You’re a small firm that has a proven B2B product to sell and the direct website sales to prove it. You’ve even had investment from investors excited about your revenue growth projections. But how can you take your small business up to the next level, finding those buyers without having to rely on word of mouth?
The obvious answer is to take on a salesperson.
But how do you know what to pay them? Obviously, salespeople work on commission – the more they sell, the more money they make – but won’t they need a basic salary to tide them over? And what should that split be?
This is when you need to decide on a sales commission structure for your small business.
First, you need to ask yourself some questions.
What is the hunter vs farmer concept?
A simple distinction between types of salespeople is the hunter vs farmer concept. The kind of salesperson you may need depends on the type of business you are in.
Martin Knowles, co-founder of sales coaching firm Sales Untangled, co-author of the Amazon bestseller of the same name, defines hunters versus farmers as follows:
Hunters are fast-moving predators, motivated by commissions in sectors such as estate agency, used cars and banking, rapacious when it comes to closing deals, who are immune to rejection but who find it difficult to work in teams. They’re lone wolf personalities who hunt away from the pack.
Farmers on the other hand are nurturers, good at developing trusted long-term relationships, whose strength is customer service and loyalty to customers. They are team players where it’s much more important to grow relationships motivated by their own career development – so ideally suited for the managerial oversight sales manager position.
Knowles, who has worked as a sales director for PepsiCo, Benckiser and GlaxoSmithKline, says: “You have different types of personality possibly needed at different stages of a company’s development.
“If you’re starting a new business, be aware of these different personality types. It may be that who you need to hire is the opposite type to yourself.”
What is a typical sales commission structure?
What is it that you want your salesperson to achieve?
Which type of sales do you want? High-volume, low-value sales on a short time cycle or bigger long-term deals which need patience and a long-term sales cycle. Who exactly is it that you’re selling to? This all going to affect the type of salesperson you want to hire.
Can you learn anything from existing sales figures?
If you already have a sales team, analyse the data. Examine your existing sales figures to calculate and set realistic targets. If you already have sales staff, interview them about what’s worked in the past. Where did challenges arise? Which plans made them feel the most motivated? Did any of them cause undue stress?
What is a realistic estimate of performance based on your salesperson capacity?
According to the Salesforce report, The State of Sales, 57 per cent of salespeople missed last year’s quota. Obviously if you only have one freelance salesperson working on a commission-only basis (see below), that is going to be different to a full sales team with account executives and a sales manager when it comes to hitting revenue targets.
Do you need to add to your own skills?
Don’t hire in your own image. You may need to hire the opposite personality type to yourself
What is the right kind of incentive?
What better to get your sales team excited than by letting them help design your sales commission structure? Do your staff feel adequately compensated and appreciated for their work? Are the goals attainable? Are they overly complicated? Is what you’re offering in line with the rest of the industry?
If you’re losing a lot of staff to competitors, it might be that you’re not offering enough. Compare to industry standards Ensure your sales commission structure is in line with the norm by comparing to industry standards. Everything works best when everyone is on board and is happy with their compensation.
Examples of sales commission structure
A sales commission structure, or commission plan, defines how and when a salesperson gets compensated. This is tied to sales, quotas, volume, completing specific tasks and more. Most plans combined a fixed amount with a variable amount. In other words, one part of the salary is consistent, while the other depends on the salesperson’s performance.
One thing to bear in mind is that you don’t want your sales commission structure only to reward one or two high performers, leaving the rest of your sales staff to drown. Make sure your plan is designed to leave enough headroom for a top performer to make money. On the other hand, while you want to push lower-performing staff, you don’t want to demoralise and sap them of their confidence completely. It’s a balancing act, which is why a nuanced sales commission structure can work best.
What are the types of sales commission?
This is what it says on the tin, with 100 per cent commissions and no basic salary. For a start-up or a micro business, this structure offers the fastest route to market.
However, if your salesperson is working on commission only, then they’re not employees. Although this saves you money on organising PAYE, paid holidays and offering ancillary benefits such as a pension scheme or health insurance, without any job security you may find you get fly-by-night salespeople. They might hang around for a week or so but, without a base salary, there’s no incentive to stay.
Knowles says that the best salespeople may find a commission-only structure off-putting.
“You’re not going to get salespeople of calibre on commission only, they’re going to look for stability elsewhere. You’re going to get people who are prepared to work for nothing, and you have to ask yourself, why is that the case?” says Knowles.
Pros of commission only
- Doesn’t cost you anything
- Good for companies with less complex product/service offerings
- Good for start-ups that need to conserve cash
Cons of commission only
- No company loyalty
- High turnover of low-quality sales staff
- Training intensive when it comes to teaching product knowledge
Base salary plus commission
Although base plus commission is the most popular sales commission structure, the split can vary widely from sector to sector. It provides salespeople with an hourly or straight base salary plus a commission rate. Typically, the base salary is often too low to support someone’s income entirely, but it does provide a guaranteed income when sales are low.
In Britain, the average commission split is 85 per cent base salary and 15 per cent bonus commission, whereas in the States it’s more aggressive with a 60:40 split.
Example: A salesperson earns £500 a month in salary with 10 per cent commission, or £500, on £5,000 worth of sales. If she earns £20,00 of product sales during one month, she earns £2,500 – £500 in base salary and £2,000 in commission.
Pros of base salary plus commission
- Gives salespeople comfort they will be supported during fallow sales weeks
- Offers incentive for salespeople to earn more
Cons of base salary plus commission
- May not appeal to aggressive salespeople who are hungry for healthy commissions.
You may have seen sales jobs advertised with the acronym OTE after the salary offered. This stands for “on-team earnings” and basically means what you can expect to earn once your base salary and average monthly commissions are combined.
A guaranteed commission means that a new starter is guaranteed their OTE for the first few months while they get their feet under the desk, regardless of whether they sell anything or not.
Example: Your sales job offers £1,000 a month base salary with average commission of £2,000 OTE each month. Your new starter is given £3,000 a month for three months while they learn the ropes, regardless of whether they make any sales. After that, they switch to the base plus commission model.
Pros of guaranteed commission
- It gives younger salespeople a fair start and takes the pressure off them to perform
Cons of guaranteed commission
- How long can you be expected to subsidise staff? At one point are your sales staff expected to break even? When do they run out of runway?
This is an even more sophisticated sales commission structure, encouraging sales teams to exceed their targets through earning higher commission rates if they meet certain tiered quotas. This is ideal for highly motivated top-performing salespeople with the ability to earn high commission rates if they meet quotas. This type of sales commission structure is good for larger businesses with established sales teams boasting top performers.
Example: A salesperson receives a 5 per cent commission rate until they close a certain number of deals, after which they start earning 10 per cent commission on new deals.
Pros of tiered commission
- Good for larger, more established sales teams
- You want to scale and grow your business
- Encourages salespeople to over-perform and exceed quota
Cons of tiered commission
- If tiered commission is capped, once a salesperson has hit their target, they cannot earn anymore
- You could find yourself having to pay out open-ended bonuses throughout the year, creating cash flow problems
How the role of the salesperson is changing
Like everything else, the pandemic has changed things. For salespeople who used to like getting out and schmoozing clients, who relished sales being a contact sport, who thrived on body language, Zoom calls are difficult. Selling over a computer is a different skill. Video calls are shorter, rather than building up to the sales pitch, you must get straight to the point.
Martin Knowles believe the role of the salesperson is changing with a fissure growing between the traditional “pushing” activity of closing sales but now more emphasis on nudging relationships, so it’s more of a fishing activity. Social media means you can contact create content in a subtler way and wait for nibbles of leads.