Commission-Only vs. Salary-Based Sales: Which Is Right for Your Business?
Jayce Grayye • Oct 09, 2023
How a company structures employee pay sets a precedent for the performance, culture, and satisfaction of its staff. Finding a balance between workers’ expectations, market trends, and the company’s bottom line can be a complex equation for upper management to solve.
In a competitive sector like sales, one of the most pressing issues for management is deciding between commission-only or salary-based pay. Fortunately, selecting compensation models is not guesswork. By weighing up company-specific factors against market rates, you can determine which approach is right for your business. And, that’s exactly what we’re going to do today.
Understanding Commission-Only Sales
It’s best to come at your pay structure strategy from an informed position. The first step is to fully understand the different models. Next, you need to weigh up the pros and cons. After this, you’ll be able to choose a structure that aligns best with your business.
Definition and characteristics
A “Commission-only” sales representative earns a percentage of the revenue they generate from sales. Their income is performance-based and reflective of the number of products or services that they sell.
The percentage of revenue that salespersons earn can vary. However, seeing as commission-only sales reps earn their entire wage through commission, the percentage tends to be higher than that of a salesperson with a base salary. On average, the commission rate is two to three times more for commission-only roles.
By nature, commission-only pay is a high-risk, high-reward compensation model. On the employee side, the sales reps rely immensely on their own abilities. If they sell a lot, they can earn a nice slice of the pie, but if they go through a rough patch, their income could drop significantly.
On the employer side, there isn’t as much risk involved. Yes, they must give up a high commission to their salespeople, but if they do well, everyone’s a winner. The two most important factors for businesses are that they:
- Have a quality product or service that drives demand.
- Hire commission-only sales reps who know what they’re doing.
If both of these factors are in line, the potential earnings are mouth-watering.
Pros of commission-only sales
Commission-only compensation models offer unique advantages. Here are some of the major pros worth considering.
- Payroll efficiency: This lean income structure means your business pays for results only. Your salespeople earn based on their contributions so you don’t have to worry about wasting money on payroll.
- Motivated salesforce: Money is always a great motivator. Over 73% of job seekers regard salary as the most important aspect of a new job. Hiring commission-only sales reps typically results in a sales team that’s highly motivated to perform.
- Transparent performance metrics: Revenue is always the primary sales metric but with a commission-only model, the performance cycle is much more linear.
- You can attract quality sales reps: With commission-only pay, earning potentials are often limitless. With an attractive product and competitive commission rate, these types of jobs attract top salespeople who are highly driven to sell as much as possible.
- Operational efficiency: With the right salespeople, your team often manages itself. You just need to ensure you have a good product or service, an efficient sales process, lead generation, and an attractive commission rate.
Cons of commission-only sales
Unfortunately, no system is perfect and so, commission-only compensation models also have downsides.
- Recruitment can be difficult: Without a standout product and a seductive commission rate, it can be tough to attract high-performing sales reps.
- Dependent on reps: The success or failure of your business lies heavily on your salespeople, further emphasizing the importance of recruitment.
- Unethical salespeople: With such a strong incentive to sell, commission-based pay can influence reps to use unethical tactics to close deals.
- Hard decisions: In a results-based industry, management must make difficult decisions to let underperforming reps go.
- Strong pipelines are a must: If you don’t have enough leads or a strong sales process, results can suffer. Regardless of how good your sales reps are, having a solid infrastructure is vital.
Understanding Salary-Based Sales
Salary-based sales involves a vastly different compensation model. Depending on the type of business you run, a salary-based pay structure may or may not be the right fit. Let’s dive in.
Definition and characteristics
Salary-based sales reps earn a fixed amount of money per month (or year) regardless of how many sales they bring in. They’re paid to show up and work a specific number of hours. Although they’re employed to sell, their sales performances don’t impact how much they’re paid.
Compared to commission-based sales jobs, salaried roles are more stable. Sales reps know exactly how much they’ll earn and can plan accordingly, giving them security and safety.
A guaranteed paycheck every month doesn’t mean that salary-based sales reps can slack off, however. All sales reps are given targets and if they’re not consistently met, the rep is unlikely to progress their career and may ultimately end up losing their job. As always, there are pros and cons to this type of compensation model.
Pros of salary-based sales
The pros of salaried sales positions aren’t necessarily as obvious as commissioned roles. However, for certain businesses, salary-based pay makes a lot of sense. Here are some of the main advantages:
- Ethical motivation: Salaried salespeople can be motivated in other ways, like performance-based promotions or pay-rises, bonuses, or paid time off. Some see these benefits as a more ethical means of motivating sales reps than through commission alone.
- Security: Not everyone is cut out for a high-pressure job like commissioned sales. Some workers perform better when their job is secure and less stressful.
- Customer service: Without the pressure of a hard sell, salaried sales reps can focus on relationship building and customer service, which may generate more income in the long run through trust and loyalty.
- Easier recruitment: Job seekers are often likelier to be drawn to a job with a guaranteed salary rather than one that may not pay at all.
Cons of salary-based sales
It’s important to reiterate that when it comes to sales, there’s no perfect system. Before you settle on a salary-based approach, be sure to consider some of the drawbacks:
- Sales slumps get expensive: Regardless of how well business is going, employees must be paid. So, when sales are down, you’ll experience a significant hit to your bottom line.
- Lack of motivation: Salaried sales reps often lose motivation because there are no clear incentives to improve.
- Added benefits may not be enough: Some salespeople won’t be motivated by the prospect of a promotion or paid time off so your added benefits may fall short of their intention.
- Difficult to attract the best salespeople: Top sales reps are usually motivated by maximizing their commission so it may be hard to attract them with a basic salary.
Which Compensation Model Is Best for Your Business?
With two contrasting compensation models, you must analyze the advantages and disadvantages of each in relation to your business. Commission-only can attract some of the top salespeople in your industry, but without a good product, a backlog of leads, and a handsome commission rate, retaining reps will be difficult.
Commission jobs are often best suited to high-ticket sales. High-value, high-cost items generate a lot of interest and revenue, and so, they attract the top sales reps. A good sales process with a short sales cycle will help incentivize and retain sales staff. If you can afford to pay out a good commission, you won’t find a better way to sell.
On the other hand, salary-based sales jobs may be preferred when relationship-building and customer loyalty are priorities. We often see salaried sales jobs in companies that sell more than one product or service, like in a hardware store. In these roles, the salesperson does more than just sell. They also provide guidance and information.
Determining which compensation model is best for your business comes down to suitability. As with any business decision, you have to take into consideration things like:
- The impact this pay structure will have on the company long term.
- How the pay structure affects profitability.
- The influence of pay structures over recruitment.
- How the pay structure is perceived by employees, managers, and external stakeholders.
Choosing a compensation model is a strategic decision that incorporates both short and long-term objectives. Always consider the end goal and weigh up the potential outcomes of going with either model. With all the information on the table, you’ll be in a great position to make the right call.
Need Help Choosing the Right Salary Model?
Making financial decisions for your business can be challenging. Taking the leap often requires confidence, but the outcome remains uncertain until action is taken. In these pivotal moments, seeking insights from industry experts can be invaluable.
When you're gearing up to choose a compensation model, reach out to Jayce Grayye Consulting & Recruiting. We'll guide you to the most suitable structure for your business. And once that's settled, we'll connect you with top-tier sales representatives. It's as simple as that!
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