When developing a sales compensation plan, there are a variety of potential pay structures to choose from and usually when a company is deciding how to structure their plan, they rely on features of a compensation plan that make the most sense for their business. However, what is often overlooked when choosing which type of compensation plan to implement is what is going to drive sales reps to generate the most revenue.
The most commonly used compensation structures are commission-only and salary plus commission. We’ll go into a deep dive on the pros and cons of both below and which compensation plan has the potential to rally your sales reps to sell the most.
What Does a Commission-Only Pay Structure Look Like?
A commission-only pay structure is when sales reps receive sales compensation as their only source of income. An employer may still offer additional benefits such as health insurance and a retirement plan, but as far as what goes directly on their paycheck, they are limited to only what they earn by producing sales.
What are the Pros and Cons of Commission-Only?
Pros of Commission-Only
Unlimited Earning Potential: For high-performing sales reps with years of experience under their belt, a commission-only pay structure can be attractive. A commission-only structure usually brings with it a much higher commission rate than a salary plus commission structure, which can be motivating for seasoned sales reps.
Flexibility and Independence: Because there is no salary involved, sales reps can take advantage of the ability to work on their own schedule and their own timeline. Sales reps will value the freedom and independence to work as much or as little as they want to, knowing that in the end they have full control over how much they make.
More Economical for Companies: On the employer side of things, a commission-only structure can be beneficial for companies because they only have to pay income off of guaranteed revenue. Whereas, with a salary plus commission plan, the employer will be on the hook for the salary even if their employees are not bringing in sales.
Cons of Commission-Only
Fluctuations in Income: As mentioned above, there are certainly sales reps who will be enticed and motivated by a commission-only sales compensation plan, however, most sales reps may be skeptical or stressed out at the idea of a commission-only compensation plan. Regardless of what product you sell, there will always be periods of high sales and low sales. Some of this may be predictable based on seasonality, but sometimes the period of low sales can come unexpectedly. Situations like these can cause a lot of stress and uncertainty with your sales reps.
Encourage Bad Sales Behaviors: When sales compensation is the only source of income for reps, it may encourage bad sales behaviors. This could include being more aggressive with potential prospects, which can be an instant turn-off for customers. A customer that feels pressured into making a purchase with a company is more likely to try to seek out a competitor who has a softer sales approach. Trust is everything in the sales process and an overly aggressive sales rep is going to have a much harder time establishing trust with a customer.
Discouraging to New Team Members: Sales reps who are most likely to have a negative experience with a commission only plan are newer team members. When a new sales rep joins the team, it takes a fair amount of onboarding, shadowing, and training to truly understand the product that they are trying to sell. They must also learn about buyer profiles and who the average customers are to find the best possible way to approach them. All this lead time to learning about the products, customers, and the company itself is time that is not spent actually making deals. A long onboarding process can mean a sales rep will go a long period of time before they are able to earn anything substantial on their paycheck.
What Does a Salary Plus Commission Structure Look Like?
A salary plus commission structure means that sales reps earn a steady salary with the opportunity to earn additional income through commissions. Typically, the salary is determined by calculating on-target earnings (OTE) which is the total income (salary and commission) a sales rep can make if they meet their sales quotas. The total expected commission earnings are subtracted from OTE to determine salary.
What are the Pros and Cons of Salary Plus Commission?
Pros of Salary Plus Commission
Provides Security & Stability to Employees: Without the stress of having to worry about a lull in sales, a salary gives employees a sense of security and stability that can actually act as a motivator in itself. The added security of having a base salary allows sales reps to take a more strategic approach to engaging with customers, instead of racing to get in touch with as many customers as possible without doing adequate customer research ahead of time.
Attract and Retain Talent: Most sales reps are going to seek out companies that offer a base salary because of the security that it provides. This gives companies that provide a base salary a competitive edge against those that don’t when it comes to hiring new sales reps. Sales reps that work for a company that provides a base salary are also more likely to have a longer tenure with the company.
Better Work Life Balance: Sales reps working on a salary plus commission structure have a better chance of a standard 9-5 work schedule, which can result in a better work-life balance for employees. The guaranteed income of a base salary makes it easier for sales reps to adhere to a normal work schedule, without overworking and overstressing employees to work longer hours just to make ends meet.
Cons of Salary Plus Commission
Adds Risk for Company: Unlike with a commission-only plan, a salary plus commission plan leaves the company on the hook to pay their employees regardless of how much revenue is generated. This adds a layer of risk to the company, as they may incur losses during periods where no sales are generated.
Can Create Complacency Among Team Members: In some cases, having the cushion of a base salary can cause your sales reps to become complacent and less motivated to go out and make sales.
Bottom Line: Which One is More Likely to Motivate Your Team Effectively?
With a commission only-structure, there is a potential for sales reps to make good money from high commission rates, but a commission-only environment can be unsustainable for most sales reps. The stress associated with fluctuating income is much more likely to lead to burnout among your sales reps, which in turn can increase turnover for your business.
Overall, when weighing the pros and cons of each structure, the base salary plus commissions comes out a little ahead of the commission only plan. While there are still benefits to using a commission-only plan, for long term growth and a sustainable sales team, implementing a base salary will give your company an advantage to maintaining a strong sales team.
Regardless of what compensation plan you decide to go with, Core can help you automate the process. Contact us for more information or schedule a free demo and we can walk you through how our platform simplifies commission tracking and management.