3 Discuss the pros and cons

of commissions versus
straight pay incentives
for salespeople.

INCENTIVES FOR SALESPEOPLE

Sales compensation plans typically rely heavily on sales commissions, and should
aim to achieve the company s strategic (and therefore sales) goals. As one survey
said, the performance metrics given to the sales team must drive behaviors that will
help the company s go-to-market strategy to be successful. 41 Unfortunately, the
same survey found that 30% of respondents believe their sales compensation
program rewarded the right behaviors not well or very poorly. 42 However, with
the recent recession, employers are moving to align the metrics they use to reward
their salespeople with the firms strategies. For instance theyre factoring in more
growth-oriented metrics, and reviewing their sales pay plans more often. 43 In any
case, some salespeople do get straight salaries; most receive a combination of salary
and commissions.

Salary Plan
Some firms pay salespeople fixed salaries (perhaps with occasional incentives in the
form of bonuses, sales contest prizes, and the like).44 Why do this? Straight salaries
particularly make sense when the main task involves prospecting (finding new
clients) or account servicing (such as participating in trade shows). Turnover is
another reason. Faced with the difficulty of attracting and keeping good salespeople,
a Buick-GMC dealership in Lincolnton, North Carolina, offers straight salary as an
option to salespeople who sell an average of at least eight vehicles a month (plus a
small retention bonus per car sold).45
The straight salary approach also makes it easier to switch territories or to reassign
salespeople, and it can foster sales staff loyalty. The main disadvantage, of course,
is that straight salary can demotivate potentially high-performing salespeople. 46

Commission Plan
Straight commission plans pay salespeople for results, and only for results.Commission
plans tend to attract high-performing salespeople who see that effort clearly produces
rewards. Sales costs are proportionate to sales rather than fixed, and the company s fixed
sales costs are thus lower. It s a plan that s easy to understand and compute. Commission
plan alternatives include quota bonuses (for meeting particular quotas), straight
commissions, management by objectives programs (pay is based on specific metrics),
and ranking programs (these reward high achievers but pay little or no bonuses to the
lowest performing salespeople.)47
However, problems abound. In poorly designed plans, salespeople may focus on
making the sale, and may neglect nonselling duties such as servicing small accounts,
cultivating dedicated customers, and pushing hard-to-sell items. Wide variations in
pay may occur; this can make some feel the plan is inequitable. Misjudging sales
potential can lead to excessively high commissions and to the need to cut commission
rates. In addition, salespersons pay may be excessive in boom times and low in recessions.
Furthermore, sales performance like any performance reflects not just
motivation, but ability, too. If the person hasn t the sales skills, commissions won t
produce sales.48

Combination Plan
Most companies pay salespeople a combination of salary and commissions, usually
with a sizable salary component. An incentive mix of about 70% base salary/30%
incentive seems typical; this cushions the salesperson s downside risk (of earning
nothing), while limiting the risk that the commissions could get out of hand from the
firms point of view.49
Combination plans have pros and cons.50 They give salespeople a floor to their
earnings, let the company specify what services the salary component is for (such as
servicing current accounts), and still provide an incentive for superior performance.
However, the salary component isn t tied to performance, so the employer is obviously
trading away some incentive value. Combination plans also tend to become
complicated, and misunderstandings can result.
The latter might not be a problem with a simple salary-plus-commission plan, but

most plans are not so simple. For example, in a commission-plus-drawing-account

plan, the salesperson is paid based on commissions. However, he or she can draw on
future earnings to get through low sales periods. Similarly, in the commissionplusbonus plan, the firm pays its salespeople mostly based on commissions. However,
they also get a small bonus for directed activities like selling slow-moving items.

Maximizing Sales Force Results

In setting sales quotas and commission rates, the employer wants to motivate sales
activity but avoid excessive commissions. Unfortunately, the tendency is to set
commission rates informally.51
Setting effective quotas is an art. Questions to ask include: Are quotas communicated
to the sales force within 1 month of the start of the period? Does the sales force
know how their quotas are set? Do you combine bottom up information (like
account forecasts) with top down requirements (like the company business plan)?
Are returns and de-bookings reasonably low? And, has your firm generally avoided
compensation-related lawsuits?52 One expert suggests the following rule as to
whether the sales incentive plan is effective: 75% or more of the sales force achieving
quota or better, 10% of the sales force achieving higher performance level (than
previously), and 5% to 10% of the sales force achieving below-quota performance
and receiving performance development coaching. 53
A survey of sales effectiveness reveals that, among other things, salespeople at
high-performing companies:
Receive 38% of their total cash compensation in the form of sales-related variable
pay (compared with 27% for salespeople at low-performing companies)
* Are twice as likely to receive stock, stock options, or other equity pay as their counterparts
at low-performing companies (36% versus 18%)
* Spend 264 more hours per year on high-value sales activities (e.g., prospecting,
making sales presentations, and closing) than salespeople at low-performing
companies
* Spend 40% more time each year with their best potential customers qualified
leads and prospects they know than salespeople at low-performing companies
* Compared with salespeople at low-performing companies, spend nearly 25% less
time on administration, allowing them to allocate more time to core sales activities,
such as prospecting leads and closing sales54
*

Evidence-Based HR: How Effective Are Your Incentives?

