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Commission versus fixed salaries

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Two successful firms are observed with quite different compensation plans for their
salespeople. One firm pays its salespeople on a commission basis, whereas the other firm pays its salespeople fixed salaries. Do you think that one of the two companies is making a mistake? What are the pros and cons of each approach?

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Hi there,

It all really depends on the type of business that you are running and the type of people that are working for you. For example, I am working in the telecom industry, where the majority of sales people are paid primarily on a commission basis. This means that if they have a poor month in terms of sales then they don't get paid. The salesforce has to be of the mindset that they are ok with the ebb and flow of the sales cycle and that sometimes they may get paid more, and other times, they may get paid less. The goal with a commission based structure is that the employee will work harder to get that extra sale because if they do not complete the sale, they don't get paid. It all really depends on what motivates the employee.

I found a good article on commission vs. salary that should help elaborate on the issue:

The Paycheck Conundrum: Salary vs. Commission
The most effective compensation plans must align sales activities with a company's mission, providing security while fostering an entrepreneurial attitude that grows the business.

By Craig A. Shutt

Some swear by salary, with the security if offers, as the best compensation and retention tool to build and retain a crack sales force. Others swear by the carrot of commissions to encourage top sales efforts. What works best?

The answer is, there is no one perfect compensation plan that will fit all dealers like a well-worn shoe. But each company can create a program to meet its own unique needs that will keep it from stumbling as it faces new market challenges

At Bender Lumber in Bloomington, Ind., for instance, most sales people are compensated solely on commission, using a sliding scale based on gross margin. But several long-time staffers are salaried, having been grandfathered into the new program when they expressed concerns about the ups and downs inherent in commission-only compensation. Meanwhile, at Dunn Lumber in Daytona Beach, Fla., sales people are paid a combination of salary and commission, receiving essentially a nonrefundable draw against monthly commissions. During their first six months, however, new sales people receive only salary while they begin to generate commissions; then the salary becomes reduced as they bring in more sales.

"There are a wide range of compensation approaches available, and the success of any particular one is dependent on the company's situation," says Dave Kahle, president of sales-consulting firm DaCo Corp. in Grand Rapids, Mich. Variables such as product mix, management system, culture, sales tools and processes will impact which format proves most successful. "Most companies find a combination of salary and incentive will work the best," he says. "But I would never say, 'This is the best approach for everyone.' There are too many details that affect it."

Industry consultant Bill Lee endorses that assessment. "Helping to create a compensation plan is probably the most common request I receive," Lee reports. Straight commission formats based on measurable criteria are the most typical, he notes, "but there are a lot of exceptions." Variations include straight salary, salary plus commission, salary plus a bonus tied to a measurable goal and salary plus a discretionary bonus.

Pros and Cons Exist for Each

Some of the pros and cons of each system are ...