Resource: Commission vs. Base Salary
Commission-based compensation, or base salary? It’s one of the oldest and most controversial questions in the business.
In a commission-based pay structure, the sales agent earns a percentage of each sale they make, and these commissions comprise the majority of their earnings. The size of the commission varies widely, based on the price and volumes of the products or services they sell. In a salary-based pay structure, the sales agent earns a base salary, which is either an annual or, less commonly, and hourly sum. This payment remains the same regardless of the agent’s sales volumes.
Most sales positions today incorporate both commissions and a basic salary, but the proportions can vary widely from industry to industry, and even position to position. Some positions may offer a very small base salary, with uncapped potential for earnings via commissions. Other positions may offer mostly salary-based compensation, with small commissions and incentives for especially high performance.
What’s the ideal pay structure? There is no right or wrong answer. It comes down to what works best for each individual and each company. Commission-Based Compensation: Pros and ConsFor Employees
If you are an ambitious and money-motivated sales person, the advantages of commissions are obvious. There’s a potential for very high income. The control over your own financial destiny provides a strong motivator to keep you excited and productive each and every day. Plus, commission-based employees are generally given more freedom and autonomy in the workplace.
On the minus side, you will have to deal with the possibility that you could make very little money if you go through a lean and rough period, or the economy slows down. Commission-based compensation is best for individuals with a high tolerance for risk and uncertainty, but who have a strong belief in their own skills and abilities. The rewards can be great, but so are the risks. For Employers
Commission-based compensation has been the more popular choice among employers for some time. There are several very good reasons for this. Commission-based pay puts the onus for success on the sales person, keeping them hungry and motivated. It attracts more naturally competitive individuals, because the unlimited earnings potential tends to appeal to people who are ambitious and self-motivated.
But it can have its pitfalls, too. A commission-based pay structure may take away the sense of unity in the sales team – they’ll all be competing with each other, not just your competitors. And your highly entrepreneurial employees will be primarily looking out for their own interests, not yours. They may also be more likely to take your customers with them when they leave.
Or, a different problem can occur – sales agents who are worried about their weekly sales volumes may not be concerned with nurturing lifelong relationships with their customers, because making their next salary and commission cheque provides a more pressing concern. Salary-Based Compensation: Pros and Cons For Employees
As a salaried employee, you will have more financial stability and job security. You will be able to take holidays without worrying about your sales numbers, and with the confidence that your team members are pulling for you while you’re away. The workload and hours will probably be more predictable.
On the other hand, while you have financial stability, you will also have a limited and largely capped earnings potential. And if you’re a high performer, you may become irritated by the knowledge that you’re making more sales and generating more revenue than some of your team-mates. Additionally, salaried employees tend to receive more supervision and oversight in the workplace.For Employers
The main advantage of paying your sales agents a salary is the sense of teamwork it can create. It can also be easier to retain your best sales agents if they have some degree of guaranteed job stability. Even the most experienced sales reps have bills to pay and families to take care of, and after a certain point in life, they may shy away from the high-risk environment of commission-based sales.
On the other hand, paying a guaranteed income may also attract inexperienced or less capable sales people, who aren’t as skilled or confident in their abilities. Compromising For Maximum Benefit
The best pay structure is one that incorporates the advantages of both salary and commissions, providing both stability and motivation.
How do you strike the balance? Begin by assessing your personal or company goals, and analysing which pros and cons outlined above will have the greatest impact on achieving these goals.