Incentives for Salespeople

Sales compensation plans typically rely heavily on incentives in the form of sales commissions. However, some salespeople get straight salaries, and 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. Straight salaries make particular sense when the main job involves prospecting finding new clients, or when it mostly involves account servicing such as developing executing product training programs for a customer’s sales force or participating in national and local trade shows. You’ll often find jobs like these in industries that sell technical products. This is one reason why the aerospace and transportation equipment industries emphasize sales salary plans.

The straight salary approach has pros and cons. Straight salary makes it simple to switch territories or to reassign salespeople, and it can foster loyalty among the sales staff. Commissions tend to shift the salesperson’s emphasis to making the sale rather than to prospecting and cultivating long term customers. The main disadvantage, of course, is that pay isn’t proportionate to results. This can constrict sales and de-motivate potentially high performing sales people.

Commission Plan:
Commission plans pay salespeople for results, and only for results. Under these plans salespeople have the greatest incentive and there’s a tendency to attract high performing salespeople who see that effort clearly leads to rewards. Sales costs are proportionate to sales rather than fixed and the company’s fixed sales costs are low. It’s a plan that’s easy to understand and compute.

However, it is not without drawbacks. Salespeople tend to focus on making the sale and on-high-volume items, and may neglect non-selling duties like servicing small accounts, cultivating dedicated customers and pushing hard-to-sell items. Wide variations in income may occur; this can lead to a feeling that the plan is inequitable. In addition, pay is often excessive in boom times and low in recessions. Also keep in mind that sales performance like any performance is a product of not just motivation, but of ability too. If the person hasn’t the sales skills, then commissions won’t produce sales.

Research evidence provides further insights into the pros and cons of sales commissions. One study addressed whether commission plans influenced salesperson turnover. One potential drawback of commission-only plans is that working without a financial safety net may induce salespeople to leave when pay is 100% at risk.

One sales representative put it “If I go on vacation, I lose money, If I’m sick, I lose money, If I’m not willing to drop everything on a moment’s notice to close with a customer, I lose money”. “I can’t see how anyone could stay in this job for long. It’s like a trapeze act and I’m working without a net”.

In this study, paying salespersons under maximally contingent reward conditions in other words, where commissions accounted for 100% of pay was the situation with by far the highest turnover. Turnover was much lower when salespersons were paid a combination of a base pay plus commissions. These findings suggested that 100% commission can drive higher sales by focusing strong-willed salespeople on maximizing sales. However, it can also undermine the desire of less-strong-willed salespeople to stay. Thus, the effects of a commission plan depend on the salesperson’s skills and personality.

Combination Plan:
Most companies pay salespeople a combination of salary and commissions, usually with a sizable salary component. Early studies suggested that the most popular salary / commission split was 80% base salary and 20% incentives, with 70/30 and 60/40 splits being the second and third most frequently reported arrangements. These splits have not appeared to change dramatically over the years. For example, one compensation expert used a 70% base salary/ 30% incentive mix as a target; this cushioned the down side risk for the salesperson, while limiting the risk that the upside rewards would get out of hand from the firm’s point of view.
Combination plans have pros and cons. 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 tend to become complicated, and misunderstandings can result.