How to pay your sales team: Commission, bonuses and salary
Your sales team is your connection to your customers. As such, you want to design a compensation package that helps you attract and retain the best people.
Before you decide how you will pay your sales team, consider your business objectives, the role your salespeople will play with customers, the aggressiveness of your sales targets and the flexibility of your budget.
Once you have clarified what you want to achieve, the next step involves finding the right mix of base salary and commission pay and/or bonuses to reach those goals.
What are the benefits of paying salary?
A steady salary provides employees with stability and security. A substantial base salary can be used if your sales representatives need technical knowledge to sell your products or services or if they have to establish a long-term relationship with clients.
When salary is the main compensation method for your sales team, it is a good idea to establish performance standards for both customer service and sales targets. Quarterly or annual can then be designed so employees will achieve a desired level of sales and quality of services.
The other advantage of using mostly base salary as compensation is that it simplifies the budgeting process, as it is relatively easy to forecast fixed salary budget costs.
The benefits of commission pay
Straight commission is a great way to attract aggressive, skilled sales representatives.
This group will typically have some basic technical knowledge, but their skill is more focused on finding customers, pitching your products or services and closing the deal. Others in the company will have more in-depth technical skills and provide direct services to the customer.
With this type of remuneration, the reward for performance needs to be clear and financially attractive. You must pay the commission on time and regularly. Many organizations tier the sales goals with bonuses given for achieving quarterly or team goals.
From a salary budgeting point of view, costing is based on sales projections, and increased commission costs are handled by increased revenues.
One word of caution, however—your commission pay should be based on a percentage of revenue or profit. Tying commission to a quantity of goods or services sold can lead to heavy discounting and negatively hurt your margins.
Using a mixed compensation model
Most companies pay a base salary that is complemented by commission pay and bonuses.
A 70/30 split between base salary and commission plus bonuses is a fairly typical mix according to a 2008 survey from the Canadian Professional Sales Association. From this baseline, it’s a good idea to adjust as needed. For example, an experienced salesperson or manager might ask for a higher base salary, while a new recruit could accept a salary based almost exclusively on commission.
Tweaking this split can also encourage different behaviors. For example, you can increase the share of commission pay if you need your sales representatives to be very aggressive. Or you can make base salary a bigger part of the total compensation package to inspire a more consultative sales approach.
You might also want to consider a tiered commission structure, where salespeople earn a given percentage of sales up to a target, with the percentage increasing for sales beyond that goal.
Review your compensation plan from time to time
You’ll want to periodically review your compensation plan as your results come in and as the economic environment changes. If sales are falling, for example, it might be because your base salary is too high and your employees aren’t properly motivated. Also, consider raising the value of your compensation package if you are losing team members to your competition.
You might also want to discuss your compensation plan as part of an overall HR plan with an outside consultant.