In a recent 21 Hats Podcast episode, we touched on an age-old debate: When compensating salespeople, is it better to emphasize salary or commission? William Vanderbloemen volunteered that he’s trying to find a middle ground. Here’s the full quote:
“I look at what the corporate world—which has been doing [executive] search longer than the non-profit world—has done, and you’ve got a spectrum where one is just cowboy culture, and consultants are rewarded based on the sales they produce and the bills they collect. It’s almost like they’re a solopreneur using the house brand. And then the other end of the spectrum is, We’re all going to get paid based on how the company goes, and your tenure is what weights your bonus. And that feels more like Europe than the United States. So I’m trying to find a middle ground, and I don’t know that I’ve got it figured out. I’m wide open to listeners sending me something to find a way to split Solomon’s baby.”
Thoughts? What has your experience been paying salespeople?
I like to think of salespeople as hunters in a tribal land. Hunters like to hunt. They also like to eat a bit of what they kill. However, they need to share most of the kill with the rest of the non-hunting tribe for the good of the tribe long term as they provide much of the support for the hunters narrow skill set. Our company is a lot like a tribe and we have a similar aspiration to build a business to last 100 years or more. We have elected to blend a healthy salary with strong individual rewards for individual performance and, on top of that, share a corporate wide bonus focused on 2 metrics (critical numbers) with all employees. I believe this three tiered approach allows for individual reward for the sales team but also encourages teamwork (which is even more important for the tribe long term).
The challenge with sales people compensation is the myth that they create the sales by themselves. Even in the life insurance business which is a cowboy mentality business, sales are not made in a vacuum. If it's a complex sale (and all big life insurance sales are) there are internal people that help, advanced marketing attorney that help and underwriters who help. The sales person is paid a commission and everyone else is on salary.
I find this is true in every sales environment. How you compensate sales people is a statement about how you run your company. If you believe in the lone ranger sales person, then commission is the way to go. If you understand that sales is a team activity then, at the least there should be a commission pool for the entire sales team.
My favorite is to have a bonus based on the company performance where the pot is split among everyone in the company. After all, without operations there would be nothing to sell. When you do this, it's much easier to get everyone on the same page and all working towards growing the business. It also helps with controlling the resentment that often is aimed at the sales department by the rest of the company.
As a sidelight, if you go to the group compensation system you will attract sales people that understand how the group is more powerful than they are as individuals and have better company results.
I've used both over the years and have found the group method far outperforms the individual one.
We pay about half of our staff on some kind of commission plan, where they are compensated based on monthly sales...the other half participates in a company profit sharing plan.
The commission / profit sharing programs are in additional to the team member's base salary which is fairly competitive with a similar position at another company.
Commissions are always calculated using the gross profit (GP$), not sales (this encourages the sales person to sell at the highest margin) nor on net profit (since they have no real say in overhead costs). GP$ profit is defined as:
A baseline goal (bogey) is established for each member of the team when they start with the company based on the average GP$ being generated by their current accounts. The bogey never changes throughout their tenure with the company. If they helped to develop a new piece of business, then they are paid a commission on this business as long as they are with the company. Effectively then, they are building their business within our business which, if they are successful, binds them to the company for the rest of their career (sometimes referred to as "golden handcuffs").
A Regional Sales Manager (RSM) is paid 12.5% of the GP$ profit of any sales made in their territory above their monthly goal. In addition, all of the RSMs share in a team commission pool, equally divided which is an additional 5% of all the GP$ profit in all the territories combined (this encourages the RSMs to work together as a team as RSM 1 will still benefit from sales made by RSM 2). Our top RSM earned just over $300K in addition to their base salary last year.
In addition to the RSM's commissions, the Sales Manager is paid 5% of the total GP$ of all of the RSMs they manage.
The inside sales staff (customer service personnel) is paid a commission of 2.5% of the GP$ of all the accounts they are assigned.
Finally the product managers are paid 3% of the GP$ of their particular product segment (OptiFuse products, Switch Components products, and retail package products (CAAP)).
