Compensating your sales rep
Deciding how to pay your salespeople can be challenging.
On the one hand, you want to pay them well so they’re motivated to close more sales. On the other hand, you need to control costs. Fortunately, you have options.
Whatever payment scenario you choose to offer a sales representative, remember to consider those (often forgotten) selling expenses such as travel, car allowance, kilometre rates, cellular phone charges, and reimbursement for customer meals and entertainment. You’ll want to document a clear understanding with your rep regarding what you will and won’t cover.
A straight salary plus benefits package may be preferable if your business model is based on:
• A high level of customer care.
• Achieving sales quotas.
• A long sales cycle because you’re selling a complicated product or service.
• Collaborative selling, where sales reps work together to meet company revenue targets.
For example, some electronics retailers pay salary without commission to remove high-pressure selling tactics.
Base salary plus commission
This popular compensation scenario combines the security of a salary with the motivation of commission. It’s the typical compensation package paid to professional salespeople. Benefits to business owners include:
• Payouts based on performance – the rep makes more money when you do.
• Predictable selling costs; salary is a fixed cost, and commissions are a variable cost that can be factored into the cost of sales.
• An ability to attract quality sales professionals who prefer some income surety but like the idea of being rewarded for their efforts.
For example, an organization selling software licenses might offer a base salary of $28,000 and a commission of 15 percent on new contracts, plus a 5 percent residual on license renewals.
Draw against commission
To maintain sales rep motivation while supplying the comfort of a base income, you may decide to offer a draw against commission. Under this scenario, the sales rep is entitled to a maximum monthly draw should they require the funds. It’s not a salary – any amount withdrawn by the employee is deducted from future commissions.
Just like entrepreneurs, top sales performers are drawn to full commission compensation because they believe it fairly rewards them for their efforts. However, this payment arrangement carries some distinct advantages and disadvantages to the business owner:
• Variable cost only. You pay when a sale is made.
• Attracts top earners who possess superior selling skills.
• Built-in sales team motivation: If you don’t sell, you don’t eat.
• Low financial risk.
• Loss of control. Can be difficult to manage sales representatives who, absent a salary, don’t feel obliged to follow your orders.
• High turnover. There’s less commitment to your company.
• The sales rep may put unwanted pressure on your customers to buy.
• Resistance to performing any non-sales related activities, such as paperwork.
While money is likely important to your new employee, it may not be their sole source of motivation. Employees may be drawn to your small business because of your mission, your ability to involve them in different departments, your small team and the chance to learn management skills directly from you, the owner.
By Roger Pierce