3. Balance for Long Term Growth

The third principle to consider when formulating a compensation strategy is to balance the compensation program, in order to ensure the long term growth and continuity of the business overall. To do this, a number of questions need to be addressed.

1. How does your compensation work when a person is just starting out?
   
2. How well does it serve the salesperson as sales levels grow?
   
3. What about in the future when someone is well established?
   
4. Does it keep people complacent, providing “best effort” or does it have large increases in pay for large increases in productivity?
   
5. Is it structured to reward mediocrity (like many compensation schemes) or excellence?
   
6. Does your compensation system encourage people who are not quite right for your company to move on, or does it pay them too well to leave, despite a poor fit?

Many sales positions have a learning curve to develop or expand product knowledge. In addition, most new salespeople also need a “ramp up” period to get established with a new company. This generally ranges anywhere from three months to two years, depending on the length of the sales cycle. 

Products with a relatively short sales cycle generally have a ramp up time of 3 to 6 months. With longer sales cycles, the time to get a new salesperson established may be from one to two years.

During this time, you may choose to provide a larger financial base (or draw) to a new salesperson, decreasing over time, as the variable portion of compensation increases with that person’s increased sales.

There are a number of ways to address this. One might be a set salary with a low commission to start. A second strategy is to use a training allowance for the first four to six months, in addition to the ongoing program.

A Sample in Action

One package we have seen successfully used in a high-end professional services business included a three year phased program moving from an initial base salary plus commission (of 10% of gross sales), to a salary / draw blend plus commission (the same), to one of straight commission (again at 10%) by the third year.

In year one the compensation was as follows: 

Base Salary                                                                $2,000 per month 

Car Allowance                                                                 500 per month 

Training Allowance                                                            500 per month – first six months 

Total fixed compensation for the first 6 months                $ 3,000 per month 

Total fixed compensation for the first 12 months                $ 33,000 

Commissions earned in year 1 (10% of sales)                      22,000 

Total first year compensation                                                $ 55,000

In year 2, the base changed to $12,000 base salary + $12,000 draw against commission (with the car allowance remaining intact). The year-two compensation totaled over $94,000. 

In year 3, the entire base salary (other than the car allowance) was eliminated and replaced with a $2,000 per month draw against commission. The year 3 income for the salesperson was over $110,000 and has been growing since. This program created an effective phase-out of salary and replaced it with a straight commission compensation program, other than a $500 per month car allowance for a sales position with primarily local travel. 

This allowed the business owner to align her interests with those of her salesperson to their mutual benefit. The above proved to be an excellent example of how a phased arrangement allowed the salesperson a level of protection initially (with at least some base level salary), and good upside as they became more established. It also protected the medium and long-term interests of the business owner. 

In this case, the salesperson will not become complacent, as they will continue to be compensated at a relatively high commission rate (10% for all new business from a customer in the first year, and 5% for any work after year 1). 

As for the business owner, well, she is not stuck either. If the salesperson’s sales drop, her exposure is limited to a $2,000 monthly draw against commissions and a $500 monthly car allowance. As long as sales don’t drop, she is satisfied that the salesperson is well worth the good living he enjoys. 

Summary 

Compensation is by no means a simple subject. However, with a little planning and a lot of care, you can build a compensation program that will assist you to build and retain a strong sales force that will gain and keep more customers at a profit as you grow your business consistent with your goals and commitments in life.