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Salespeople: What Works - Commission or Retainer

Written by: Peter Rowe

Article Overview: One of our coaching clients asked for some thoughts on structuring rewards for their sales people, and the following notes arose from our thinking on the subject. On reflection, even though it's just an outline, I thought it may be relevant to some of you, so here you go:

Salespeople: What Works - Commission or Retainer

The Question What do you think will motivate my sales team more: A high commission and a low retainer; or a high retainer and a low commission?

The Answers 1. That which gets counted (and rewarded) gets done.

1. If you reward "Sales" you'll get sales. Whether they are profitable or not is another matter. You could end up with sellers sacrificing margin (discounting) for the sake of shear volume.
   
   
2. If you reward "Margin" or "GP", the salesperson is generally more engaged in the negotiation of a profitable solution, though they may become predatory in terms of the Client's interests (ie. putting commission ahead of the Client's best interests).
   
   
3. If you reward "Life Time Value" with a trailing commission on repeat business, service income, etc, then a salesperson has a vested interest in maintaining service standards, relationships and further sales.
   
   

2. You only have Gross Profit to share.

1. When calculating reward structures, you can only reward sales staff from your (Gross Profit) margin, and not from your "Gross Sales Revenue".
   
   
2. When calculating reward structures, ensure there is a balance between the piece of your margin you give to sellers, and the piece you retain to run the business. As a general rule, start by modelling a reward structure based on 5% of gross margin, then take it up in increments to see what's possible.
   
   
3. Always start low. It's easy to increase a reward, and damn-near impossible to decrease it without negative consequences.
   
   

3. Commission-only is GREAT - when sales are strong.

1. What happens when sales slow or stop & your sales people starve? They leave because they can't continue to work for you if they are starving to death.
   
   
2. If, in response to slow times, you change back to a retainer to keep alive salespeople who were previously on commission, you have a challenge: You now have to bear the cost of currently non-performing but essential sales staff to whom you have previously paid a large portion of your margin in the good times.
   
   

4. Negotiating reward packages tells you a lot.

1. The best sales people are optimists! (That stands to reason - they expect to get the sales and they do!)
   
   
2. Be mindful that most commission salespeople don't save to buffer themselves through slowdowns (they are, by nature, optimists and don't expect a slowdown), but they do expect to be supported when things are slow, despite having shared richly in the spoils when things were good.
   
   
3. Negotiating a reward package with your sales staff, and asking them to project the results of a sales slow-down on their income, will tell you a lot about them. It puts them under pressure to think about hard times, and how to manage those. It will/should add some balance to the process.
   
   

5. Paying rewards only when the money is received.

1. That makes business sense, and it's really the only way to do it, but bear in mind two things:
   
   
   1. Most sales people are "instant gratification hunters" - they want to eat the hind leg of whatever they just killed, while it's still warm. Putting in place residual payments, deferred settlement, rolling weighted averages, or any other type of delayed gratification is often demotivating. On the other hand, trying to claw back warranties, shortfalls, bad debts, etc from already-paid commissions also has a negative impact. Better sometimes to give less than you could, instantly, than all that you could, spread out over time.
      
      
   2. Most sales people are lousy financial planners and live from pay to pay. Instant rewards usually keep the results rolling. Any sales person with a trailing income usually underperforms until it's gone. Better to pay them a little less than you could, pay them instantly, and find them a life partner who can outspend them by 20%!
      
      

The Opportunity We just love sales! And we love sales training, having done it with some of the best and biggest companies in the country so, if you would like to assess what a spot of the right sales training could do for your business - and start enjoying fatter profits - please contact me now!

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Article Tags: commission, gross profit, motivate, negotiating, retainer, revenue, rewards, sales, sales team, salespeople



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