Business owners often lack the proper knowledge of how to compensate their salespeople. Many have their sales staff on a salary that is eating away at the budget but they are not seeing the proper returns. Some salespeople are strictly on commission—while the business owner may incur less risk, the employee morale and loyalty may suffer. There are many ways to compensate salespeople, which often leaves people confused. Salespeople can be on a base salary plus commission, salary plus bonus, variable commission, draw versus commission, and residual commission. It’s no wonder people are confused on this topic with all these options with similar names.
In my consulting practice, I am often faced with this problem. Each business I work with is different and usually needs vetting before I suggest a compensation structure but my preferred compensation is draw versus commission.
Draw versus commission
The draw versus commission structure is very common among experienced outside sale reps.
The salesperson is given a "base salary" (I put it in quotation as it is not actually a salary, but acts as one). It is typically around $2,500 to $3,500 but varies drastically depending on market, industry and a host of many different factors. This is paid out monthly, so to cover the personal expenses of the salesperson while they get their feet wet, get comfortable with the product and market, and build a client base. This ensures that while they are engaging in sales activities, they have some money coming in. This is especially useful when the sales cycle is long. As they start to sell, and earn commissions, prior to being paid out the commission, they must pay back the pot of money of the draw.
This helps the salesperson through the early stages and gives them some runway, but the business owner doesn’t have a large salary sitting on the books.
- As the salesperson grows and starts making sales, they effectively go on 100 percent commission. That way the owner can scale and not have to worry about payroll as the sales person gets only what they kill.
- The draw can be non-recoverable by the business owner if the salesperson fails to ever make it past the threshold or it can be recoverable.
- The draw should be around $2,500 to $3,500 monthly (low so to motivate the desire for commissions.
- The draw can be only for about 3-6 months (or however long a typical sales cycle should be for someone starting out) or it can be indefinite if there are significant seasonality flows in the buying patterns of the market.
- The commission percentages are typically very high and the on-target earnings (OTE) are usually in the six figures.
That will cover your sales commission situation, but building a sales team has to do with more than just a commission structure. Ensure all other pieces are in place prior to launching the sales department. I have seen too many businesses fail because they wanted to build a sales team and they had no clue what they were doing.
Here’s the most important thing to keep in mind: whatever compensation you give your salespeople needs to be self-sustaining. This is true whether it be salaried, draw, or 100 percent commission-only structure.
Only compensation structures that work are ones where the company is very heavily invested in their salespeople. That investment can come either via base salary, draw, hourly rate, or through spending an incredible amount of money on training, development, and marketing.
The reason draw versus commission is so successful is that both parties have skin in the game. Both parties have something on the line. When one person has far more to lose than the other, the loyalty and morale go down. If a company wants to put their sales person on a 100 percent commission only structure, they need to ensure that they are diverting those ordinary salary funds towards generating a significant amount of leads or traction in the market for the sales person. Otherwise, you will get a significant amount of resentment from the sales person, and that is not a sustainable path towards long-term growth.
Finally, if the salesperson is incredibly successful, and you want the salesperson to generate the leads, create the opportunities and close the deals; they are likely to leave if they are not paid a significantly heavy commission. The reason for this is simple: they now have the clients and leads to work on their own business. Now, you lose the salesperson and those leads. This is why 100 percent commission only structure is not the greatest long-term strategy in select situations.
Ali is an accomplished sales master and consultant. Starting his career in sales at the tender age of 18, Ali quickly realized that he would have to become better because being terrible at selling was not fun. Since then, Ali has personally closed over $150 Million in sales for many companies from small local establishments to large multi-national organizations. Since 2012, Ali has taken his passion for closing deals to teaching others how to close deals. Ali currently lives in Atlanta and travels the country helping companies increase their sales; you can keep up with him @ www.rosegardenconsulting.com.