Updated January 1, 1 . AmFam Team
Think you can’t afford to hire a top-notch sales team? Think again. With a commission-based compensation system, you’ll only pay your sales force when they bring in customer dollars.
“We see a fair amount of commission plans,” says Per Torgersen, a principal at Better Sales Comp Consultants, a Los Angeles-based sales strategy firm. “There are benefits in specific situations and life cycles of a business.”
But while only paying when a deal is closed can protect your balance sheet, there are also trade-offs business owners should consider when deciding how to structure sales compensation. Torgersen lays out some of the pros and cons.
Pro: A commission-based sales force can nitro boost a new company’s sales. When a business is just starting out and doesn’t have much structure in place, a motivated commission salesforce can be an effective way to pump up your revenue stream while you focus on other critical aspects of growing the company. Also, top paying commission sales jobs can attract serious performers who might not otherwise give a small company a second look.
Con: A commission-based sales force can damage morale. There are any number of reasons why one sales person could close more deals than another, not all related to skill or work ethic. For example, your business might offer asymmetrical opportunities based on the geography of sales territories, sparking jealousy or infighting among your team. “Managing all that becomes much more difficult as an organization matures,” says Torgersen.
Pro: A commission-based sales force can lock in your costs. With commission sales positions, you know exactly how much money from every sale you can plow back into your business. “It’s very predictable in terms of compensation cost of sales as a percent of revenue,” Torgersen says. That makes it easier to plan your growth.
Con: A commission-based sales force can limit your sales team. Your sales team won’t want to do anything but sell. Sometimes it makes sense for your people to help with training or participate in other aspects of the company, but if they are in purely commission-based sales positions, they lose money if they aren’t selling all the time.
“It becomes more difficult with commission for leadership and management to push sales people toward strategic things that they want within the organization,” says Torgersen.
Pro: A commission-based sales force can save money on underperformers. If someone isn’t getting the job done, your company doesn’t have as much to lose. The concept of selling on commission is beautiful in its simplicity. “Here’s your percentage, go at it,” Torgersen says. There’s little to administer or manage, it’s easy for the team to understand, and you only pay when the sales force closes a deal.
Con: A commission-based sales force can put long-term customer relationships at risk. With a commission-based sales force, the relationship with the customer rests with the sales person. “Leadership really wants relationships and loyalty to be with the company overall or with the product,” Torgersen says. That way if the salesperson leaves, the company can continue to sell to the client. Salespeople who aren’t on commission are more likely to be cooperative about sharing customer information because they don’t risk losing compensation.
Torgersen points out that business owners have more options to offer beyond a straight salary or commission comp plan. For example, hybrid plans can provide a certain amount of extra compensation for hitting a targeted level of sales, so managers can tier higher payouts to star performers.
Overall, the key is to incentivize your sales force. Find the compensation plan that gets the most from your team and adds the most value to your business’s long-term success.
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This article is for informational purposes only and based on information that is widely available. This information does not, and is not intended to, constitute legal advice. You should contact an attorney for legal advice specific to your situation.