Commission for Salespeople: to pay or not to pay?

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Commission Based SalaryDespite evidence that money doesn’t motivate, many firms still offer sales staff a relatively low base pay with the potential of earning significant on-target earnings.  The actual monetary value of the on-target earnings is generally related to a sales target. But why do firms still use sales commission to drive their topline, indeed, does this tactic work and is there any alternative?

In answering these questions we need to look at what companies hope to achieve by offering commission or other form of performance related pay. The aim is that the employees’ motivation is increased and that they will strive to achieve the targets set. And since the topline is increased, the aim is that the scheme will be self-funding from the added gross margin realised.

From the employee’s viewpoint

It’s worth looking at how the commission will be viewed by the employee. This can be calculated using a form of actuarial prediction. The actual money predicted to be earned will be the commission offered multiplied by the salesperson’s view of the chance that he or she will actually be capable of achieving the target multiplied by their view that the target is achievable in the first place. This latter factor is a function of the firm’s product or service offering, the competency of other staff involved in the sale, the firm’s market position and the state of market itself.

If an apparent commission of £20,000 is agreed, and if the salesperson views their chances at 50% with a product marketing chance of 50% that gives an actuarial commission payable of £5,000. Research suggests that before people strive for money alone, there needs to be at least 10% of salary available. In this example, someone on a basic salary of £20,000 would see a 25% bonus as quite attractive. If on the other hand the commission offered was only £4,000, it’s unlikely they’d up their game. Likewise if £20,000 was agreed with someone earning £80,000, it is again unlikely that the perceived gain would be worth the effort.

When it’s not all rosy

If of course the product is poor, the market is tough and the salesperson is not well trained, the chance of success reduces and the actuarial commission becomes unattractive. In offering a commission the firm needs to be sure that the salesperson perceives that it can be earned.  After all, the salesperson will look to the history of previous payments and to their feelings about the firm and its products in forming an opinion before agreeing to the objective.

So what’s wrong with PRP?

So on the face of it sales commission can be a useful tool. There is however a huge body of both theory and practice against performance related pay in the modern firm. Modern firms require three primary things from their employees: flexibility, quality and soft skills.

1.  Performance related pay schemes don’t foster flexibility. By their very nature they are designed to remove the sales person’s flexibility and focus their mind to achieve one thing only – the sales target.

2.  Performance related pay schemes create a desire for speed of sale. There is potentially significant opportunity for cutting both the gross margin and the selling price of the job and for reducing the quality of the delivered product or service.

3.  And on the soft skill side, performance related pay schemes reduce the necessary risk-taking essential for innovation and they stifle creativity.  Performance related pay schemes also have a long history of being divisive rather than fostering team working.

Commission for Salespeople: to pay or not to pay?

Sales commission is a short term instrument. The salesperson can be motivated in the short-term but it’s unlikely that they would invest their time and effort in building the market for the future.  They would be more likely to ignore longer term prospects and focus on the so-called low hanging fruit: the sales opportunities likely to tumble soon. The result is possibly a boom-bust scenario with a high sales staff turnover: in this case salespeople earn their commission and move on once the short-term opportunities dry up.

So what’s the alternative? If management are enthusiastic about performance related pay then there are two simple rules.  First, apply PRP across the whole firm. Everyone is part of the business of satisfying the customer so reward all appropriately. Second, make sure that the PRP is implemented on the heels of a robust performance management system. This last point ensures that objectives are set and performance is measured correctly.

So in summary, there’s perhaps nothing in principle wrong with performance related pay but its implementation needs to be considered carefully. There is more to it than just sitting with salespeople and agreeing a commission.

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