First Person: Choosing a Compensation Plan for Salespeople

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In my 30 years in sales and marketing, nothing has fascinated me more than the question of how to develop the ideal compensation program. Whenever someone in sales is willing to share how they are compensated, I am delighted and "all ears." Often friends shared some insights into their income plans. I also sold for enough different companies in my career to have personally experienced several plans.

Types of Compensation Plans for Salespeople

- Hourly

- Hourly plus commission

- Salary Only

- Base salary plus commission

- Commission Only

- Guarantee

- Bonuses, contests and spiffs

Hourly

An hourly wage is typically used for retail sales, especially where the salespeople are essentially clerks. Sometimes the salespeople get bonuses for exceeding quota or for getting the highest sales.

Hourly plus commission

When I started in sales, Radio Shack Computer Centers paid us an hourly base. We were paid a commission on whatever we sold, though the rate varied by season.

Radio Shack calculated the commissions on our sales. They then subtracted any wages they paid us for the month. If we earned more than they paid in wages, they gave us the additional amount. If our commissions fell short to the wages, then they wiped out the negative so we started fresh in the next month.

I have also used this plan for inside salespeople who support the outbound reps.

Salary

Salary alone is sometimes used for sales management or even for retail salespeople. The only business-to-business company I have ever heard of using this for salespeople and their managers was DEC (Digital Equipment Corporation).

Base salary plus commission

When I started in sales, 'base plus commission' was my favorite type of compensation because it gave me a dependable monthly salary. In this plan, any negative owed carries forward into the subsequent months until earned commissions finally exceeded what I had been paid. This kind of sales plan is often used for higher ticket items sold business-to-business.

Commission Only

Because the employer has no money invested in salary or wages, commission rates tend to be much higher for commission only than for base salary plus commission plans. This is a common approach for anyone who effectively has his own business: factory reps, real estate agents, insurance agents, multilevel marketing distributors, and some professional sales organizations in the business-to-business sales.

Guarantee

MAI Basic Four used a guarantee to reassure me that I would make at least the same income when I moved over to them as I did the previous year. I wanted to work with their sales manager to learn from him. The guarantee enabled me to move without worries about my income while learning.

Bonuses, contests and spiffs

There are other incentives based on something other than commissions. The prize might be a cruise or paid vacation for two. It could be a physical gift, anything from a gift card to Outback Steakhouses or to Target up to a Rolex watch or even a new BMW. While the BMW is out of the reach of most small business owners and managers, the dollar amount usually isn't the key. Just be creative in finding what will motivate your sales team.

Caution about Motivation:

Keep in mind as you design your compensation plan that not everyone is motivated by the same things. For instance, while I was competitive enough to want to win the prizes, I would not push a prospect to move up his decision just to win the paid vacation. My relationship was more important. As a consultant too, I presented the benefits of another job then let them decide.

Caution about Commissions:

I warn all of my clients, unless you have absolute control over pricing be very careful to pay commissions on gross profit, not gross sales. I have seen salespeople sell at a loss just to get paid their commissions.

The beauty of these five different compensation plans for salespeople is that they give you as a small business owner or manager choices. You can also choose to focus attention on specific products or goals with bonuses, contests and spiffs. Guarantees enable you to attract proven performers. Use these ideas to design a plan that works for you.