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Reward salespeople with progressive commissions

As an entrepreneur you most likely have a certain amount of moxie, but you may not feel that you have the right personality to be a good salesperson. Or perhaps because of your other duties within your business you cannot focus as much time on sales as you feel necessary. Hiring a good salesperson may be your answer.

While there are many things to consider in hiring a salesperson, I want to focus on a few key points regarding your new salesperson's compensation.

Use a commission structure instead of paying straight salary. While salary offers a salesperson a certain amount of security and allows you more control over your sales team, it provides little incentive and therefore requires closer supervision. In an entrepreneurial environment where your time is limited and cash can be tight, you are better off having your salesperson receive most (if not all) of his or her compensation in the form of commission. Commission turns your sales expense into a variable cost, which means you only pay the salesperson when the company is actually making sales.

Align your salesperson's interest with that of the company. For example, if you have empowered your salespeople with the ability to discount prices to make a sale, then you may want to pay commissions on gross profit instead of sales revenue. This way your salesperson does not have the incentive to reduce the price to the point that the sale isn't profitable for the firm while still getting a commission that is based on sales revenue.

Create an evaluation system. You will need to evaluate your sales staff to ensure they are reaching the goals that you have set. These evaluations can be based on the salesperson's output (sales revenue, sales growth, number of new accounts, etc.) or on the salesperson's behaviors (number of sales calls made, demonstrations given or proposals sent, number of customer complaints, selling time vs. non-selling time, etc.) You can use a combination of evaluation systems, but don't make it so complicated that it takes too much time to administer.

Do not cap the salesperson's income. I have never understood why some companies put a limit on the amount of money a salesperson can make in a given period. I have actually known salespeople who reached their annual cap in the fall and have stopped working for the year. Because a commission is a variable cost, you and your salesperson's interests are aligned, and you should want your salespeople to make as much money as they can. In doing so, they will only be adding to your company's bottom line.

Increase commission percentage as sales increase. This actually is the opposite of capping the salesperson's income. I like to structure sales compensation such that if a salesperson goes beyond my expectations, then she has the opportunity to make even more money. For example, if I pay my salesperson 10 percent of gross profit and her quota is $500,000 then I may want to pay her 15 percent of gross profit for any sale she makes over her $500,000 quota. This just adds additional incentive to go well beyond the quota.

I have always thought that a great sales professional should be one of the highest compensated individuals in the company. I believe that will translate into profits for your firm. In other words, if done correctly, you will attract highly motivated and confident salespeople and will be able to pay them as they "pay" you.


Eric Farr is a graduate of The Wharton School and of Brigham Young University, where he participated in the student club sponsored by the Center for Entrepreneurship. He can be reached via e-mail at cfe@byu.edu.