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  February 24, 2012
Driven by Sales...

  "Nothing happens in a business until a sale is made" ~ Anonymous

The third Tuesday of each month is reserved for a happy-hour get together with three of my close friends who also happen to be business owners.  None of us are competitors in any way and our group comprises of a retail business, a service provider, a custom software solution provider and a manufacturer (me).
 
We typically spend the first hour discussing with one another, the changes that have taken place in our lives since our last meeting, interesting observations and/or commentaries about current events. 

The second hour is spent dissecting a single business topic that is general enough to span all of our various business interests and industries.

These topics might include:
  • How do we attract more customers to our businesses?
  • What is the most effective tool that our businesses are currently employing?
  • How are we using the Internet to support current and potential customers?
  • How can we be more efficient with our time?
  • Where can we find alternative financing in today banking environment?
The topic this month was most interesting in that it was timely for me as well as two others around the table.  Our discussion item this month was "what is the best way to compensate sales people...a high salary or high commissions"?

This is a topic that I’ve struggled with ever since hiring my first sales person over twenty years ago. 
  
The Salary Model

There are some schools of thought that say that in order to attract and motivate a top sales person, a company must pay a high upfront salary.  This will incentivize a true sales professional to perhaps move from their current position and join your company.  The formidable salary also will attract those people who have very specialized knowledge and training.  

The positive side to this type of structure is that the sales person being hired is an identifiable sales professional with existing product and market knowledge.  Many times they are highly skilled and hold advanced degrees.  They may have existing contacts, an extensive rolodex and have a proven track record indicating that they are truly capable of creating new sales.

These types of sales people are found in industries such as pharmaceuticals, semi-conductors, factory automation, medical devices, aerospace, defense, and control systems where very specialized knowledge is required and the sales-cycle is extended.     
 
The downside to this theory is that it can take a lot of time to identify this supposed sales professional and a lot of money to convince them to leave their current situation.  Regardless of their industry knowledge, a decent amount of additional product training is most likely warranted.

Additionally, the high salary does not provide any real incentive to work hard as they are being paid whether or not they are creating new sales or not.  Typically the sell-cycle is long so a company must wait several months or years to determine if the sales person is actually effective or not.  By the time a company figures that the sales person is really not doing a good job, they have moved on to another opportunity at another company.

Lastly, the targeted sales person may really not have been such a star performer at their last company in the first place.  They may have some success in the past; however those past successes may not be indicative of future performance.  It’s quite possible, in fact, that you’re doing your competitor a favor by hiring away their problem and making it your own.

The bottom line is that hiring this type of sales person should be viewed as a long-term investment for a small company.  It typically does not pay dividends immediately but could be extremely rewarding if the sales person is successful.  However it could also be an expensive and time consuming proposition for the company if an ineffective sales person is hired because the guaranteed salary is generally paid far in advance of actual revenue to the company.

The Commission Model

The second idea is to pay a sales person a very small salary and backload the program with a rich commission.  Since the earnings potential in this scenario is theoretically unlimited, if the sales person is successful, they can potentially earn far more than if they were paid a guaranteed salary.

Certain companies are attracted to this type of compensation structure because the supposed upfront risks are low for the company.  They hire a sales person on the hope that they will sell something and if they don’t it doesn’t matter because it really didn’t cost anything.

There are several industries that use this model including real estate, vehicles, financial services, furniture, time-shares, and insurance.

While it is true that a company doesn’t pay much salary upfront, there are still hidden costs that a company must consider.  There are costs to advertise these positions, interview and hire these sales people.  Sales managers must also be hired to provide training and supervision.  There are also overhead costs of housing and equipping these sales people.

Although there are big commissions paid to the most successful sales people in these fields, the typical sales person is paid peanuts in comparison.  Many of them would be financially better off working at McDonalds or Wal-Mart.  In a very short time, these sales people soon realize that they are not making enough money to cover their living expenses and soon leave to seek employment in another field.

The high turn-over leads to instability especially at those companies who rely on returning customers and long-term relationships.  Customers become frustrated when they are constantly being handed off to new sales people and the relationship between the company and the customer can suffer.  The net result could be a loss of business rather than the generation of new business.

The Blended Model

The two models discussed above are the two poles of sales compensation.  The realistic approach for many companies is a blended model that combines a salary with a commission program.

The guaranteed base salary allows a sales person to pay their living expenses while the commission program provides them incentive to develop new business at new and existing customers.

This also will help create stability for a company instead of rotating through a number of different sales people.

As the four of us left the restaurant that evening, we agreed that hiring the right sales person was one of the hardest decisions that a small company must make.  A good sales person may be the difference in the company’s success or failure.

My friends and I concluded that there is no easy answer to this age-old question that haunts small business. 

In order for a company to make money and survive it needs new sales, in order for a company to acquire new sales they need sales people, and in order to attract, hire, train, and manage sales people, a company needs to make money...

Regardless of what other company departments believe...sales are the engine that drives every successful company.

Thank you very much for your support of OptiFuse where we always want to be a part of your solutions not your problems. 



Jim Kalb
President
OptiFuse
www.optifuse.blogspot.com
jimk@optifuse.com


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