When it comes to small business compensation strategies for salespeople, it’s often a question of finding a balance between three essential approaches. The first is to structure the salesperson’s compensation around high commission and low base salary. The second is to use all commission and no base salary, and the third approach is to use a combination of high base salary and low commission.
The focus for small businesses must always be on building customer loyalty and retention. To succeed requires stability at the sales position. Customers and sales professionals tend to form a bond, an understanding and a familiarity in approaches that allows them to build strong relationships over time. Unfortunately, when your small business hires one salesperson after another, it will do nothing more than negatively impact your sales volumes and your customer relationships.
Instead of going from one salesperson to the next, it's best to concentrate on long-term growth by matching your product's sales cycles with the most appropriate sales compensation structure for your salespeople. The intention should be on securing high quality sales professionals who have the ability to grow these relationships and cultivate consistent and repeatable business.
1. High Commission and Low Base Salary
A high commission structure and low base salary tends to do rather well for small businesses. It’s ideally suited to the mid-range sales cycles, one where the decision to order isn’t immediate, but isn’t too long either. It attracts the “middle of the road” sales professional, one with the ability to sell and not always put commissions ahead of the customer relationship. Why is it important that salespeople not think solely about commissions? Because a small business needs their salespeople to adopt a professional, long-term approach to managing customers, versus one focused solely on the commission in front of them. The approach should be on securing repeatable business, and maximizing gross profit on sales over time, instead of on a transaction by transaction basis.
It’s important to note that what one company considers a low base salary, another company may consider high. Therefore, do your homework. If you use a low base salary and high commission structure, be sure to pay commissions on gross profit per sale and not sales totals. Gross profit is the ultimate indicator of a sale’s value to your small business. Low gross profit equals low value, it’s that simple!
2. All Commission and no Base Salary
This approach is best used for extremely short sales cycles, one where customers make an immediate decision to buy. Unfortunately, this approach won’t allow your small business to hire the best salespeople. When salespeople have a compensation plan based solely on commissions, they think only of the commissions. Certainly makes sense doesn’t it? After all, if your small business isn’t willing to offer them a base salary, then they are well within their right to judge every single customer interaction on whether that customer will buy or not. Nothing else matters!
Now, do you really want your salespeople pushing harder than necessary? Do you really want them putting the sale ahead of any business concern? Does it make sense to have salespeople who try to speed up sales cycles by forcing the customer’s hand? Certainly not! Avoid this approach at all costs. It doesn’t work because it forces the salesperson to use strong-armed negotiation tactics and push customers for orders when there aren’t any to be had. These salespeople also tend to take their customers with them – from one employer to the next. Most importantly, it attracts low quality sales professionals and is akin to hiring the proverbial “snake-oil” salesman.
3. High Base Salary and Low Commission
Theoretically, paying a high base salary, with lower commission, should attract the best sales professional for the small business owner. This approach is ideally suited for the long sales cycle, and since long sales cycles tend to correlate to large purchases, it really requires a seasoned salesperson with the ability to handle the ups and downs of the entire process.
The benefit of the high base salary position is that it allows the small business to attract the sales professional whose approach to sales is to measure the viability of the opportunity itself. In this case, not all sales are worth pursuing. Some have extremely low gross profit margins and others represent a long-term risk to the company.
Salespeople who are able to secure a high base salary tend to view it as a sign of confidence in their ability. In essence, the small business isn’t interested in having just anyone represent their business. They manage the customer’s account with the mindset of protecting the company’s interests. Contrary to the previous option (all commission and no base), these sales professionals tend to remain employed for longer periods and therefore, develop stronger customer relationships.
Of these three, the best approach to both securing loyal salespeople, and growing the business, is the third approach. The third approach correlates to high employee retention and to retain salespeople often means to retain customers. Granted, there is a cost to this approach. Hiring the best salesperson doesn’t always mean it will work out. Therefore, if you can’t make it work with the third option, then use the first. However, ignore – and I can’t say this enough – ignore the second.
I’ve yet to see a situationn work where a salesperson was paid too low a base salary. While there may be an industry or market where the second approach works, for the most part, it’s extremely expensive because it attracts salespeople with questionable sales tactics. If you want to have access to a sample sales commission excel table, then please read: Small Business Sales Management: Sample Commissions Excel Table
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