Too many times, during my nearly 17 years of sales and sales management training, I've seen compensation plans that actually pay a salesperson NOT to sell! They are usually straight salary with little or no incentive to open new accounts or grow old ones. On the other hand, in most industries, to offer a straight commission with no draw or base pay, will not attract competent people. Thus, what the employer needs is the right blend of base, draw and commission for the job. One that will attract the right person, but not pay him or her so much that you as the owner come out the loser.
Here are a couple of scenarios to watch out for as you structure your compensation plan, or just check if these things are happening to you. If they are, it's time to restructure your plan:
Company underpays the new hire - The candidate is hired and is initially very happy, because it's the best paying job he or she has ever had.
The new hire starts to attend networking functions and meets salespeople working for competitors. He discovers that he is underpaid! Now he can either: approach his employer to remedy the matter, quit and go work for a competitor and bring all his accounts with him, or stay and become a disgruntled employee.
'Scenario A' could have been prevented from the outset with a properly structured compensation plan. If that had been done, the employer would have attracted a more qualified candidate who needed far less ramp-up time.
Company overpays the new hire - The candidate is hired and very happy because he knows the job pays extremely well for the position.
A year passes, and the company realizes its big mistake - it never took the time up front to structure a proper compensation plan, and it is overpaying the employee by about twenty-five percent. Finally, the company tells the employee it has to restructure the plan. However, as the company's only salesperson, the employee has the company 'over a barrel' and takes advantage of the situation by not being open to any change. In fear of the employee quitting and taking many of his accounts with him, the company backs off and decides not to make any changes in compensation. Instead, it calls in a sales expert for advice.
The sales expert advises the company that a new compensation plan must be structured and another salesperson must be hired while keeping the current salesperson. The company hires the new salesperson with the new compensation plan and thus, some of the 'over the barrel problem' is solved. But this is a painful process for everyone. Also, the company, which is trying to reduce payroll, actually has to 'lay-out' more to solve the problem. However, it usually is the best strategy when you're in Scenario B. Yet, the whole situation could have been avoided if the appropriate steps had been taken up-front to structure a proper compensation plan.
To avoid Scenarios A and B as well as many other potential improper salesperson compensation plans, be sure to follow these recommendations:
- Structure a plan that is not all commission and not all salary. Usually half and half buffered by draw.
- Know what your competitors and businesses that recruit your kinds of candidates are paying. Based on this and your financials, structure a plan that works for you.
- Consider paying a base pay, and a draw against commission.
- Consider putting a cap on the maximum draw owed.
Following these simple recommendations will put you in the top twenty percent in terms of the quality of your compensation plan. In the end, it will be a win-win-win. You will win; your salespeople will win; and your customers will win due to the long term relationships fostered by you through your salespeople!
Contact me at 781-848-0993 or email@example.com if I can help you in any way.
Greg Nanigian is CEO of Greg Nanigian and Associates, affiliate Sandler Training. Over the past 26 years, we've helped thousands of sales professionals and organizations optimize their selling strategies, increase profits and create lasting relationships with their customers.