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Chris LoCurto

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October 25, 2011

Setting Up Commission Structures

October 25, 2011 | By | 19 Comments">19 Comments

There are many ways to pay your team members. The most common are:

  • Hourly
  • Salary
  • 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?

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  • http://lgthaxton.wordpress.com Louise Thaxton

    I guess I have seen all types work – and not work! It seems to me to be more about the person than the structure. I have given some individuals huge opportunity to make a lot of money – and they didn’t. And then took that opportunity – gave it to another – and they knocked it out of the park.

    I am a firm believer in base plus incentive – with the base being low. Since my branch’s income is TOTALLY from sales, that is the way I needed to structure it. If the branch does well from sales – then the team does well. If not, they don’t! It makes everyone responsible for “selling” – even the person answering the phone!

    • http://Chrislocurto.com Chris LoCurto

      Amen!

  • http://theretrospectiveentrepreneur.wordpress.com the retrospective entrepreneur

    An interesting fact is that Svenska Handlesbanken (founded 1871) has no budgets, no sales targets and pays no bonuses to any member of management or staff who all work on flat salaries. Handlesbanken recently was rated the 2nd strongest bank in the world by Bloomberg.

    Relying on money to incentivise can be a bit like golf with one club

  • http://theretrospectiveentrepreneur.wordpress.com the retrospective entrepreneur

    This year sold my highly successful international engineering business (to a US corporation) that never paid a single penny in commission. Our sales team were working with large corporations over long lead times (typically years) to develop bespoke solutions to unique technical problems. The salesman was part of a team that included engineering, manufacturing & finance who all worked together with their counterparts in the target company. To be honest the ‘sales’ function was really that of door opener for our executives in each of the above functions and was increasingly becoming an in-house marketing function e.g. we found LInkedin was becoming a vital tool to enable us to reach key DMU members in a target). When your customers are global you can’t have sales people roaming the World.Finding the right people was never easy but with the right team in place salary only worked just fine for us (in our particular circumstances).

    Don’t get me wrong, in the appropriate circumstances a commission scheme can be highly effective. i’m just arguing that each and every situation demands an open mind and the application of analysis to find the best solution that recognises the customers needs, own company goals and strategy. In the example I gave in the earlier comment we paid a % of gross margin. Sales figures were known only to the operating board – everyone knew (on an hourly basis) what the GM figures were. It worked like a dream in turning around an under performing distribution business that was ultimately sold on to its largest competitor.

    • http://Chrislocurto.com Chris LoCurto

      Excellent. I couldn’t tell if you paid salary or commission.

  • http://theretrospectiveentrepreneur.wordpress.com the retrospective entrepreneur

    I find it curious that neither you, Chris nor any of the commentors so far have addressed the issue of what is appropriate for the sales task. All companies, industries and products are different and so are people. Matching the comp plan to the circumstances is the correct thing to do.

    Let me provide an example – some years back I was asked by the CEO of a company I was chairing to interview a sales manager he knew ‘ You have to see this guy, he’s the best in the industry, the customers love him and I’ve tried to get him for years’. So, I interviewed this man and I was underwhelmed, so I tested him him on a number of profiling instruments I use. The results indicated someone very high in non-verbal intelligence & with a DISC profile of High S & C. I interviewed him again and it all fell into place – neither money nor achievement matters to this man but he was obsessed with finding the perfect technical solution for his customers…and we were distributing complex IT hardware / software solutions. He was just what we required and he was a stunning success.

    The other aspect (that I addressed in an earlier blog post http://bit.ly/vWdOiB ) concerns the ‘prominence of the sales role – if your product is supported by a massive advertising and promotional budget then throwing high commissions and bonuses at the sales team isn’t going to be the smartest thing to do. However, if you are reliant 100% on the efforts of the sales team, then schemes 3,4 and 5 on your list may well be appropriate.

    The other aspect to consider, is paying commission not on sales but on gross margin; in industries where salesmen have price flexibility, this system can have spectacular success if you put profit above pure sales…

    Horses for courses

    • http://Chrislocurto.com Chris LoCurto

      Good stuff. So how did you compensate if not on commission?

  • http://twitter.com/tbric Tom Brichacek (@tbric)

    Being a salesman at heart, I like the base salary for a fixed period then straight commission. To partly answer Eric’s question, I like to know the product intimately. To me, this would involve starting and the first step of producing to shipment and doing each of those jobs for a few days. The more I understand the product the better I can sell it. I would like a base salary for this time and then some extra to get out and get started selling.

    If I can learn why my ice is better than what you have, I could very well sell it to Eskimo’s.

    Learning your product inside and out is partly what makes a great salesman. You don’t have to sell it, you let the product sell itself. Just help the customer through the process.

    • http://Chrislocurto.com Chris LoCurto

      Amen!

  • http://ericspeir.com/ Eric Speir

    I have seen many people start with a salary and commission for a season and then move totally towards a commission based package. This helps people to get a few months under their belt without the fear of not eating! It helps them build confidence in themselves and the products so that they can become good salesmen. I wonder what is the best training process for a potential salesmen?

    • http://Chrislocurto.com Chris LoCurto

      I would love to know that as well. We’ve tried all kinds of processes, but I have yet to find one that I think is solid.

      • http://ericspeir.com/ Eric Speir

        Do you know of a good book or resource that you could recommend for selling or recruiting?

        • http://Chrislocurto.com Chris LoCurto

          I wish I did. I read some, but nothing has actually been stunning for me. Or recommendable.

        • http://lgthaxton.wordpress.com Louise Thaxton

          Eric – I have read so many sales books! But one of the ones that I think is powerful – and I just read it a few months ago -is “Go for No” – http://www.goforno.com. It is short read but has some great principles! If you read it, let me know what you think.

  • http://www.cabinart.net Jana Botkin

    Are you able to spot a capable sales person in an interview? Are you able to turn a mediocre one into a great one? And how can anyone sell to folks who are on Dave Ramsey’s plan??

    • http://Chrislocurto.com Chris LoCurto

      You should be able to tell if someone can sell after a few interviews with them. But it still takes putting them on the front lines to make sure. As for turning a mediocre salesperson into a great one, it depends totally on the person. If they are teachable, absolutely. And selling to DR followers, is the same as anything else. You have to sell the why. I don’t care nearly about the what of your product, as I do the why I should buy it.

  • http://twitter.com/mahez007 Uma Maheswaran S (@mahez007)

    In my experience, I have found the system of “Salary plus commission” working the best for both employees and employers in India.

    Since the social security is poor in India and there is not safety net, salary gives a safeguard to meet bare necessities plus the commission gives the motivation to perform.

    I would say that plan of “Salary plus commission” for sales people have worked best in Indian context. It creates a win-win for both parties and also makes great sense.

    • http://Chrislocurto.com Chris LoCurto

      Good to know.