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Risk Reward Principle For Designing a Sales Compensation Plan

Should I pay salary or commission? I have that questions asked of me often. It will take a little bit of homework for me to answer it for you, but what I’d like to share in this video is a simple principle that can help you decide on what blend of salary and commission you should use in your compensation plan. Look for links to other support material on our website below.

Should I pay salary or commission? I have that question asked of me often. It will take some homework for me to answer that question for you. But what I’d like to share in this video is the Risk Reward Principle when designing sales compensation. It is a simple principle that can help you decide on what blend of salary and commission you should use in your compensation plan.

The Blog

There’s a lot that goes into building a Compensation Plan. One of the most popular blogs on our website is titled, “You’re Paying Your Sales People How Much?” The blog goes over a 5-Step Approach you need to go through in making sure that you have a profitable compensation plan. This blog covers all those details you might want to consider when you finally get down to the stage of planning salary and commission.

The Principle

But let’s get into the principal of risk and reward. It’s pretty simple. Whoever takes the most risk in the compensation plan up front should get a greater reward for overachievement in the sales goals. When you refer to my blog for details to build your compensation plan, I will show you how to set those goals.

When you invest in sales people, they should produce X amount of dollars because you’re expecting X amount of return for your investment. That’s the goal. Now you may plan to pay a higher salary up front and a smaller commission. In that case, the company’s taking a higher risk during that early part of the business year. If your sales people don’t make enough sales, you’ve paid a lot of money in salary for a small amount of sales. But when they hit that target and go over, you’re in good shape. Anything over that target goal, you as a company are going to realize a greater reward. And overall you’re going to get a greater return for every dollar.

On the other hand, if you have a high commission-only or a low salary and high commission for your sales team, the sales person takes on the risk up front. Once they hit that hundred percent target goal, I often set milestones for over achievement that pay out at a higher rate. In that case, the salesperson receives a larger slice of the pie since they took on more risk. This principle is illustrated in the picture above.

That’s the simple Risk/Reward Principle when designing sales compensation. Check out the blog and you will get a lot more of the details of how the principle can be applied to your business.

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