Sales Compensation — What’s the Right Salary and Commission Mix?

Striking the right balance between salary and commission is one of the most complex—and vexing—issues that CEOs and sales leaders face.

What Sales Compensation Mix Are Other Companies Using?

First, let’s look at how other companies compensate their reps. As shown below, a CSO Insights survey of 1,000 businesses (ranging from very small companies to very large ones) showed that variable compensation was 40% or less of total compensation for about half of the companies surveyed. For the other half, it was greater than 40%. A typical salary/commission mix is probably around 50/50.

What’s the Purpose of Paying a Base Salary?

You may wonder why you need to pay a base salary at all in the sales compensation mix. Shouldn’t a competent sales rep be able make a good living on his/her commissions alone?

This is a topic worthy of many newsletters, maybe even a book. We won’t attempt a detailed explanation here.

The short answer: There are good reasons to pay a base salary. That’s why most companies do it.

Paying your reps a base salary promotes:

• Security—To be effective, sales reps need to be hungry but still feel financially secure.
• Loyalty—A commission-only sales rep may leave for a higher paying opportunity elsewhere.
• Cooperation—A base salary makes a sales rep feel part of a team and drives cooperation and collaboration.
• Value of Other Responsibilities—Many, if not most, reps have non-sales responsibilities such as customer service.

In addition to paying a base salary, companies use variable compensation to motivate reps to sell strategically important products and services. To find the right balance of base salary plus commission for your company’s sales compensation mix, start by asking two questions:

• How long is your sales cycle?
• What else are your reps doing besides selling?

How Long Is Your Sales Cycle?

If your company sells complex, big ticket “solutions” with a long sales cycle, you need highly skilled sales reps who spend months (maybe even years) cultivating prospects and developing customized proposals.

Since these deals take a long time to close—and some never close—reps don’t receive a commission for a long time, if ever. They need a salary to meet living expenses while they wait for deals to close.

This is especially true for sales reps in a new company or a new sales territory. They need time to develop relationships and create a sales pipeline.

At the other end of the spectrum, some companies offer straightforward products and services with high sales volumes and short sales cycles (two months maximum). Once up-to-speed, these reps can earn commissions monthly. As a result, they need a much lower base salary than reps who sell complex solutions.

Many companies employ both kinds of sales reps: the “outside sales” rep who sells longer term solutions and works on the larger deals and the “inside sales” rep who works on the shorter term, transactional deals.

In these cases, the company may need more than one compensation plan. The compensation mix for a solution seller, for instance, may be 40% commissions and 60% base salary, whereas the inside sales rep’s mix may be 60% commissions and 40% base salary.

In some industries, such as insurance and investment management, brokers are paid only a commission. They may be employees, but they operate very independently.

What Else Are Your Reps Doing besides Selling?

There’s another reason why companies pay reps a base salary. Many reps have numerous non-sales responsibilities which can include:

• Managing customer relationships.
• Handling customer service tasks.
• Handling administrative tasks, including collections.
• Representing the company at events.
• Working on marketing and PR programs.

This work benefits the company but does not enrich the sales rep directly. Still, the rep needs to somehow be compensated for this.

You may never reach what some CEOs consider nirvana: an all commission sales team. But you may be able to shift the compensation balance further toward commissions by taking these two steps:

• Shift more sales responsibility to the inside sales team.
• Minimize outside sales reps’ non-sales responsibilities.

Read more:

• These Inside Sales Compensation Plan Templates Will Motivate Your Reps to Win Revenue
• Best Project Management Software Comparison