Karen Klein of the Los Angeles Times recently interviewed me about sales compensation. I’ve pasted it below and here’s the link if you want to read it on the LA Times site.
Get input before deciding pay terms
May 2, 2007
Dear Karen: I’d like to hire some sales representatives, but I don’t know how to pay them. Should they get salaries or commissions?
Answer: Rather than developing a compensation package for your sales team, consider allowing them some input. Their participation will create a feeling of ownership for them and increase their “buy in,” said Keith Rosen, sales advisor at AllBusiness.com, an online business guide. “If they create it, they own it, and that will reduce pushback and complaints around compensation,” he said.
The length of your sales cycle is an important consideration, Rosen said. “Great salespeople contending with long sales cycles can have inconsistent cash flow if they’re working for straight commission. This can be tough for a salesperson dealing with fluctuating market conditions and a family to support,” he said, and make it hard for your firm to attract stable professionals.
“Conversely, if you’re dealing with one-call closes or sales that happen within a month, straight commission is very effective and weeds out those who aren’t internally motivated and driven to perform,” Rosen said.
Consider these models:
• Base salary plus commissions. Your salesperson receives a regular salary as well as performance-based commissions. Depending on your situation, base salary can be increased as commissions are decreased over time, or base salary can be decreased as commissions are increased until your salespeople are on straight commission.
• Draw against commissions. Salespeople receive regular advances against future commissions, with a limit on the total advanced. This model can be risky — if the salesperson quits early, you may be stuck with a commission deficit.
• Guarantee against commission. The salesperson receives a minimum periodic income even if commissions don’t reach that level. This is similar to a draw, but the money paid would not have to be repaid against future commissions.