Sales Compensation - moving total cash structure from base and incentive to commissions only
beckeywc
2 Posts
I am currently working on a sales compensation project that will take total cash compensation from base plus incentive to commission only. What things should we consider when taking this drastic approach. I'm interested in design, administration and employee communication thoughts.
Comments
Inside or outside sales? If employees contemplated for this plan are not outside sales, then they are still entitled to minimum wage and overtime. Outside sales people are exempt, but the definition of outside salesperson is pretty narrow and has been judicially construed (meaning you need to know what your circuit thinks constitutes an "outside salesperson" and the answer may not be generalizable to other circuits).
"Commission only" for outside salespeople usually means, literally, commission only.
"Commission only" for inside salespeople usually means, "draw against commission," with an understanding that the draw is generally not recoverable if the company decides to fire the sales rep for lack of production. There are ways you could recover the draw above minimum and OT pay earned, but it probably would not be worth implementing (cost of litigation, possible collection-proof nature of the employees, ill-will with candidates for employment, etc.).
Commission only for outside sales not our inside sales team.
Thanks for the feedback, TXHRGuy.
Here are some thoughts.
Design
There has to be a realistic way for people to make real money to accept this sort of risk. If anybody in management hopes to increase revenue by taking money out of salespeoples' pockets, then this is the wrong way to do it. However, it's a great way to increase revenue if you have hunters rather than farmers in your external sales force. It's also a great way to weed out farmers. So, rule one is make sure that your outside sales force can make serious money under your plan or they will start to leave you and recruitment will be very difficult.
Maintain a chargeback account, set a cap on it, and permit employees to take a draw against their chargeback account. Being the benevolent bridge loan grantor is a great way to build a good relationship with an often difficult to manage type of employee. The draw is often more important than the chargeback concern, unless the nature of your business includes considerable cancellation risks. Rule two is to protect your bases while also protecting the risk takers' interests.
To avoid getting back into the problem of having a bunch of farmers on staff, either require their customer count or sales base to increase every year (an up or out approach) or put a sunset on their residuals (50% gross on first sale, 20% residual for 12 months, 10% next 12 months, company client therafter or 5% continuing with annual site visit, whatever makes sense to you). Rule three is to ensure that the hunters never get too comfortable until they have put your company in a very, very good position.
Administration
Design and administration go hand in hand. The more complicated you make the system, the harder it is to administer. Compensation errors with salespeople are very, very damaging. They immediately lead to conspiracy theories about how the company is )*&%ing the sales staff. Rule 1 of administration and design is to keep it simple so that you don't make mistakes. People always want to play incentive games to try to tweek performance. Limit that to things in the nature of contests that augment but do not modify the base compensation structure.
Sales people can be very needy. The more complicated you make the system, the more questions you will be answering every pay period. Sales people want to understand their checks. Unless you like to do a lot of hand holding, Rule 2 is keep the math simple.
Sales people can be very needy. The more complicated you make the system, the more questions you will be answering every pay period. Sales people want to understand their checks. De ja vue. Unless you want to do a lot of hand holding, Rule 3 is make client and revenue reports available and readable.
Communication
Keep it positive and about their own interests. Sales people want to hear about how the Company is taking caps off of earning capability, how they can now virtually write their own checks. Show a realistic model of how much a person can make. Show that a person who won't knock your socks off but does a good job will make good money. From there, show incremental examples that finally demonstrate how a rock star will make very serious cash. Use small words, plenty of pictures, and clear, happy sounding communication.
They will want to know what is in it for them in light of the transfer of risk.