PRDV217: Introduction to Sales

I often hear from successful new businesses and salespeople who have done well – so well that their company lowers their commission rate or finds some other way to cut their compensation. They come to see me because they have lost faith in their employer. I hear stories about this frequently.

The argument against pure salary is that commissions give sales and new business people incentive to succeed. Salary merely makes them comfortable. I have come around to the opposite point of view.

When salespeople are on some kind of commission, if successful, their commission checks can be significant. And that is when the problems begin.

I can think of one case where a business development person brought in an account that generated a quarterly commission check of close to $60,000, payable for two years; this was on top of a fairly high base. This made him one of the highest-paid executives in his company. Someone from the holding company reviewed the payroll, and his checks stood out like a sore thumb. Consequently, his employer unilaterally changed his deal, which, in effect, lowered his commissions going forward. His choice was to take it or leave it. He took it because he wanted his commission checks, but it left a bitter taste in his mouth.

When any company hires a salesperson, it is done with the best intentions. But while the company is thrilled with an account win and the new revenues it generates, it often happens that someone sees the money going out in commissions and realizes it is a lot of cash. It does not matter that the employee's salary was intentionally low to incentivize them to get new business. And it doesn't matter if that new business person's base salary is $40,000 or $250,000 – the base is generally relevant to their experience and track record, as is the amount of commission. It is no one's fault. It is just built into this form of compensation.

I spoke to a lawyer about the issue of companies changing compensation arrangements with employees. His comment was that there is little that can be done when the company changes the package because the company controls the purse strings. It almost does not matter what the original offer letter or contract says. The company inevitably has a much larger pocket book and is therefore not susceptible to a law suit. More than that, since most agreements state that the commissions are only payable if the sales person remains an employee, it means that as long as commissions are due, the sales person is essentially a captive. If the executive should leave, future commissions are rarely paid, whether that clause is there or not.

I have come to the conclusion that experienced new business people with an excellent track record, rather than being on salary plus commission, should be on a relatively decent salary with the possibility of a year-end bonus based on their success. The other advantage of the new business person getting paid a decent or even high salary, is that it gives them a seat at the executive table and then they are not seen as a "hired gun" by prospects or other employees. And most of all, it avoids huge problems for both the employer and employee.

Commissions are fine for sales of one-time items – a single assignment that generates a specified amount of revenue or a sale of x number of widgets at a specified price. Commissions end up getting confusing when there is profit and loss or third parties involved. In any case, a detailed pre-arranged agreement needs to be spelled out in an offer letter or contract. But with commissions, there are always gray areas. With salary there is little room for doubt from either party.

I would love to hear from new business people to share their stories. Is my conclusion correct?

Source: Paul Gumbinner, http://viewfrommadisonave.blogspot.com/2013/04/new-business-or-sales-people-commission.html
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