Is a 100% Commission Plan The Best Way To Compensate Salespeople?
Posted by completesalesmanagement on August 5, 2008
As the economy continues to challenge many businesses the question of effective compensation systems becomes more of a concern for many organizations. A recent article in USA Today highlights some of the concerns that many people have today about commissions. (http://www.usatoday.com/money/economy/2008-06-01-commission-tips-pay-income_N.htm)
Without a doubt the life blood of the business is sales. Without sales nothing happens, no revenue and no profits. Yet, like marketing and advertising costs business owners want to make sure that they are getting a return on their investment. As such the question on how to structure the compensation for these salespeople is of major concern. And when times are tight reducing or eliminating payroll expenses is a serious consideration. The last thing any business wants to do is have a payroll cost and no return associated with it.
Therefore, most organizations usually see a 100% commission program as a basic form of compensation when it comes to paying their salespeople. Under this compensation plan the salesperson is only compensated when they bring in a transaction. Often the salesperson is considered an independent contractor meaning that the employer is exempt from having to pay the typical employer expenses such as payroll and benefits. In some cases such independent salespersons may even represent many other comparable products.
The obvious benefit of the 100% commission salesperson is the cost of employment and assumed low risk of hiring. However, one concern with this type of compensation program stems from the level of control that a business can have over the salesperson. In order to preserve the independent contractor status the internal revenue service has outlined several rules that restrict the amount of control that a business can have over its independent contractors. Violating these rules can then impose severe tax liability on the organization. For example, businesses have to be very careful on requiring independent contractors to work specific hours, having to attend company meetings, among other things. More information about this issue can be found at:
http://www.irs.gov/businesses/small/article/0,,id=99921,00.html
One thing to remember is that there still is a risk of hiring the wrong person regardless of the financial cost. I have worked with organizations that felt they were not financially impacted from a non performing salesperson simply because they did not have to pay a check. The fact is that a non performing person can have just as much if not more harmful effects on your bottom line. The first thing to remember is that if you hired them they represent you and your company. Their behavior and lack of production has an eroding effect on your whole operation and takes away valuable opportunities in the marketplace. A non performing salesperson also gives management the illusion that they have a sales force and can end up affecting projections and the allocation of resources.
There is common misconception that 100% commission programs attract less than qualified salespeople. This is simply not true. Many top corporations including the major wire houses and high end consulting companies consistently attract people with very impressive resumes and educational backgrounds. To these individuals the form of compensation is attractive because of the opportunity to make as much money without limitations. The idea of a salary would be limiting to their financial goals. Therefore, the lack of salary is not a detriment but rather liberating and the value is in the opportunity the position affords.
So should you consider developing or changing your sales force compensation to a 100% commission program? The answer depends on the individual business and requires taking a look at a few key areas including but not limited to the gross margins and company culture. Like anything there is no “one size fits all answer” to this question. The worst thing that most organizations do is adopt a compensation program without really doing the analysis first. The analysis is not something that should take a long time, but not doing it can cost you dearly.
