogger, and sales expert, found through almost 30 years of research that salespeople who are compensated mostly by commission are twice more likely to be retained than salespeople who are compensated mostly by salary.
The logic in this finding is that these people making commission are making “great money” and feel that they have more control over their compensation than someone making a salary and a smaller bonus.
So, what’s going to work best in your business?
Alex P. Bartholomaus is managing partner at People Stretch Solutions and works to help small to mid-sized companies drive growth and profits. He combines a non-traditional approach of psychology, behavioral science and emotional intelligence to help sales forces and leadership teams perform at higher levels.