The Cash Flow Blog

A cash flow management suggestion I recently read is to migrate a sales team from a salary + commission compensation plan to a commission-only plan.  The thought is by doing so, cost of sale can be greatly matched to revenue.

Salary and benefits are a huge portion of the cost of sale and as such, the thought is to only pay the sales team when they sell something.

Makes sense in many cases, but not as a means to address a cash flow problem.

I’m not talking about indirect sales models, but changing compensation plans of existing sales personnel from a salary + commission compensation plan to a commission-only plan in an attempt to save money in the midst of a bad time.

Here are some things you need to consider before moving your existing sales team to a commission-only sales compensation plan to address a cash flow problem in your business:

• Complexity of sale and it’s impact on sales people – The cash flow question is why make the change from salary + commission to commission-only?  Assuming the reason is to make it through a bad time and conserve cash, you have to look at the complexity of the product or service you sell and realize the impact of making such a change.  Things like length of sales cycle, dollar value of the average sale, time to cash after the sale, percentage of commission, risk of return and it’s affect on commission payments, etc. all need to be considered for their impact on the people you’re moving to a commission-only compensation plan.  Remember, the person selling for you has to eat and provide shelter for themselves and most often others.  How long will they be on such a plan, how much money can they make while on the new plan, how often will they be paid, how much risk in the business will they carry, etc.  All of these questions need to be weighed if you value the people on your team and want to keep them around.
• Turnover – How many sales people do you expect to lose because the compensation plan is changed?  Odds are you aren’t closing a lot of business, otherwise you wouldn’t be considering a move to a commission-only plan.  Realize doing so likely will force your best sales people to seek employment elsewhere – if they haven’t done so already.  If things aren’t going well, why would a top an average performer stay in a company that just took their salary and benefits away?
• Quality of new personnel – Related to the item above, what kind of quality sales people do you expect to attract to your company on a commission-only plan?  If sales are hot and the commission rate is great, the earning potential may attract quality people.  But again, we’re talking about changing a sales compensation plan to commission-only because things aren’t going well.  Any new-hire worth their weight will want to speak to other sales people about the commission-only plan and ask questions about the length of the sales cycle, pricing, lead generation, timeliness of payments, and real earnings versus potential.   The danger is good people will leave and less quality people will replace them, making poor sales results get even worse.  Eventually, things will turn around and at that point you want the good people with you.  Under-performers should be let go before and regardless of a cash flow problem.
• Desperate acts of the sales force – Take salary away an employee in an effort to save money and pay them for performance…and watch out.  Not everyone will react the same.  Some sales people will turn to acts of desperation – over commit, over sell, make promises that can’t be kept, discount beyond authorization, hassle and annoy for a closed sale, obligate the company in ways that result in great financial risk, etc.  Not everyone will change who they are, but don’t be surprised if the guy or gal with three kids to feed suddenly starts making promises to customers they can’t keep in an effort to close a sale in time to earn a commission before a mortgage payment is due.  I’ve seen this happen.
• Control – Sales people who are paid commission-only are likely to be more difficult to manage.  The reason is they don’t have much to lose.  If sales are down and people aren’t making money, asking them to work harder isn’t going to be well received and threats of firing them aren’t going to be taken very seriously.  Can you really fire someone you aren’t paying?

None of the above is meant to dissuade people from adopting commission-only sales compensation plans.  What’s meant is to be aware making such a such a change in an effort to address a cash flow problem can be dangerous.

As business owners, we’re all on a commission-only plan.  More accurately, many or most of us are on a profit-based compensation plan.  The caution to have is our employees don’t share our mindset of success or dedication to our business – not as a general rule of thumb.  And changing the compensation plan of a sales team to make it through a rough time, while making perfectly good sense as a business owner, has potentially unintended consequences we need to be aware of.

If you're new here, please subscribe to this site. It's the best way to make sure you don't miss any new tips or ideas to maximize your business.

Thanks for visiting!