Commissions are the most commonly used sales compensation tool. They often make up a large portion of pay mix, alongside base pay. Organizations employ several different sales commission structures to motivate their reps and inspire performance among the team. Commission-only sales reps do not earn a base pay under their sales compensation plan. Rather, their pay mix is purely variable pay (aka just commissions).
Understanding Pay Mix and Incentives
So how much pay should be at risk for a member of your sales team? Pay mix is the mix of base salary, variable pay, and non-monetary incentives sales reps earn. Most commonly, pay mix includes both base salary to variable income, but some pay mixes have 100% salary (as Dan Pink tries to argue in favor of in his book Drive) or 100% commission.
Unfortunately, there isn't a one-size-fits all pay mix, and it should be tailored to different sales roles and responsibilities. In many cases, the ratio of base pay decreases as sales reps gain seniority and advance in their roles. The most important part is finding a pay mix and pairing it with sales incentives that motivate reps to close deals that help achieve organizational goals.
The Challenge of Commission-only Sales Reps
It's important to note, however, one risk companies face when employing commission-only sales reps. Organizations must understand that commission-only sales compensation plays a big role in brand perception, recruiting, and sales rep behavior.
Perhaps the most important impact commission sales has is on the recruitment and retention of top sales talent. Regardless of pay mix, compensation plans must be competitive enough to consistently bring in new talent and keep your top reps happy.
In addition, organizations should consider sales rep tenure when designing a commission-only pay mix. Inexperienced, entry-level sales reps might not have the skills necessary to "survive" on their sales commissions alone. Therefore, it might make more sense to design a pay mix with a larger ratio of base pay for less experienced roles (or at least while they onboard and ramp) than more tenured roles and managers (Get more tips for compensating different sales roles in our Complete Guide to Sales Team Compensation).
The Impact on Sales Rep Performance
Sales compensation plans are meant to motivate sales teams to close deals. The strongest companies ensure that the pay mix and incentives drive the behaviors necessary to reach organizational goals. So what's the impact of commission-only sales compensation on rep performance?
For example, let's consider the Real Estate industry, which has historically staffed its sales teams with commission-only sales reps. This model has allowed for a combination of the best sales reps rising to the top, while allowing others to participate at will at various times.
Long before Uber and other members of the “gig” economy, real estate offered a way for people to choose their hours and associated work load while helping others buy and sell homes for a commission. In fact, to this day, many real estate reps work part-time, holding open-house events on weekends, in addition to another job during the week.
The Annuity and Insurance industries also tend to favor commission-only sales positions in a similar way.
What to Remember with Commission-Only Sales Reps
The success of operating with a commission-only sales compensation plan depends on the individual company and sales position. It's not ideal for every situation, but it can prove successful for industries like real estate, annuity, and insurance. When determining if a commission-only plan is right, these are key things to remember:
- Commitment: If the employees are not fully committed, good leads might be wasted on reps who do not feel a full obligation to the firm
- Job Security: As the month winds down, sales reps that need to make a mortgage payment or a rent check might engage in questionable behavior to get paid
- Turnover: Turnover can be a big problem for sales organization, and because commission-only plans aren't the norm, you may see higher turnover rates (Learn more about how you can identify reps at risk for turnover more easily here)
- Company Loyalty: There is a risk that company loyalty may be low, and the second a better opportunity comes along, commission-only sales reps will move on
When it comes to pay reps effectively, it's important for organizations to remember the end goal—achieving (and ideally, exceeding) organizational goals. This is only possible with a strong pay mix and sales compensation plan that drives the right sales behaviors.
Want to learn more about compensation planning? Download our Ultimate Guide to Sales Compensation Planning.