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December 28, 2013

Business Cents: The advantages and disadvantages of the commission structure

TERRE HAUTE — As many of you may already know, salaries are one of the largest expenses — if not the largest expense — of a company. Throughout the business environment, companies rely on a sales force to assist in generating revenue to cover company expenses and provide a profit at the end of the day. As companies begin to identify trends in their industry, especially considering the current economic situation, many have examined the salaries of their staff and especially sales people.

One of the new trends in sales forces is doing away with commission structures. Many companies are realizing that commission structures drive competition among their sales staff, and the staff are not adequately identifying the customer needs and filling those needs.

In addition, companies are also finding that commission-driven sales staff are not aligning well with the company mission and vision. By taking the individual incentive out of the picture, the sales staff can focus on the customer need and pain.

This will ultimately increase revenue in the short-term and long-term picture because the customer will feel the company actually cares about them and helped them find a solution to their need.

Now, there are some advantages and disadvantages to dismissing the commission structure.

Advantages:

1. It dismisses negative behavior which focuses on individual profit over company profit

2. It dismisses focusing on short-term outcomes.

3. Many companies operate in a cyclical industry; sales staffs have a sense of security with a pay check every month.

Disadvantages:

1. You may lose some of your sales staff due to the compensation model change.

2. How can you attract top agents with such a new method of compensation?

As you consider this adjustment, you must also consider transparency. Do not implement something without having a candid discussion and permitting time for implementation and acceptance both on a personal and professional level.

For example, if you want to adjust from a commission to a salary structure, have the initial conversation in August. Let everyone air their concerns and then lay out the benefits and impact it will have on them at work. Then state that the implementation will be Jan. 1 of the following year. This provides time for employees to ask questions and as I stated, accept the change. It won’t be a change forced on them, it will be one in which they feel they had a say in how it was handled and understand why the change is taking place.

 

Heather (Penney) Strohm is the regional director for Indiana State University’s Indiana Small Business Development Center.

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