Is compensation based on quota or a commission system better for your sales employees? While both have their benefits, they also have drawbacks.
Here’s a breakdown on commission:
- Paid by commission (percentage) and salary offset by commission they produce
- They also collect a second check representing the additional income from their commissions beyond their salary. Sometimes, they might have additional expenses to cover such as overhead or advertising.
- These people are usually entrepreneurs, seeing themselves as owning their own business under the umbrella of the parent company.
- Collaboration with other sales professionals is rare, unless they are splitting revenue from a shared client. Getting these sales people away from the phone for a meeting can be difficult, since it is directly taking away from their earning potential.
- The pros:
- Direct correlation between hard work and rewards.
- Attracts self-motivated workers.
- Salary costs are covered by the sale’s team’s revenue.
- The cons:
- Since the sales cycle is so short, everyone must be short-term oriented.
- Advocating teamwork is difficult.
Pay through commission allows sales professionals for their pay to be directly correlated to their performance, as well as typically collect a salary. Sales professionals paid through commission are often entrepreneurs, essentially running their own business within the company they work for. Since these salespeople rely on performance to make a living, they are motivated the way self-employed entrepreneurs do. Locking down meetings with commission based salespeople can be difficult, because they tend to view his time as better spent on the phone or in the field. Placing caps on commission has also been found to decrease high-performing workers’ motivation.
Commission can be beneficial as evidenced by the connection between hard work and being rewarded, and the productivity of self-motivated employees. Not to mention, the firm’s costs are covered by their team’s revenue. Commission has drawbacks because of its tendency to be short-term oriented, lack of team work and loyalty.
Quota is broken down a little bit differently:
- Sales professionals on quotas might be bankers or people working in fields with long sales cycles. They are paid with a healthy salary with the chance to earn additional bonuses.
- People on quotas have a cushion — their salary. They don’t have the same sense of urgency.
- On the plus side, it can motivate people to work towards long-term goals. It encourages teamwork and generating revenue for other areas of the company if a certain product fits a client’s need.
- The pros:
- Less pressure to produce immediate results. Can think long term.
- Encourages collaboration between employees, sometimes creating 'teams'.
- The cons:
- Not as motivated to increase short term revenue.
- Often not as motivated as commission salespeople because of their salary cushion.
- The system can breed mediocrity, or feeling like they are just doing enough to get by.
Sales professionals that work based on quotas typically deal with long sales cycles and are paid on salary with a chance to earn bonuses. This salary structure creates a cushion, which can, in theory, replace the sense of urgency to make a sale with complacency. On the other hand, it can also motivate salespeople to work towards long term goals, which can also increase loyalty to the company. Those working on quotas are more likely to embrace a team mentality and experience less pressure to produce immediate results. As a drawback, they tend to be less motivated to increase short term revenue for the company, are comfortable, and may feel like they are “doing enough”.
When it comes to your company, what will work for you best will mostly depend on what type of sales cycle your business works with, and what your employees expect.