With the economy showing signs of life, compensation administration is again taking a front seat for organizations hoping to keep their best employees, and appropriate sales salaries are definitely high on the priority list. During times of economic growth after a decline, businesses face the possibility of high turnover once employees become comfortable looking for other opportunities. Creating effective compensation strategies is one way to combat this reality.
In a BLR webinar titled "Sales Compensation Strategies: How to Motivate and Re-Energize Your Staff in the New Economy," Harry J. Schum outlined some basics for us regarding sales salaries.
Sales Salaries: What Are Your Options?
Sales salaries can take many forms. Here are some of the most common:
- Salary only. In this case, salespersons are paid a set amount each pay period, without variation.
- Commission. For commission-only systems, the payment is typically a percentage of the sales and/or of the margin.
- Bonus programs. These can take many forms, such as SPIFFS (Special Plan Incentive for Fast Sales) or a bonus paid for meeting sales challenges. Schum advised that "bonuses are usually ad hoc and have a temporary basis . . . salespeople are usually looking at the top two bullets – salary plus salary and commissions – as the major portion of their income potential." Bonuses should be used for specific, targeted reasons.
- Supplemental rewards. You can add variety by including rewards like "President’s Awards" or "Salesperson of the Year," etc.
- Draw. A draw is an advance of pay for living expenses, but it is tied into the earnings of commission in the long-term. You will need to determine whether you allow an advance draw on commission-based sales pay. If you use a draw system, you’ll need to know whether the draw is considered recoverable or non-recoverable should the employee leave before the pay has actually been earned.
- Combination of all of the above.
Which of these forms of sales salaries best fit your organization? Here we’ll outline further details to help you answer that question.
Sales Salaries: The Details
Each of the various forms sales salaries can take has pros and cons. Here are some things to bear in mind.
- Salary-only. In this situation, all of the costs are fixed costs from an organizational perspective. "Usually those types of sales programs are from a very rote process, so they’re not really sales-driven . . . you don’t need sales competencies in order to move the product. By definition, because it’s all salary, it’s an incentive-less program. These programs should be used when you have more order-takers than sales functions. You can think of – maybe – people being either web-based or call-in centers." Schum explained.
- Salary plus commission. This scenario spreads risks because it moves some of the salary cost from being a fixed cost to being tied to sales levels. It is designed to attract quality "hunters" because you need people who can sell well. Another benefit of this option is that it allows employees to be paid to do other tasks, since they are not paid 100 percent commission.
- Salary plus bonus. Adding a bonus structure can allow a business to focus on specific objectives. Schum tells us that often this is "utilized in organizations that are much more business-development focused than sales-focused." This may be the case, for example, for businesses that have a very long sales development process in which a new contract could take more than a year to land. Another time this structure is utilized is for sales management personnel and/or administrative members of the sales team.
- Commission only. These programs can be implemented with or without a draw. You can choose to make this advance recoverable or non-recoverable. Recoverable just means that if the person leaves the company before the draw has been earned, they may be required to repay the draw. A commission-only system provides a very strong incentive to excel and is well-suited for pure hunters – people that really believe they can deliver. They’re taking a chance by putting their pay at risk. This could also be used for non-employees, such as outside sales reps.
As you see, sales salaries come in many forms. Which is best suited for your business?
For more information on sales salaries, order the webinar recording. To register for a future webinar, visit http://catalog.blr.com/audio.
Harry J. Schum is a Senior Consultant with Compensation Resources Inc. His areas of expertise include executive compensation, variable pay, incentive strategies and human resource planning, and program implementation.