Sales Compensation Plans – Why Pay a Base Salary?
I see many postings by companies looking to hire sales professionals on straight commission. Their logic is that if a sales representative is good, the rep will have no problem “eating what they kill.”
Sounds too good to be true, huh? Well it is, because you usually “get what you pay for.” Let’s look closely at the logic of this argument.
Eat What You Kill
Many very successful sales representatives eat what they kill. They’ve developed a business within their territory which generates high commission payouts. For some, their commissions far outweigh their base salary, if they even have one.
Even the most successful sales reps do not start their territories or careers with an established book of business. They build it. And it takes time, often years of patient effort, to build a revenue-producing territory. Plus, when you hire a sales rep with experience in a territory, the rep cannot immediately replicate his or her previous level of success. Two major obstacles cause initial lower sales production: the sales rep’s non-compete contract with his or her former employer and customers’ loyalty to their vendor companies, not their sales reps.
Non-Compete Agreements. Competitive companies limit their sales risk by requiring new reps to sign non-compete agreements. These agreements stipulate that if a sales rep leaves the company, the rep cannot sell a competitor’s products to their former customers for a specified period of time, usually one, two or three years.
Customer Loyalty. Unless the product is a price-driven commodity, customers are usually reluctant to switch vendors or service providers simply to follow a sales representative. They recognize the risks associated with switching vendors. Product quality, availability and customer service levels may not be comparable. They may also need to negotiate new contracts and pricing.
A successful sales rep who joins a new company, even one who remains in the same territory, must invest time with customers to rebuild relationships before significant sales are achieved. During this territory development period, the sales rep will need supplemental cash flow to survive.
Recommendation
Rather than trying to attract sales reps with a 100% commission-based income, consider a base salary plus a more modest commission payout. Or, pay a draw against commissions to lessen the impact of low earnings while the rep develops their territory. The result, while costing more in the near term, will likely attract better sales reps who are more loyal to your company.
Wallace Management Group Can Help
At Wallace Management Group, we’ll help you design and implement sales compensation plans based on your company’s goals and strategic plan. We’ve written sales compensation plans for small, medium and large companies in industries ranging from technology to manufacturing, industrial services, distribution and logistics. Learn more at www.wallacemanagement.com.
We’d like to help you achieve your sales and marketing goals. Contact us at (203) 856-9400 or info@wallacemanagement.com to discuss how we can help you drive more business.
