Incentives for salespeople

Sales compensation plans typically rely heavily on incentives in the form of sales commissions. However some salespeople get straight salaries, and most receive a combination of salary and commission.

Salary plan

Some firms pay sales people fixed salaries, (perhaps with occasional incentives in the form of bonuses sales contest prizes, and the like). Straight salaries particularly make sense when the main task involves prospecting (finding new clients) or when it mostly involves account servicing (such as executing product training programs for a customer’s sales force or participating in trade shows). This is why technology based industries like aerospace and transportation equipment tends to emphasize sales salary plans.

The straight salary approach has pros and cons. Straight salary makes it easier to switch territories or to reassign sales people and it can foster sales loyalty. Commissions tend to shift the salesperson’s emphasis to making the sale rather than to prospecting and cultivating long term customers. The main disadvantage of course is that pay isn’t proportionate to results. This can de-motivate potentially high performing salespeople.

Commission plan

Straight commission plans pay sales people for results, and only or results. Under these plans salespeople have the greatest incentive. Commission plans tend to attract high performing salespeople who see that effort clearly produces rewards. Sales costs are proportionate to sales rather than fixed and the company’s fixed sales costs are thus lower. It’s a plan that’s easy to understand and compute.

However problems abound. Sales people tend to focus on making the sale and on high volume items, and may neglect non-selling duties like servicing small accounts, cultivating dedicated customers and pushing hard to sell items. Wide variations in pay may occur; this can make some feel the plan is inequitable. Misjudging ales potential can lead to excessively high commissions and to a cycle in which sales commission rates need to be cut. In addition, salesperson pay my be excessive in boom times and low in recessions. Furthermore, sales performance – like any performance – reflects not just motivation but ability too. If the person hasn’t the sales skills, commission won’t produce sales.

Another potential drawback of commission only plans is that working without a financial safety net can be unsettling.

If I go on vacation I lose money. If I’m sick, I lose money. If I’m not willing to drop everything on a moment’s notice to close with customer I lose money can’t see how anyone could stay in this job for long. It’s like a trapeze ct and I’m working without a net.

In this study paying salesperson 100% based on commission was the situation with by far the highest turnover. Turnover as much lower when salespersons received combination of a base pay plus commissions However, the results did depend a lot on the salesperson’s skills and personality. The findings suggested that 100% commissions can drive higher sales by focusing strong willed salespeople on maximizing sales. However, it also undermines the desire of less strong sales people to stay. (Sometimes of course, such outcomes are exactly what the employer wants).

In another study, data were collected from 214 business to business salespeople. It concluded that certain salespeople respond positively to fixed salary plans while others respond positively to incentives.

Most companies pay salespeople a combination of salary and commissions, usually with a sizable salary component. An incentive mix of about 70% base salary /30% incentive seems typical this cushions the salesperson’s downside risk (of earning nothing) while limiting the risk that the risk that the commissions could get out of hand from the firm’s point of view.

  • Shashi Shaun

    Hi, what is the tax deducted for incentives, i work for an MNC & assume large chunk going out as tax deduted for incentive, can i save on by investing in some scheme? my incentives at times cross huge figures. Shashi