Salary or Commission?
Many small businesses can't decide and most companies don't believe they can afford the salespeople they wish to hire. The biggest variable in this decision is the length of the sales cycle, not the amount of compensation!
Compensation is usually simpler than most companies make it. Most companies seem to either over compensate or under compensate on salary. Most companies tend to do the same with commissions.
There are three key points in time with compensation. They are:
- at new salesperson start-up - you must subsidize the new salesperson.
- the end of the ramp-up - commissionable revenue has begun to arrive.
- at the point of establishment - revenue supports the salesperson.
In my experience, the most effective compensation plan is one that slides. It begins with 100% salary for time period #1. Commissions kick in during time period #2 and salary can be reduced. Commissions replace salary during time period #3.
If you were to graph this compensation, it would look just like the picture above. If you prefer to maintain some or all of the salary and stay away from straight commission that would be fine. If you feel that it is necessary to provide more commission for new versus existing business, that is fine too. And if you want to provide salary for managing existing business and commission for generating new business, that is fine too. In most cases, especially where margins are tight and variable, commissions should be paid on the margin rather than revenue.
The most important point is that in most cases, the compensation program should look different at the beginning than it does at the end.