How Sales Commissions & The Right Compensation Plan Help you Grow Your Business
From "Help! My Business is Growing!" Podcast
As your business expands and you start hiring committed salespeople, you'll soon need a competitive sales compensation plan.
Sales compensation is the amount due to salespeople based on their performance against specified targets. Salary, commission, incentives, or a combination of the three are all considered compensation. Your compensation or commission structure not only affects your sales team but also directly impacts your financial strategy.
In this episode, my guest Chris Michel and I break down how sales, commission, and a compensation plan drive growth and affect your business.
Chris is an Outsourced Sales Manager that coaches and guides business owners who are self-managing sales and should not be. He brings to show over 30 years of sales and management expertise, primarily in the HVAC world.
In this episode, we dissect:
02:05 When is the best time to start hiring dedicated salespeople for your business.
07:50 What should an owner or founder look for when hiring salespeople?
12:40 What are the elements of a good commission plan/structure?
20:40 The disadvantages of overly complicated & frequently changing compensation plans.
30:10 When is 100% commission the best way to compensate a salesperson?
35:30 Should a Sales Manager also be placed on 100% commission?
Listen to the podcast here:
When is the best time to start hiring dedicated salespeople for your business?
As the owner of a rapidly growing business, there will come a time when you will find yourself doing all the work, from handling sales, delivering the products, and fighting tooth and nail to get everything done.
Though you might be doing an ok job sales-wise, if you don't get help with sales, you'll no longer have the ability to do all the other things you need to do to run - and grow - your business.
When you reach this saturation point, when, as a business owner, you can't do anything else, it is the best time to hire one or two people to work exclusively on bringing in sales.
They won't do anything for the other aspects of the business (e.g. service or production) because all they will do is sell.
What should an owner or founder look for when hiring salespeople?
There are so many options out there these days in terms of hiring. Many want to get into sales, including those with previous success in the field. But that’s not a guarantee you'll land top talent.
For example, despite his 30 years of experience in this field, Chris claims that he has only ever had a 50% successful hiring percentage!
When hiring potential salespeople, be on the lookout for these qualities and ask yourself these questions:
Are they interested in and want to sell?
Can they convince customers to buy?
Some sales background is needed.
Please take note of how they handled the different sales goals or KPIs they had to achieve.
Do they take direction? Are they still “teachable?”
Can they adapt to whoever they are talking to at any given moment?
And finally - are they resilient?
"If you can find somebody who's been living on a 100% commission for a good portion of their career, they're probably a really good salesperson." - Chris Michel
What are the elements of a good commission plan/structure?
Coming up with an excellent commission structure for your business can be challenging.
It needs careful and deliberate planning to walk the line between fair compensation that fosters your employee's motivation and delivers a healthy bottom line for the business.
Here are some of the essential elements needed to create your commission structure:
Good salespeople will bring in revenue to your business that you would not have been able to do, so they should receive a portion of that revenue.
Build your commission scheme into your pricing. This way, you'll have enough to cover all the commissions, bonuses, and incentives due to your salesforce and you won’t be giving money away.
Offer periodic, target-based bonuses and incentives to motivate your team further.
Explore the different forms of sales compensation available and see what works with your finances and business model.
Check industry standards
Each industry has its own set of sales compensation structures that you might have to match to stay competitive.
Be transparent and honest about the plan with your salesforce.
The disadvantages of overly complicated & frequently changing compensation plans.
A sales compensation plan that changes frequently can harm your salesforce. Constantly changing rules decreases team morale, and they will feel demotivated. Some might even look for other places to go, and you can potentially lose staff.
By adjusting your commission scheme repeatedly, you are playing games with your sales team's money. They also will no longer know how much they will be earning.
Aim for the following:
Set targets - and compensation plans - that won't move.
Document and communicate all adjustments every step of the way.
Change your sales compensation plan only once a year at the most.
Foster understanding with your sales team by being open and engaging them in dialogue.
Assure them that any new plans or changes are done so in the best interest of both the employees and the business.
When is 100% commission the best way to compensate a salesperson?
Choosing to compensate a salesperson via 100% commission will depend on the following:
The length of your sales cycle.
It’s possible with shorter sales cycles (about one to two months) but challenging with longer cycles (anywhere from three to 12 months).
The character & resiliency of your team or salesperson.
Not all salespeople will agree to a 100% commission compensation plan. But there will always be that rare breed of salesperson who will say yes, especially if the ticket size or final pay-off is potentially large.
"I wouldn't do any more than one commission structure change per year unless it is detrimental to your copy unless something tragic has happened or some major thing happens in your industry. " - Chris Michel
Should a Sales Manager also be placed on 100% commission?
Again, this depends on the character of your sales manager.
Chris, for example, demanded 100% commission when he became the sales manager. He wanted to show solidarity with his team, that he was with them (literally) 100%. It boiled down to how he was coaching and working with his team and helping them improve their selling skills.
The decision to place your sales manager on 100% commission is entirely up to you. Keep in mind that a 100% commission compensation plan is highly challenging and is not for everyone. Most managers in this position will say no, however, as a leader, especially if leading a sales team on 100% commission, one should consider it.
We dissect this topic and more over at the podcast. Listen here:
A growing business like yours will eventually need a dedicated sales force.
You can now focus on growing the business.
It will make your company more sales efficient.
When selecting or hiring your new salesforce, choose candidates with the following qualities:
With intent and desire to sell
Easily adapts to different audiences
When you create a competitive sales compensation plan, include these elements:
Consider your overall financial strategy
Understand (and adjust, if needed) your pricing
Understand the current industry compensation standards
Experiment with the different types of commission plans and map them out on a spreadsheet before selecting one to implement
Be fair, clear, and transparent
Avoid overly complex compensation plans and aim only to change them annually to avoid salesforce confusion and demoralization.
Consider 100% commission-based schemes for the more passionate and resilient sales managers and your team members.
About Chris Michel:
Chris is an Outsourced Sales Manager with over 30 years of sales and management experience that coaches business owners who are self-managing sales but should not be - so they can take the time to work on their business.
by Kathy Svetina
Kathy is a Fractional CFO and the founder and director of NewCastle Finance LLC. She is a financial puzzle solver, focusing on women-owned businesses, providing financial insights needed for a healthy and sustainable business.