How to Compensate Sales People and Improve the Bottom Line
If someone just buys something, in most cases, the salesperson is simply an order taker. But if someone “helps” a customer purchase the very best product, which fits the customer’s needs, at the best possible price, in my opinion, that person is a true salesperson, not just an order taker. In fact I would go even further and refer to them as the customer’s, “assistant buyer.”
The True Sales Person
The true salesperson not only produces income for themselves and their company they also instill customer confidence, build value in the company and it’s products, and encourage referrals. A person who can do all that certainly needs to be fairly compensated for their efforts. How to do that is the question.
Salespeople usually receive some combination of salary and/or commission. However, the amounts and percentages can differ based on customer traffic, pricing of the products or services, and the time involved in making the sale. Here are some common ways to compensate salespeople and pros and cons of each.
Straight or Commission Only Selling
This is good for the company, but not always good for the employee. If no sales are made then the cost to the company is zero but the salesperson doesn’t make any money either. Straight commission sales usually pay a higher percentage than other types of compensation; and that is good for the salesperson, but can also produce high employee turnover. Have a good month all the bills are paid; have a bad month and the wolf is at the door. It requires a strong personality and high level of self-confidence. Not usually recommended for the newbie or inexperienced.
Big Box Retail Compensation
As a salesperson for a large electronics retailer, my salary was based on the type of sale. Volume, margin, and service contracts all contributed to my earnings in different ways. If I sold a lot of cheap, bottom margin products, I would make little income. Selling higher margin products I could make fewer sales and make more than just relying on volume. Five percent of sales had to have some type of service contract sold in order to remain employed. This type of selling is fast paced, high pressure and stressful. However, it’s probably the best sales training available. It teaches time management, importance of product knowledge, learning customer needs, product demonstration, add on sales and closing techniques. Not a bad place for new salespeople to “make their bones.”
Salary Plus Commission
This is by far the safest type of selling for the beginning salesperson. You know that during the month you are going to make something. You can plan your budget around a minimum amount of income. It removes some, but not all, of the stress levels. The employer should require some level of sales quotas.
Salary plus graduated commission
This is my favorite for a retail operation. The base salary is based on the maximum hours the salesperson would work, at any one time, during the entire year. For example during the holiday season the employee might work 9-9 on Black Friday and/or Saturdays. This would obviously require some overtime so that is factored into the base salary for the entire year.
Here’s how the base salary would work. Look at the maximum hours an employee would work at any time during the year. You may be open 9-9 during Christmas for example. Twelve hours X 7 days = 84 hrs. Not asking anyone to work all those hours.
Let’s say the average salesperson could work 55 hours during any one week. So, take 40 hrs. X $7.75 (Min. Wage) = $310.00. Fifteen hours of overtime at $11.38 hr. would = $170.70. So the minimum starting salary would be $480.70, or an average of $12.02/hr. for 40 hours with 15 hours of overtime already built in.
Suppose commission increased as certain sales levels are reached? For example, beginning January 1, they make a starting commission of 5%, in addition to their base. When total sales, for the year to date, reach a pre-determined amount, the commission goes up to 5.5%. When total sales for the year reach the next level, 6% and so on. Depending on the type of business, the top rate might need to be capped, so look at this compensation package carefully.
The salesperson has a daily incentive to increase sales and even more importantly reduce returns and charge backs. The quicker they make each level, the more income they make for the year.
The most important feature of any compensation package is that it must be good for both parties… the company and the sales person. If the package does not allow each to reach their life goals, they are doomed to failure. Be fair, and you’ll be profitable.