Business Success - Commission vs. Salary-Plus-Bonus

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Commission vs. Salary-Plus-Bonus

Chris Lytle, CSP, Author of The Accidental Salesperson

According to a compensation survey summarized in Selling magazine, only seven percent of the sales organizations in the U.S. use straight commission plans. What have 93 percent of the companies figured out? Straight commission plans reduce the sales manager's ability to control and direct the behavior of the sales team. If you can live with that, straight commission is great. If you want to be a more effective manager, you might have to bite the bullet and make some changes.

Pretend that I'm selling for you. Here's the biggest problem with paying straight commission: I get my 15 percent whether I make my quota or not. Say my budget is $20,000 for the month. I sell $18,000. Hey, I can live on $2,700 a month. But if five salespeople feel the same way, your station is going to fall short of budget by $10,000. Can you live with that? How about your owners? You could fire me for not making quota. But you probably won't for a few months at least.

My colleague Norm Goldsmith at The Leadership Institute says, "When you pay straight commission, people work as hard as they want to earn as much as they want." In a nutshell, that's what's wrong with straight commission.

The trend is toward a salary-plus-bonus compensation system. A "bonus" is different than a commission because you pay a bonus for accomplishing specific financial objectives. And you control the bonus based on the objectives you need the sales team to accomplish.

At The Leadership Institute for Managers, we advocate a system that is based on 70 percent salary and 30 percent bonus.

To make it very simple and specific, let's take a salesperson who earned $30,000 in commissions last year. This year, you changed the compensation plan. (You can do that because you're the manager, but you'd better get a buy-in from corporate or your boss.) You pay the salesperson $21,000 in salary (70 percent of last year's earnings). The salesperson will get 26 checks of $807.60. You have now put 30 percent of the last year's earnings, or $9,000, at risk. That $9,000 gives you some management control over the salesperson's behavior. Here's why: In order to get back to $30,000, the salesperson must do what you want him or her to do.

That leaves you with $750 per month ($9,000/12) in bonus money (not commissions) to reward performance. You could pay the salesperson $375 for making quota. And if new business is important, you could pay the other $375 for getting five new accounts or upgrading three current accounts and selling two new accounts. You are now paying for performance instead of paying the salesperson for whatever he or she feels like doing.

"But great salespeople are money motivated," you're thinking, "and this puts a lid on what they can earn." First, you probably don't have a staff full of great salespeople. If you're lucky, you have one pretty good one, a couple of "Steady Eddies" or "Edwinas," and one you should have fired six months ago. Still, you can pay commission on every dollar sold after the salesperson has made quota. You can even pay 20 percent commission. Sell an extra $1,000 over quota and take home $200.

If, at the end of the year, the salesperson who earned $30,000 last year has earned $35,000 this year, you recalculate the salary at 70 percent of the $35,000.

For the entry-level person, figure out what an average first-year salesperson earns in commissions at your company, multiply by 70 percent, and you have a salary for rookies. You may have to adjust this when hiring experienced salespeople, but at least you have a bottom, entry-level salary.

Salary-plus-bonus compensation programs have another bonus for you. Paying a salary plus bonus can let you go after established workers in other industries instead of just entry-level people who are desperate enough to work for straight commission. You might go after schoolteachers, social workers, or other people who understand preparation, have good people skills, and are looking for a chance to use their talents to earn real money.

Years ago I attended a Don Beveridge sales management seminar at which he said, "Money doesn't manage." I don't know who he stole that from, but I stole it from him.

What that means is that, after a certain point, the fact that people can earn more money doesn't make them go out and do it. After a certain income level they may be motivated by an extra week of vacation rather than another hundred dollars in their pay envelope.

Money doesn't manage. And if you don't have a compensation plan that pays for accomplishing what you need done, then you're not managing either.

The bottom line is (and this is Harvard Business Review stuff) that if you pay straight commission you have relinquished management control and said to the salesperson, "Make it or quit." The salary plus bonus plan puts more control in the sales manager's hands--where it belongs.

This news arrived on: 05/14/2008

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