Commission-Only Sales: How to incentivize Commission-Only sales teams?

To understand how to structure a commission-only compensation let’s compare this to a salaried and commission sales compensation. This will ensure you provide a fair and reasonable incentive plan that will motivate your troops. 

For salaried Account Executives

The salary derisks the work and pay outputs for the sales reps so the commission will be lower than for a commission only sales rep.

The rule of thumb is that the annual revenue quota should be 4x the cost of the sales rep salary, assuming there are not too many other sales costs relating to closing deals.

Take this example:

Base salary: $25,000 (In Chile)

Commissions/Bonuses: $25,000

On Target Earning: $50,000

Sales expenses for this sales rep (travel etc.): $10,000

Total cost of sales: $60,000

Annual Quota target to close: $240,000

Commission of 10%: 24,000

Add a Bonus of $1,000 to get to the $25,000 Commission/Bonus target based on performance.

Obviously adjust to your market but the math can remain relatively the same.

For Commission Only Account Executives

You want to keep them motivated and engaged. Especially in year 1. Commission recommendation is 30%. Here is the math:

Say they work full time. They will therefore have the same Annual Revenue Quota as if they were salaried. In this example we will take again $240,000

30% of $240,000 = $72,000, that is higher than the salaried sales rep by $22,000.

If you can’t pay the commission in cash, think of providing stock equity compensation as well. This way you can lower the commission say by 10% and still provide an incentive to the sales agent for hitting the numbers. 

Remember: Your revenue is your life. Invest in it. Revenue provides the cash to the company for it to survive and for the valuation to thrive. Don’t be cheap. Give big carrots but at the same time be very clear on the importance of delivering results. It’s give and take. 

The reason that is, is because a) you are only paying on results so your risk is reduced b) you need to keep sales commission only agents motivated to work for you and not feel they are less valued than salaried employees c) it will be attractive value proposition to bring more of them onboard and maximize your sales potential (beware of not making them compete on same territories) d) they are taking a risk of not getting paid anything so the carrot need to be slightly higher to see sales come out of this approach for your company. Otherwise, what ends up happening, the motivation dwells down fast and the time you have invested earlier on these sales agents also get lost in your P&L.

Incentivize to expand existing accounts:

Most businesses miss the point. It is easier to expand an existing (happy) client than to find and close a new logo. If you don’t align your sales incentive plan to that effect you will end up with sales folks only looking for new logos as opposed to thinking about how they can expand, upsell, cross-sell and existing accounts.

For salaried sales reps: Provide a high commission rate of say 15% for expansion deals or a bounty bonus (an added $1,000 award for any expansion contract signed with existing clients)

For commission only agents: This would typically not happen in the first year since they don’t have history or prior accounts to expand. I would keep the same commission for all opportunities.