Paying your sales force

Commission income suggests opportunity for some and frightens others. From the beginning of the industrial revolution in the 18th century, when sales people were called "drummers," to the 1950s, commissions were the common method of payment. It was believed that the fear of failure and the desire of money was enough to drive a salesperson to succeed.

Today, there are still firms that view sales people as drummers, including real estate brokers, investment brokers, telemarketing firms, and a variety of direct sale organizations. In these companies, if you sell, you make money, and the more you sell, the more you make. A simple arrangement; your worth to the company is your earning power. In David Mamet's play "Glengarry Glen Ross," there is a scene where the sales manager is berating the sales force, telling them they are worthless human beings unless they can "close" their customer leads. He brags that his wristwatch is worth more than the cars they drive. Not a very pleasant image of the selling profession.

How do you pay your salespeople? Here are some choices to think about.

Commission only

The commission-only plan is a stipulated percentage paid on every sales dollar. The commission rate varies by industry, type of business and product. If you chose it, find out the rate for your type of business before writing your help-wanted ad. The prime advantage of commissions is the minimization of your risk as you are obligated to pay your sales people only on actual sales, and in some cases only after the customer has paid you.

Another advantage is the focus on incentive – attracting those who seek dollars, not security. Salespeople seeking large incomes will look for companies that offer such opportunity. It also attracts people who wish to be semi-independent – who dislike direct supervision.

A disadvantage is a lack of managerial control. You cannot insist on non- selling activities, such as lengthy sales reports or market research – you cannot manage their activities as you do your other employees'. Another drawback is the possibility of "runaway commissions." If you are fortunate enough to have a surprisingly successful product or service, you may wind up paying hefty commissions – maybe even more than your paycheck.

Salary

Contrary to commissions, with the emphasis on selling, straight salary plans are preferred when sales representatives have little control over concluding actual sales. For example, a representative may find a potential customer, make the initial contact, be assisted by engineers or other members of the firm and finally rely on a team for the final negotiations.

Straight salary is used in low-level selling positions such as detail people who call on stores, take inventory and write orders for replacement merchandise.

Straight salary plans have the advantage of limiting selling expenses, permitting control over the daily activity of the sales representatives and appealing to their security. However, there is no incentive to sell. It attracts those more concerned with security than selling. If you need aggressive people with initiative, straight salary is not for you.

Combination salary and commission

Today, the combination salary and commission plan is the one most commonly used. Structured correctly, it contains the advantages of both salary and commission without the shortcomings. The salary is the base income, providing a degree of financial security and establishing the person as an employee, not an independent agent. It assumes managerial control over the representatives' activities and recognizes seniority and non-selling, semi-managerial activities with periodic reviews and base salary rises. The commission income provides the incentive and rewards selling efforts.

Combination plans can be simple or as complicated as you wish. Usually the base salary represents approximately 60 percent of the person's income with commissions comprising the balance. With this plan you can control income levels by varying the commission rate. You can avoid excessive commission earnings as your business grows by reducing the rate.

Keep it simple

But if you wish your compensation package to work, keep it as simple as possible. A salesperson, who feels cheated over a misunderstanding or confusing rules, will not be in your fan club. When you design your plan, make sure it rewards effort – that it rewards those activities the sales force has control over rather than luck or circumstance.