Somewhat astonishingly, given the amount of money employers pay out in commissions,
about 60% of employers track sales performance and sales commissions
much as they did decades ago, using spreadsheets.55 But to maximize performance,
the sales manager typically needs evidence, such as the following: Do the sales
team members understand the compensation plans? Do they know how we measure
and reward performance? Are quotas set fairly? Is there a positive correlation
between performance and commission earnings? Are commissions more than
covering total salespersons expenses? And, does our commission plan maximize
sales of our most profitable products?56 It is difficult or impossible to gather this
evidence or answer these questions because the spreadsheets don t easily support
these types of analyses.
Gathering this evidence and conducting these analyses require special enterprise
incentive management software applications.57 Several vendors supply these systems.
One is VUE Software , which supplies VUE Compensation Management .58 With
the aid of VUE Compensation Management the sales manager can analyze compensation
and performance data, conduct what-if analyses and reports, and do trend
analyses for performance data.59

Commission Vs. Salaried Salespersons

Commission-based pay and salaries are two common pay structures used by employers. Commissions are common in
sales jobs where salespeople are paid based on the amount of volume they generate. Salaries and commissions have
pros and cons for salespeople.

Commission Pros
Commission salespeople are usually motivated to produce more sales because their paycheck is tied so closely to
performance. Each sale means more money, and there is usually no ceiling on potential income. For ambitious and
money-driven sellers, commission pay drives them to make more sales calls and work to close more sales. For the
company, paying salespeople on commission means it only pay for results.

Commission Cons
The biggest drawback of commission pay for salespeople is that it offers no guarantees or stability. Salespeople nervous
about the risks might get burned out quickly from the pressure. Many sales reps who work on commission can also make
their own schedules. Although this gives you more flexibility, it also means you need to be disciplined enough to work
enough days to earn a decent living. Salespeople paid on commission also have to pay for some of their own expenses in
some cases. In this sense, they invest in their own selling business.

Salary Pros
A straight salary is divided and paid in equal installments over time and provides more stability and comfort. This can ease
the pressure on salespeople. Sales employee expenses are usually covered by the company in a salary structure.
Companies also tend to put more time and effort into training when salespeople are salaried. Additionally, when
salespeople are not motivated strictly by the money they make off of commissions, they might spend more time
emphasizing customer service and other facets of their jobs beyond sales performance.

Salary Cons
A straight salary has little ability to motivate. It provides stability, but when salespeople know they get paid regardless of
performance, they might not be motivated to go above and beyond the minimum performance level. A salary can also limit
a salesperson's pay. If you need to make more money to cover additional expenses, such as a new home or new child,
you don't have many options beyond asking for a raise. Another downside of salaries is that they don't encourage a
competitive spirit in the sales force, which can limit growth in the organization.

DEFINITION OF TERMS:

Incentive is something that motivates an individual to perform an action. The study of incentive structures
is central to the study of all economic activities (both in terms of individual decision-making and in terms of
co-operation and competition within a larger institutional structure).

Commission is a sum of money that is paid to an employee upon completion of a task, usually selling a certain
amount of goods or services. It can be paid as a percentage of the sale or as a flat dollar amount based on sales
volume. Employers often use sales commissions as incentives to increase worker productivity. When commission is
paid in addition to a salary, it may be included in the employee's pay check or paid on a separate schedule i.e. bimonthly or monthly.
Salary is a form of periodic payment from an employer to an employee, which may be specified in an employment
contract. It is contrasted with piece wages, where each job, hour or other unit is paid separately, rather than on a
periodic basis. From the point of view of running a business, salary can also be viewed as the cost of acquiring and
retaining human resources for running operations, and is then termed personnel expense or salary expense
Appraisal is the formal and informal process through which an employee is able to discuss their training and
development needs with an appraiser. The appraisal process enables a two-way communication process between the
employee and the organisation. The employee is able to get a better understanding of the needs of the organisation,
while the organisation gets a better picture of the development needs and requirements of the employee.

What is the difference between Salary, Wages and Commission?

Wages are typically a set hourly rate like $8 an hour. You get an hourly wage of $8 for working a certain amount of
hours. If you dont work, you dont get paid.
A salary is typically a set monthly amount like $2,000 a month that includes a package of leave time. So if you work
one month but are sick 2 days then those two days of sick are deducted from your leave time, but your monthly salary
will still be $2,000.

Commission means you get paid based on how much work you do. If you work in sales, you get paid a certain
percentage of what you sell. If you get 10% of what you sell and you sell $5,000 then your commission is $500. Your
pay from week to week will vary and your earnings are dependent on sales or production.