Setting Up Commission Structures
There are many ways to pay your team members. The most common are:
- Salary plus commission
- Draw against commission
- 100% commission
In my mind, the first two leave no room for motivation. There’s no incentive, other than getting fired, to sell like crazy. Many entrepreneurs have asked me why their team members aren’t motivated to sell. When I dug into it, I would find that they are paying them a $45,000 salary. Uhhhh, I know plenty of non-motivated people who would put their feet up on a desk for 45K.
There has to be something that causes them to have to sell, and that’s usually paying just enough to put food on their table. It should be something that keeps them thinking more effort equals more money. Less effort equals food stamps. If you have to pay a salary, keep it low, so they make their living on the sales instead of the salary.
My favorite is the draw against commission. This means that you are paying them a small base, which they pay back through sales. For example: If you pay a 24K base, which is 2K a month, and you pay 10% of gross sales, they have to sell 20K of product each month just to break even. So basically if they don’t sell anything, they only cost you the base that you’re willing to pay as a draw and a bit of overhead, like phones and space.
You have to be careful and make sure they will be able to sell through that draw. If not, they will become desperate. And nothing is worse in sales than a desperate sales person. They can’t sell their way out of a paper bag. If it will take some time to fill the pipeline, then you might cover their base for a while until they are able to cover it on their own. In other words, pay them a salary for a few months instead of a draw.
There is one potential problem with this type of commission structure: if they begin to owe you. If they go month after month not covering the draw, then technically they now owe the company. This is not a good place for anyone. Again, insert desperation. I have made the mistake of changing a team’s comp plan with a draw, only to have everyone on the team owing me money.
Needless to say, sales got worse as the unpaid draw got bigger. When I realized it, I pulled them in one by one and let them know that I screwed up, and I was going to eat the amount owed to me and fix the comp plan. Each salesperson actually cried when I did that. And then, guess what happened? Sales! Yep. They each went out without the feeling of impending doom and sold like crazy.
Whatever plan you choose, it’s important to make sure you’re not violating the law of common sense. If it isn’t a win-win for both parties, don’t do it.
Question: What comp plans for sales people have you seen work or not work?