05 Dec EFFECTIVE SALES COMPENSATION: WHAT’S THE SECRET?
Most companies have no clue how to properly compensate. This is true even for funded startups. Worse, their sales people have absolutely no idea what types of compensation schedules even exist. Usually, everyone has a base salary (or hourly rate) and a commission structure. This is the most typical compensation and most prevalent in sales. This is unwise and ineffective. Committing a high base salary to an unproven salesperson is dangerous and will likely incur you more costs in the end. In fact, that one mistake can lead to the failure of your company. The greatest types of compensation packages are set on a variable base or a draw with a heavily incentivized commission and bonus structure.
What we should avoid!
Recently, I came across a young startup who had received a very large ‘Series A’ in funding. With that Series A, they wanted to start a sales team and they had decided on a set budget to do so. They had earmarked four positions at $60,000 each. This would be the total compensation for Sales Development Representatives. They had also earmarked two sets of $80,000 for two Account Executives. Well, at least we were both in agreement not to pay their sales reps on a 100% commission only structure; you do not want your salespeople to worry about where their next paycheck is coming from.
They were planning on giving a base salary and having the commission structured out so they would eventually achieve their respective $60,000 or $80,000, depending on the position. The problem here was very simple: this compensation structure was based on their received funding. While that may seem to make sense – it’s a bad idea.
The reason why this is such a bad idea is simply because it’s not a long-term, sustainable model. A startup will not be funded on a consistent basis. Eventually, it needs to stand on its own two feet and become a self-sustaining business. When the commission structure and compensation structure is based off assumed funding and not the production of the sales team, that’s a recipe for disaster!
Here’s the right way of doing this: have a draw versus commission, which is what we ended up instituting. The way that draw versus commission works is actually very simple. It is a non-recoverable draw. What that means is that the person is guaranteed $3,000 per month, every single month. This works out to $36,000 per year. While it appears to be a low base-salary, it is not a full salary; it’s what’s known as a draw. Now, let’s assume they we are selling units and each unit sold resulted in a $150 commission. To be at equilibrium with the draw, each salesperson would need to sell 20 units at $150 commission per month to be able to sustain their own cost. Anything over 20 units and they start making additional compensation.
Part of making this work appropriately includes making the draw non-recoverable. When you make the draw non-recoverable, the salesperson does not live in fear of their quota. This is because they have their draw to fall back on. We want this, because we want the salesperson to sell. IF the draw IS RECOVERABLE and they completely “shit the bed” one month, they know they must work twice as hard the next month in order to make up the deficit. After a while, the demotivation of not achieving additional compensation coupled with the oppressive feeling of digging oneself into a hole becomes too much for most people to handle.
Those few hundred dollars they receive in addition to compensation goes a long way as far as employee morale and team motivation are concerned. Getting somebody motivated to sell because they know that every sale above 20 units brings bonus money is the way to do it. That’s far better than demoralizing somebody and making back a few hundred dollars. Eventually, the salesperson will just end up leaving. Now, that costs you more in re-hiring and re-training somebody from the ground up. Worse, you’ve now lost all the time, money and resources spent on the other, demoralized salesperson. Even if they weren’t the best salesperson, they were still producing and bringing in deals. They were already acclimated to your culture and training that person would have been far easier of a task opposed to onboarding a new person.
What’s the takeaway?
Here’s the most important thing to keep in mind: whatever compensation you give your salespeople needs to be self-sustaining. This is true whether it be salaried, draw, or 100 percent commission only structure. Remember, I do not condone a 100 percent commission only structure for the reasons listed above. Still, in one situation, they work.
Only compensation structures that work are ones where the company is very heavily invested in their salespeople. That investment can come either via base salary, draw, hourly rate, or through spending an incredible amount of money on training, development, and marketing. A 100% commission only structure requires diverting what would have been a base salary and putting those funds towards other resources for the salespeople.
Both parties need to have skin in the game. Both parties need to have something on the line. When one person has far more to lose than the other, we have upset the balance and created a power struggle. If a company wants to put their sales person on a 100 percent commission only structure, they need to ensure that they are diverting those ordinary salary funds towards generating a significant amount of leads for the salesperson. Otherwise, you will get a significant amount of resentment from the salesperson, and that is not a sustainable path towards long-term growth.
Finally, if the salesperson is incredibly successful, more often than not the salesperson generates the leads, creates the opportunities and closes the deals. If they are not paid a significantly heavy commission, they will leave. The reason for this is simple: they now have the clients and leads to work on their own business. Now, you lose the salesperson and those leads. Tricky territory. Regardless of whether that salesperson is successful or not, this is why 100 percent commission only structure is not the greatest long-term strategy in select situations.
The end goal
The best compensation structure for a salesperson is a non-recoverable draw versus commission. There should always be a heavy, intensive focus on trying to hit specific KPI’s, metrics, and goals so that these salespeople are above their base draw. If a salesperson is not holding up their own weight for an extended period of time and only achieving their draw, then there needs to be some sort of intervention. It could be a termination of the person’s employment – or some sort of coaching and training. There should be a lot of coaching and training prior to the termination. Ultimately, the goal is not to terminate. The goal is to set up a compensation structure which not only guarantees some level of security to the salesperson but also motivate them to achieve and strive for more. At the same time, you do not want your structure to put the company at risk.