Commission versus base pay

Finding the right balance between basic pay and commission is crucial to rewarding salespeople, says Tom Washington

If you have ever had dealings with a persuasive, perhaps forceful, salesperson, the chances are they were thinking more about the money they stood to earn from the sale than finding the right deal for you.

But for many employers, having an engaged and motivated sales force is vital. Indeed, such staff are the lifeblood of some industries and the single most important form of creating income. But the question is, how does an organisation keep this group of typically money-driven operators performing for the good of the company, not just the size of their pay cheque?

The obvious answer is commission, a form of variable pay by which staff earn a cut of the income they create for their employer.

Transparent structure

As in any profession, there can be good and bad salespeople, and commission is a common way to reward top performers. Commission leads to a transparent reward structure based on success. If staff hit targets, they get the reward; if they miss them, they do not.

Experts say the simplicity of commission suits the type of person working in sales. Peter Reilly, director of HR research and consultancy at the Institute for Employment Studies, says: “The type of worker on commission perhaps does not manage complexity so well. If you start rolling out complicated measures of performance, they do not like it.”

Commission also makes staff feel they are sharing in their employer’s success. Reilly says this form of reward gives individuals impetus to maximise their efforts around the most profitable tasks. “It communicates the message sales are important to the organisation,” he says. “It should drive behaviours of seeking out prospects and getting the most of those prospects, which will ultimately maximise company income.”

Aligned with business strategy

However, as with the much-criticised City bonuses, commission, particularly if it is uncapped, can encourage the wrong type of behaviour. An employee can reap the benefits of short-term success, but perhaps not comply with the long-term ideals of the organisation.

Jonathan Chapman, a teaching fellow at Cranfield Business School and former head of reward at the Financial Services Authority, says: “In financial services, there have been examples in the advisory market of firms moving away from commission on pension sales, for example. In the past, some commission payments encouraged inappropriate sales, such as mortgage endowments to people who could not afford them. Employers are now trying to change the type of workforce from salesmen to much more professional advisers by rewarding them through a high proportion of base pay.”

A high proportion of commission may also result in staff spending all their time on activities that carry incentives, rather than other, equally important, facets of their role.

Higher base pay

Higher base pay shifts the emphasis from such short-term thinking. In fact, many target-driven staff would prefer the security of a higher proportion of guaranteed income. The John Lewis Partnership, for example, rewards employees with a collective bonus pot at the end of the year shared between all staff, rather than rewarding individual performance.

But base pay also has its pitfalls. Employers are unlikely to distinguish significantly between the best performers and the mediocre by setting pay differentials aggressively. When earnings cease to be based purely on results, employers must take other factors into account, such as customer service and best practice. The salesforce may not see this as a fair means of assessment. Does the manager know enough about what goes on in the sales context? This is more complex and harder to judge, and requires better management.

Employers may also not be prepared to reduce base pay if the organisation’s performance dips. The great advantage of commission is that it is for a fixed period, and targets and rates can be adjusted as needed. But base pay traditionally rises each year and staff expect it to at least stay the same. Pay rates are also complicated by external factors, such as what the market is paying and the cost of living.

For many organisations, commission can act as a safety valve because pay costs are adjusted according to revenue. Mark Thompson, associate director at Hay Group, says: “What happens most of the time is that even if an employer has a bad year, it still pays out significant commission because of high-performing sales people. Commission is not foolproof, but it does enable employers to get rid of the fixed cost of base pay, which has knock-on effects on pension contributions.”

Striking a balance

The key, it seems, is to strike a balance between base pay and commission. Thompson says having more than 25% of total income as commission is likely to skew staff behaviour in a certain, perhaps self-centred, way.

Steve Watson, director at Rewardworks, says communication around any changes to pay structure is key. “It gives the employer the opportunity to talk to its staff. Switching from commission to salary is probably good news for the majority because they are likely to get the same sort of money but be less stressed. High earners may lose out, be fed up and may leave, but that is not the kind of person employers are now looking for.”

In some sectors, sending the right message to staff through reward is a tricky task. But, with pay freezes becoming more prevalent, commission remains a key driver.

Key lessons

• Commission makes staff feel they are sharing in their employer’s success and is a transparent means of reward
• It can also act as a safety valve, as pay costs are adjusted according to income
• A high proportion of commission-based pay may lead employees to behave in a way that is not aligned to business strategy
• This includes focusing their efforts on making money rather than other areas important to customer satisfaction
• Employers should seek to reward via a mix of commission and base pay†

Case Study: Carphone Warehouse hangs up on commission

Carphone Warehouse removed commission from all its London stores in November 2008. Following a successful trial, it has now extended this to its 820 stores across the UK.

Andrew Harrison, Carphone Warehouse chief executive, says the organisation recognised that the mobile phone retail industry had suffered in the past from a reputation for hard-sell tactics and poor customer service.

The move away from commission was designed to create a different culture, assuring customers that they would receive a truly impartial service.

“This is also great news for our employees, who will get a significant uplift in their basic pay, which is of real comfort to them in the current economic environment,” says Harrison.

Rewardworks director Steve Watson says: “There is no motivation to help customers who are not going to buy from you.

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“Carphone Warehouse is an established brand now, so sales are easier and commission isn’t necessary.”

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