Straight Commission Sales Compensation is a Terrible Idea. Here are 8 Reasons Why:
Straight commission sales compensation structures sounds great to many business owners. After all, it seems low-risk and high-reward: if salespeople don’t produce, they don’t get paid – but if they sell plenty, they earn plenty. Everyone wins, right? Well, not very often.
It is more likely that a straight commission rates causes higher turnover, reputational risk, and other long-term negative outcomes. Simply put, commission-only sales compensation is a lousy idea. Read on to discover 8 reasons why:
Reason #1: Straight Commission Sales Compensation is One-Sided
Reasons FOR implementing a straight sales commission plan for salespeople usually revolve around these not-entirely-accurate notions:
- It’s inexpensive to bring salespeople into the company fold
- It motivates hard work and a “hunger” to succeed
- It emphasizes quickly closing sales and increasing revenue
- It reduces company overhead
- It preserves critical cash flow up-front
While these seem to be excellent reasons to consider a straight commission rate, together they share a fatal flaw: they only truly benefit the company – not the employee. But unless your industry is built around commission-only plans, any sales compensation program which does not benefit the company AND the salesperson is doomed.
Reason #2: Making Sales Takes Time and Effort
Selling is a process – a process with a sales cycle that can usually extend to weeks, months, or even years. What’s more, selling is often a series of strategic, periodic and nurturing steps toward a distant goal. Not only does the sales process take time, building a deep sales pipeline does, too. Straight commission plans, however, don’t give even the best salesperson a short-term safety net.
Reason #3: Non-Compete Agreements Put the Salesperson Back to Square One
When hiring a salesperson from a competitor within your industry, you typically run up against a Non-Compete Agreement. An NCA ties the hands of your salesperson from capitalizing on years of effort developing a pipeline and a book of business. Thus, the salesperson must start over and begin the arduous task of climbing back to the top of the mountain.
Reason #4: Customer Loyalty is a Blessing and a Curse
Even if a salesperson is free to pursue former clients, they are unlikely to follow the salesperson to a new home. Customers don’t like change (that’s one reason selling is so hard), so once they are in a comfortable and satisfactory relationship, they will probably stay put. And this makes it harder for the salesperson to quickly bring in enough commission-based revenue to stay afloat.
Reason #5: Cost of Turnover Can Cripple a Smaller Business
Business owners often fail to realize that straight commission rates are untenable for most salespeople, even if they accept the job based on self-confidence and high hopes. When quick income fails to materialize, the salesperson leaves (almost always for a job with a base salary compensation component). So, the business owner must start over. Again and again. And with each reboot, the not-so-obvious costs of recruiting and training and onboarding pile up.
Reason #6: Constant Salesperson Turnover Brings Reputational Risk – or Ruin
When a straight commission structure fails over and over, and salespeople enter and leave via a fast-spinning revolving door, the marketplace notices. Customers and prospects grow weary of meeting a new salesperson every few months. Eventually, they stop taking calls and stop taking the company seriously. It’s too much drama for the customer who really wants simple, pain-free service.
Reason #7: Upfront Savings Lead to Exorbitant Costs Later
While the business owner may want to reduce short-term fiscal impact on the company with straight sales commission plans, repeated new-hire-misfires burn through money. And businesses that can’t afford to do it right in the first place – by offering a base salary plus commissions – really can’t afford to do the wrong thing again and again.
Reason #8: Good Salespeople Won’t Work on Straight Commission…
…because they don’t have to. With occasional exceptions, the truth is you can’t land a great salesperson if you don’t invest in them. If you choose not to invest in them, someone else will because good salespeople are hard to find! A confident and accomplished salesperson expects a show of confidence from the hiring company. A base salary plus commissions demonstrates that level of faith and partnership.
A Better Way:
Obviously, the reasons above point out why straight commission plans are a terrible idea. So, what is a better solution? A sales commission plan that includes a base salary plus commissions. Here’s why:
- A higher caliber salesperson can be recruited and hired
- Risk is shared equally: the owner takes a chance on salary; the salesperson takes a chance on total earnings
- The salesperson can focus on the sales process and nurturing a growing pipeline, confident the family is fed while higher pay is on the horizon
- Lower turnover means reduced company costs
- The industry rewards stability with loyalty to the company, its salespeople, and its solutions
What’s the optimal mix of salary plus commissions? While this can vary by industry, market and competition, I recommend 50% salary (based on total quotas and plan expectations) and 50% variable pay. This variable pay would include commissions, bonuses and other perks based on performance and goal attainment.
The Bottom Line:
Straight commission structures are enticing for the business owner but are unfair to the salesperson and are practically doomed to fail. At Sales Xceleration, our licensed Advisors, serving as Outsourced VPs of Sales, have the experience and expertise to craft sales compensation plans that attract and retain top salespeople so the company can survive and thrive. To learn more, click here to find your nearest Sales Xceleration Advisor, or contact us at 844.874.7253.