When evaluating how to pay a growing sales team, a straight sales commission structure is an option worth considering. In theory, this type of plan drives salespeople to close more deals but it fails to guarantee a regular paycheck, which sometimes scares off new talent.
Straight commission or commission-only compensation plans have benefits and drawbacks.
While controversial, straight commission compensation can incentivize and motivate a sales team under the right circumstances.
Straight commission compensation structures have benefits and drawbacks. But that’s true of any compensation arrangement. (Check out our Complete Guide to Sales Commissions to get a bigger picture on all commission structures and elements.)
It’s important to evaluate all the elements involved before settling on a plan. To help your sales organization determine if straight commission is the right fit for your team, we’ve laid out everything you need to know below. Examine straight commission, the benefits, drawbacks, and all of our tips for paying straight commission.
What Is Straight Commission?
Also called commission-only compensation, this type of commission structure ties a salesperson’s compensation directly to their performance. That means salespeople get paid a percentage of what they sell and no other monetary compensation.
For instance, a salesperson who earns 15% commission-only and sells $123,550 worth of their company’s product collects $18,532.50 in compensation. Employers may offer other benefits, such as health insurance and a 401K. But in terms of take-home pay, the salesperson only earns on what they sell.
Benefits to Straight Commission
- Offer Pure Incentive: In the case of straight commission, compensation is purely based on performance. Employees are motivated to sell more so that they can take home more money at the end of the day.
- Drives More Sales: By using compensation as incentive, salespeople are more likely to aggressively close more sales. The more they close, the more salespeople earn and the more revenue they generate for the company.
- Guarantee Revenue: If a company only has to pay salespeople when they’ve closed a sale, that means the company is guaranteed revenue each time they have to pay out commission. It lowers risk in investing in salespeople by ensuring that they’ll have to perform to earn money.
Drawbacks to Straight Commission
- Discourage New Talent: The uncertainty of straight commission may scare off new talent and make it harder to hire good salespeople. Recruitment efforts will have to account for this and may end up costing the company more money at the end of the day.
- Risk Higher Turnover: If salespeople do not have the resources and tools they need to sell, they may become frustrated with a commission-only format, especially if they miss a paycheck due to low sales. If a company experiences high turnover, it will spend more on recruitment and training.
- Encourage Bad Selling Tactics: Encouraging aggressive salespeople may drive more revenue for the company but it can also result in bad or even predatory selling tactics. Such practices may frustrate and anger potential customers and deter further sales.
Tips for Implementing Straight Commission
- Extend High Commission Rate: Since your salespeople are assuming a risk in accepting straight commission, make sure that commission is worth it. Offer a higher than average commission rate to attract sales talent and ensure that with a typical sales cadence, they can earn above average on-target earnings.
- Enable Team To Sell: Make sure that your team has everything they need to actually make those sales. Invest in resources, generate leads, give them standard selling tools. Depending on the industry and your standard customer, that could mean generating case studies, qualifying leads through an online form, or arming your team with technology, like tablets, to track sales. Help them sell so they can make more money—for themselves and the company.
- Give Sales People the Freedom To Earn: If good salespeople understand that they can earn as much as they can sell, they’ll work toward whatever goal they can imagine. But if there’s a cap on how much commission they can collect, that may hamper their efforts and even frustrate high performers. So stay away from capping commissions.
- Know the Rules and Regulations: Familiarize yourself and your team with the local, state, and federal regulations that apply to compensation. In some instances, paying straight commission may be limited to certain employees. There may be other rules that apply to your compensation structure as well. Know what those are and how to properly align your organization with them.