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A Recent Question Regarding Implementing a Commission

A Recent Question from a Reader: I am in landscape construction, running a sod installation crew to be exact. I work for my brother-in-law and we were discussing some issues he is having with the one salesperson that he has on staff and asking my advice on how to implement a commission into the person’s salary. The goal for the company would be to compensate the person fairly and also motivate the salesperson to track down more business and follow through with placing the order in our system. How do you change the system over fairly so both sides see the advantages? Any insight you would have on this kind of situation would be greatly appreciated.

The Sales Hunter’s Response:
The fact that you have a relatively short sales cycle and you sell a physical item both work in your favor. These help make the move to a commission base much easier than a salesperson who is selling something that requires long lead-times and/or is a service.

Since the person is on board already, it will be important for them to feel like the new plan is going to allow them to make even more than before. At the same time, you need to make it a variable cost, thus lowering your break-even point.

Here’s my perspective:

  • Don’t do a draw or advance (or anything like) that unless you are 100% sure of the formula. More often than not, these tend to blow up on people leaving everybody really ticked off at each other.
  • Set the person up with a base plus commission. The base should be enough to feed, clothe, and keep them warm. In other words, put it at a point where the caliber of person you’re hiring can survive, but really can’t do much more than that. This keeps them hungry and pushing. Then, add a commission or bonus on top of that. The key is you need to do the payout within two weeks after the period (month) ends to keep it relevant and current. If your business model is scalable enough to allow you to really achieve some big profits if you grow substantially, then have an escalator clause in the bonus plan which pays out more if they sell more. You do need rules in place that mandate that in order for them to receive the commission, they have to enter the order in the system correctly, service the customer, and work to obtain payment if there’s a problem. It is critical that you spell these out in the bonus / commission plan to avoid any confusion and to ensure correct behavior from the start.
  • Don’t cap the plan. Allow them to make an unlimited amount. It’s in your best interest, and certainly don’t allow yourself or anyone else to be offended by how much they’re making. Remember, if it’s all variable: the more they make, the more you make.
  • When setting it up, take the person’s last year volume (assuming they were performing at the level you want them to be at) and put in place a base plus bonus that would get them back to an equivalent amount they made last year. Doing this will help you sell it to them. Any additional sales then become extra money to them and you. After you’ve established a history with the person, you can work to move the base down even lower. The easiest way is to never give them a raise since their raise comes by selling more. For established sales teams where a person can get up to speed within 3 months, I like a 50/50 split between base and commission. The longer the sales curve, the higher the base. For example: 65/35. In all cases, however, a high performer is going to be achieving so much in bonus that it works out to 30/70.
  • >A couple of other items: Make sure you and the salesperson are in agreement as to how you will compensate for sales where somebody else has to come along and assist. Also, make sure there is a good understanding as to how to handle leads and marketing activities. I’ve seen salespeople become so fixated on the commission / bonus that they scream and holler wanting others to get the leads, do the marketing, attend the trade shows, etc, allowing them to only show up and close. This can become very problematic if the business model can’t afford it and your entire company is not in agreement with the expectations for each employee.
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