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Compensating Your Salespeople
When creating a compensation plan and schedule for your salespeople, there are many issues to consider. For example, are you going to pay them a flat salary, straight commission or a combination of the two? Which method will attract and motivate the best salespeople? Which method works best for your company? Top sales trainer, Danny Wood offers this list of pros and cons of each compensation method.
Flat Salary - Advantages
1. Gives salesperson a stable income.
2. Develops increased loyalty.
3. Offers more flexibility in assigning sales territories.
4. Makes it easier to facilitate administration of payouts.
5. Provides a stable, fixed sales cost.
Flat Salary – Disadvantages
1. Fails to motivate salespeople to sell full product range.
2. Decreases financial incentive.
3. Leads to a potential loss of strong productive salespeople.
4. Does not reward extra effort.
Straight Commission - Advantages
1. Compensation is directly tied to performance and results.
2. Usually easy to understand and compute.
3. Strong financial incentive.
4. Sales cost is easy to track against sales.
5. Negligible Investment – you only pay for performance.
Straight Commission – Disadvantages
1. Salespeople may be tempted to compensate on high profit items/services.
2. Customer service and administrative activities may suffer.
3. Problems may arise from redistribution of sales territory.
4. Salespeople may focus on short term, rather than long term, results.
5. It may lead to substantial turnover in your sales force during market downtimes.
6. The salesperson’s emphasis may be more on volume than profitability.
Salary + Commission, Bonus, etc. – Advantages
1. Compensation is based on effort.
2. Increases flexibility in earning possibilities.
3. Some level of income stability.
4. Tends to compensate and motivate salespeople to perform all activities related to selling. (Servicing the customers etc.).
5. Allows more flexibility in establishing and meeting goals and objectives.
Salary + Commission, Bonus, etc. – Disadvantages
1. Usually complex and may be difficult for your salespeople to understand.
2. May establish ineffective ratios of salary to commission to sustain the employee while maintaining profitability.
3. Can be costly to administer.
4. May diminish corporate focus by creating too many objectives.
Wood believes a compensation plan that includes a combination of salary plus commission and/or bonus is probably the best way to maintain and motivate your sales team. But you also have to consider industry norms and your company’s financial position.
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