Question

Based on what you have read about compensating salespeople, do you think salespeople should be compensated using only fixed salary, only commission, or a combination of the two? Please explain your answer. If you chose the combined approach, what would you consider the optimal ratio of fixed salary to commission?

Answer 1

Salespeople should be compensated with a package that should be a combination of fixed and variable pay. The fixed pay should be based upon the pay scale that is designated to his or her position and variable pay should be the incentives that is earned upon the business development, delivered to the organization. A compensation package, comprising of fixed and variable portion has different following benefits.

1. The package becomes attractive and more talented sales people will join the organization.

2. Salespeople will get a compensation at a time, when their performance will not be at par. It will bring motivation in the employee that will make them work hard to achieve the sales target.

3. The turnover rate of salespeople, will come down. Hence, training cost will be saved. Besides, the top talents in the sales function, can be retained.

The optimal ratio of the fixed to commission pay is 40% to 60 % or 40:60 that can move to 50% to 50% (50:50), depending upon the additional value added responsibilities assigned to that sales person. It will make the person to earn a basic salary that is fixed and kept relatively low and the variable pay that is very high. It encourages him or her to deliver the performance that is expected from him.