Breaking the Commission Tradition

Q: We’re looking for new ways to compensate our sales staff. They’re on commission, and seem so concerned about the “next sale” that existing customers are getting poor service. Any ideas?

A: Sure. First let’s look at two traditional compensation models.

The first is straight commission, which you know all about. Marjory is in sales with XYZ Trucking. Her sales and income are perpetually high, but Marjory’s headlong plunge into her prospect list leaves no time for follow-up with customers, paperwork, or goodwill at the office.

George, at ABC Transport, is Marjory’s opposite number. George is paid a fixed salary, because his company thinks it will attract a higher caliber of worker. That usually breeds salespeople who are favorites with customers, spending lots of time tacking on value-added extras. Too much time, perhaps: George’s month-end sales figures are usually disappointing.

Two extremes, two problems, two outdated systems.

It used to be enough for salespeople to take as many orders as they could. But sales is not the job it used to be. Instead of the bi-monthly check-in, salespeople are asked to find market “solutions” that require in-depth knowledge of their customers’ business, build relationships across multiple layers of a customer’s organization, and grapple with new technologies to support their sales effort.

Full-commission salespeople don’t like spending time on unpaid activities and, if made to do so, will quickly depart for greener pastures. On the other hand, salaried salespeople often don’t know where to draw the line, and get paid well for poor sales performance.

You want to compensate people for results. But beyond that, salespeople also need to be compensated for results they generate from all the important activities of their jobs-not just selling, because their job involves more than selling.

More and more companies are adopting a system called variable compensation. Variable compensation directs the efforts of the employee by basing a substantial portion of total cash compensation on performance relating to specific personal goals, and also to the overall success of the company.

In the examples above, George’s sales activities were not pinned down to any objectives. He may sharpen his focus on closing sales if a portion of his salary were to vary according to sales results. But George’s service orientation may be helping his company retain customers very well, a factor that contributes to the overall success of his company. So George might benefit from a portion of his salary paid as a bonus for repeat sales, sales growth per client, or years of retention per client.

Marjory is motivated by the financial incentives of straight commission. High sales are great, but the cost of poor customer service, administrative inefficiency, and bad morale must be netted out. Marjory may back off her furious pace if a portion of her salary is tied to repeat sales, or sales growth per client. She could also share her energy and selling skills with a couple of apprentices, and earn a bonus when they reach their objectives.

Not only should variable rate compensation focus attention on business plan goals, it has another function: controlling costs.

Compared to a salaried system, a salesperson’s total pay reflects results during the current period-in other words, you’re not paying for the good performance of five years ago. Growth in fixed payroll costs slows down as cost-of-living allowances are applied to a smaller base. Variable compensation can even save costs compared to straight commission systems, where the high dropout rate carries a lot of hidden costs like cars, travel, expense accounts, and administration. By rewarding achievement of goals derived from your business plan, variable compensation can increase the rate of personal successes in your sales force and decrease the cost of failure.