Salary + Commission = Better Control
Many industries have gone through, or are going through, a shift from a 100% commission model to a salary + commission or salary + bonus approach for their sales reps. Some companies within an industry are early movers, while others dig their heels in the ground and refuse to change – citing the need for highly motivated employees and the risk for economic losses to the company if something other than a 100% commission method is used to pay sales reps. The latest industry to feel this shake up is Food & Beverage Shipping and Distribution (F&B) as more and more of the big players have incorporated, or are considering incorporating, some kind of salary component to their sales compensation plan.
Typically, start up companies or new industries use the 100% commission model because it’s easy and it creates a pure economic relationship between performance and pay. The company would never be carrying the costs of an unproductive rep (in theory) but the rep should be able to make a lot of money if they do really well. However, once a business really gets underway the limitations of this system start to become apparent. There are many “unintended consequences” of a commission only compensation scheme, but here are the most prevalent ones we have encountered when working with F&B companies to help them work through this change:
100% variable compensation is not the best recruiting tool.
Pure commission plans are very restrictive in terms of how and when compensation is paid.
Under these programs, there is often a lack of defined career path and it can be hard for top reps to transition to a management role.
There is usually limited ability for management to direct behavior, so reps determine what “good” looks like based on the income they need or want.
Excessive charge backs and deduction mechanisms create confusion among reps and reduce the motivational value of the plan, for very little true economic gain by the company.
In this 3 part series, we will look at each unintended consequence of 100% commission in turn, starting today with the negative impact on recruiting.
100% Commission - Not the Best Recruiting Tool
F&B companies, along with all other companies in the US, are feeling the pinch of the lowest unemployment rates since the 1960s. Gone are the days when companies could recruit life-time employees through a generous package of health insurance benefits and defined benefit retirement plans (pensions) so instead they are looking for new ways to attract new job entrants and experienced workers from other companies. This means cash compensation, work environment, and learning and development must take on a bigger role in the total rewards equation in order to make one company stand out as an employer of choice.
Further, the economic recession of 2008 and 2009 is not so far along that people have forgotten how quickly good fortune turned to dust. This has made many employees seek a higher level of guaranteed income from their employer in the form of fixed compensation. When a recession hits, if consumers aren’t spending money then any sales rep on a 100% commission plan will immediately feel the pinch and may find themselves unable to keep up with basic household expenses. While it would be nice to think that they have all saved for the rainy days, 99% of people are more on the grasshopper side of the equation and tend to always think rosy times are forever ahead of them. One obvious way employees can protect themselves from this immediate pinch is to have some form of fixed compensation in their sales compensation plan. This provides at least a minimum level of income if sales dry up and allows for a bit more leeway before the true economic scourge (layoffs) begin…and hopefully, the next recession won’t be as bad as the last one.
A Healthier Alternative
While there are certainly more challenges to the 100% commission model, the 5 above are the most prevalent and the most detrimental to a business’s economics. Sales compensation best practices and our own research indicate that a 50/50 pay mix is the most variable to be considered (e.g., if target total comp is $100k, $50k is the salary and $50k is the target incentive). Beyond this your reps tend to function in a very self-interested fashion and may take on some of the more unpleasant characteristics of time share or used car sales people (who are also typically on 100% commission plans). The solution? Consider adding a salary component to your plan, add career levels, and some metrics that drive prospective strategic sales activities (new customers, more product lines) in addition to pure retrospective financial results. Yes, this means any commission rate you have been communicating will be reduced. If all you did was add 50% salary to the mix, the rate on the commission would be cut in half. That’s the only logical outcome from this change. Plan accordingly and plan for the communication challenges this will cause. 100% commission plans are the most problematic of all compensation schemes, the most motivating (no question) but also the most difficult to change. Proceed with caution, but for many F&B companies the time has finally come where the economic and staffing costs of not-changing to a “salary plus” plan outweigh the change management challenges that will come from making the change.