When is 100% Commission Sales OK?
100% commission sales team is nearly an irresistible draw, isn’t it!? You know the stories I’m talking about – the ones promising you a highly motivated sales team for little or no investment.
But if it were really as viable as some people suggest then everyone would be doing it, right? So should you build a commission only sales team? Or should you wait until your company can support a salaried sales team?
A quick trip to Google isn’t much help. There is a ton of advice eviscerating the practice of paying sales people on 100% commission. But for every detractor of the model, there are as many exponents arguing the benefits of allowing sales people to rise or fall on their own merit. And there isn’t a lot of advice that lies in-between to balance things out.
So here are a few tips on whether your sales role is suited to a commission only structure.
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Would You Work On 100% Commission?
The first thing every business owner should do when considering a 100% commission compensation model for their sales team is to imagine themselves working in that sales role.
Then they need to ask themselves one simple question. “Would I take this job?”
If you can honestly answer YES then you can move on to other considerations below. If the answer is NO, then it’s hypocritical to offer a commission only job that isn’t attractive enough for you to seriously consider for yourself. If you can’t improve the role to the point where you would take it, then wait until you can provide a salaried position.
Consider It A Draw
A draw against commission refers to compensation that is paid against future commissions. And it can be used as a happy medium to balance the objectives of both management and sales reps.
A draw is paid like a regular salary. When commissions come in, they are deducted from the draw amount already paid. Imagine you expect your sales rep to earn an average of $6000 per month over a 24 month period. In that case paying a $3000 per month draw against future commissions might make sense. It’s a small enough amount that the sales rep isn’t getting complacent. But enough to cover their day to day expenses.
For the sales rep, a draw can mean the difference between accepting or declining a job opportunity. It shows the company has faith in their ability to perform. And gives them some stability while they are working on their first few deals. It also makes them less likely to job hop when any other opportunity comes along.
A draw can be recoverable or non-recoverable. A recoverable draw matches draw already received against commissions earned. The sales rep has to ‘pay back’ any money they’ve already received in the form of draw before they can begin to receive the excess amount in commission. A non-recoverable draw puts a limit on how far back the draw can be offset against commissions. This effectively guarantees a minimum level of compensation to the sales rep.
100% Commission Sales Checklist
When you’ve got a sales role that you would gladly accept, consider the criteria below to decide whether you should proceed.
Industry Norms: If commission-only is the standard in your industry then it is probably appropriate to adopt a similar model, if you so choose. Just don’t be afraid to be different! For every company offering 100% commission sales compensation there are probably others with a different compensation model.
Sales Cycle: The time it takes close a deal from start to finish is probably the biggest determining factor when deciding whether a 100% commission model is appropriate. Generally speaking, the shorter the sales cycle, the more appropriate commission only remuneration becomes. In some industries a single deal can take 4 to 6 months and monopolize a lot of time. This makes it very difficult for the sales person to earn a living if compensation is limited to commission only. In these cases a base plus commission, or a draw against commission would work better.
Commission Size: The size of the average remuneration goes hand in hand with the length of the sales cycle. Typically, the larger the commission, the more suitable a 100% commission only compensation structure. Consider a real estate agent selling multi-million dollar homes. A few commissions on deals this size will cover the sales agent’s personal and marketing costs for the year. Conversely, smaller deals that are profitable over long periods may make commission only compensation structures less appealing.
Lead Development: The role that sales people will play in developing or not developing their own opportunities will play a big role in the suitability of a 100% commission structure. Some firms provide a steady stream of high potential opportunities for the sales person to close. Other companies leave the lead development up to the individual sales person. Both are ok, but the level of support the sales person receives will be a major factor in determining the viability of commission only sales. For example, if the company is paying for b2b lead generation services and customer support, then the sales people have no responsibilities outside of closing the deal.
Cumulative Results: In some industries the sales person’s efforts can become cumulative and thus lend themselves to commission only structures. For example, an individual deal might pay a small amount up front, but there is an expectation of ongoing payout. In these cases the initial effort required to produce the sale becomes inventoried to generate an ongoing stream of payment.
For example, when asset managers acquire a new client they expect that they’ll receive a small commission for several years while the client remains with their firm. The original payment is small, but if the asset manager gets enough clients then over time their total commission becomes substantial.
Target Client Outcomes: Sales activities can often be at odds with target client outcomes. Be sure not to use commission only compensation if it will interfere with other target outcomes. Narrow the scope of sales person responsibilities to those that provide them with compensation.
Sales people will generally pursuit the activities that best increase their take home pay. If you want your sales people to generate deals on commission, then they will be mostly focused on getting new deals. If you also want them to provide compelling customer support without additional compensation then you may have a problem. With no pay sales people may ignore their existing clients to pursuit new clients – not the client experience that businesses are looking to create!
Commission only sales compensation is not suitable for many businesses because they fail in one or more of the above areas. But if you pass the guidelines above and can still develop an enticing sales role that you would be willing to accept, then it is worth exploring.
Have you ever worked or hired in a 100% commission compensation structure? What was your experience? Would you recommend it to others?
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