Added all together, the total effective commission (taking into account, the sales bogies and sales to unassigned territories) is about 21% of all GP$ generated by the company...leaving 79% to the company to pay base salaries, salaries to non-commissioned personnel (including my salary), and all operating costs...with about 15-18% falling the to EBITDA line (used to pay the non-commissioned personnel an annual bonus which is equal to about 6-7 weeks of their salary)
I like to think of salespeople as hunters in a tribal land. Hunters like to hunt. They also like to eat a bit of what they kill. However, they need to share most of the kill with the rest of the non-hunting tribe for the good of the tribe long term as they provide much of the support for the hunters narrow skill set. Our company is a lot like a tribe and we have a similar aspiration to build a business to last 100 years or more. We have elected to blend a healthy salary with strong individual rewards for individual performance and, on top of that, share a corporate wide bonus focused on 2 metrics (critical numbers) with all employees. I believe this three tiered approach allows for individual reward for the sales team but also encourages teamwork (which is even more important for the tribe long term).
The challenge with sales people compensation is the myth that they create the sales by themselves. Even in the life insurance business which is a cowboy mentality business, sales are not made in a vacuum. If it's a complex sale (and all big life insurance sales are) there are internal people that help, advanced marketing attorney that help and underwriters who help. The sales person is paid a commission and everyone else is on salary.
I find this is true in every sales environment. How you compensate sales people is a statement about how you run your company. If you believe in the lone ranger sales person, then commission is the way to go. If you understand that sales is a team activity then, at the least there should be a commission pool for the entire sales team.
My favorite is to have a bonus based on the company performance where the pot is split among everyone in the company. After all, without operations there would be nothing to sell. When you do this, it's much easier to get everyone on the same page and all working towards growing the business. It also helps with controlling the resentment that often is aimed at the sales department by the rest of the company.
As a sidelight, if you go to the group compensation system you will attract sales people that understand how the group is more powerful than they are as individuals and have better company results.
I've used both over the years and have found the group method far outperforms the individual one.
We pay about half of our staff on some kind of commission plan, where they are compensated based on monthly sales...the other half participates in a company profit sharing plan.
The commission / profit sharing programs are in additional to the team member's base salary which is fairly competitive with a similar position at another company.
Commissions are always calculated using the gross profit (GP$), not sales (this encourages the sales person to sell at the highest margin) nor on net profit (since they have no real say in overhead costs). GP$ profit is defined as:
GP$ = sales price - (COGS + in-coming freight + duties + out-going freight + any additional costs of packaging / handling)
A baseline goal (bogey) is established for each member of the team when they start with the company based on the average GP$ being generated by their current accounts. The bogey never changes throughout their tenure with the company. If they helped to develop a new piece of business, then they are paid a commission on this business as long as they are with the company. Effectively then, they are building their business within our business which, if they are successful, binds them to the company for the rest of their career (sometimes referred to as "golden handcuffs").
A Regional Sales Manager (RSM) is paid 12.5% of the GP$ profit of any sales made in their territory above their monthly goal. In addition, all of the RSMs share in a team commission pool, equally divided which is an additional 5% of all the GP$ profit in all the territories combined (this encourages the RSMs to work together as a team as RSM 1 will still benefit from sales made by RSM 2). Our top RSM earned just over $300K in addition to their base salary last year.
In addition to the RSM's commissions, the Sales Manager is paid 5% of the total GP$ of all of the RSMs they manage.
The inside sales staff (customer service personnel) is paid a commission of 2.5% of the GP$ of all the accounts they are assigned.
Finally the product managers are paid 3% of the GP$ of their particular product segment (OptiFuse products, Switch Components products, and retail package products (CAAP)).
Added all together, the total effective commission (taking into account, the sales bogies and sales to unassigned territories) is about 21% of all GP$ generated by the company...leaving 79% to the company to pay base salaries, salaries to non-commissioned personnel (including my salary), and all operating costs...with about 15-18% falling the to EBITDA line (used to pay the non-commissioned personnel an annual bonus which is equal to about 6-7 weeks of their salary)