100% sales commission plans – is it the right thing to do?
Some companies are faced with the question of whether a 100% commission plan is the best commission plan design for them. There is clear benefit of tying the costs completely to sales and reducing risk to the company. But they wonder if it will attract quality sales people to their firm. Will it allow the sales people to focus on the right deals that may take longer to come to fruition versus focussing on the short term deals? Will it mean a rush to close deals with poor terms or by discounting excessively.
In many industries the standard practice of paying commissions is already set and other companies have to necessarily follow suit to attract sales people or because the industry dynamics force them down that path. Good examples are mortgage and real estate agency commissions where they are overwhelmingly 100% commission plans. The aircraft industry tends to have salary plus commission plans because of the complex, large sales and the long sales cycle.
100% commission plans work better in industries/companies with the following characteristics:
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The industry standard practice is already set
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Company brand name and products are strong and easier to sell against competition
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Company has a practical monopoly
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Strong qualified leads are available for sales people
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Sales cycles are quick
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Sales are continuous and regular throughout the year
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There is a large pool of potential sales people to draw from
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The product and sales process is not complex
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Sales people are only expected to sell
The majority of sales people look for a certain amount of security and prefer predictable income stream. An alternative is to provide a combination of salary and commissions with an appropriate level of salary versus commissions. Companies with the following characteristics will do better with this alternative:
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The industry standard practice is already set
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There is a lot of competition for your products
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Sales people have to depend on their network or cold calling to find prospects
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Sales cycles are longer
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Sales is cyclical with busy and slow periods
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The pool of sales people that you can hire from is small
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Sales people need a substantial amount of expertise to be able to sell the products
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Sales people have other responsibilities such as customer relationship, collections, managing locations, etc.
There are other possibilities such as draws that can provide compromise between these alternatives. That is a subject for a future article.
