Salespeople are the beating heart of a business; without the revenue they generate no other parts of a business will function for very long. The question is, how best to incentivise sales to work well, individually and as a team?

Fiirst principles
The Chartered Institute of Professional Development (CIPD) suggests that any pay structure “should be carefully designed to support the business strategy of the organisation and to provide a clear and non-discriminatory framework for pay progression and career development for employees”. It also needs to be flexible to adapt to the changing business environment and should also consider any local variations, especially where the cost of living is higher.
Pay structures should reward or encourage behaviours which, in the case of sales, is performance in seeking revenue-generating business according to the goals set by the employer. It’s interesting to note that the CIPD believes that many smaller organisations have no real defined pay structure of any kind.
Duncan Brown, the Institute for Employment Studies’ head of HR consultancy, says there are three steps to creating a pay structure: “The first step to consider is the total level of pay, taking account of the value added by the sales roles and the market rates for similar roles. Second comes the split between fixed and variable pay. Third, the make-up of the variable pay needs to be agreed with the main distinction being between commission – i.e. the pay as a direct proportion of revenue and/or profit, and bonus – cash lump sum for agreed results and how those results are achieved.”
Brown thinks that also relevant are decisions such as performance measures, timescales for results, the mix of team and individual performance targets, and the treatment of adjacent roles such as sales support, etc.
Dani Novick, director at Mercury Search & Selection, sees the practical effects of this. For her, the question of whether pay should be skewed towards base or commission is rather academic: “Whilst there are clear arguments on both sides as to which is best, market forces determine what happens in reality. Market demand has determined that remuneration in the print sector has always been biased towards base pay and the abolition of tax incentives for profit-related pay at the end of the 1990s only reinforced this.”
But how to set the targets that need to be achieved? Jonny Giffords, organisational behaviour advisor at the CIPD, suggests that employers need to set objectives that maximise the performance outcome that the employer wants; this he says is fundamental to increasing performance.
He says: “Smart means, in reality two things – the objective should be specific (time- or person-based) and challenging (it stretches the individual). These two characteristics work for certain jobs such as sales positions where roles are typically predictable.”
But pay goes beyond the simple ‘instant hit’ of a sale. Pay needs to also address wider impacts on sales staff. If you focus only on objectives and how staff are managed, the sale made and commission sales people can make, staff will take a very narrow approach to performance. On this Giffords says employers need a positive interaction between sales and customers every time, even if a sale isn’t made: “Salespeople are brand ambassadors and need to look beyond a possible sale – the customer may not buy today but could tomorrow. If a salesman in that position gets a sniff of the customer not making a purchase then they may not be particularly helpful to that customer – it’s really serious in the long term for the company.” His view is that very narrow pay structures and management can be counterproductive.
It makes sense then that pay structures encourage salespeople to promote the company and if appropriate, the team. “Here,” says Giffords, “you should set team targets so that everyone gets paid on anyone in the team selling – pay structures can create a stronger sense of cohesion.”
Chloe Themistocleous, an associate at law firm Eversheds, agrees: “Employers generally find team targets encourage employees to work together for a common goal and assist one another. Targets where employees are in competition with one another can affect team morale and spirit negatively if not managed properly.” Similarly, Themistocleous thinks a bonus scheme should be something that all employees can participate in and one where they are on equal footing with one another at the outset.

Rates of commission
Before deciding on the base/commission split to pay, it’s important to recognise that while there are several factors influencing pay for sales staff “it’s clear”, as Novick puts it, “that there is a proportional link between base salary and projected turnover, i.e. higher salaries go with higher turnover. Whilst this is entirely to be expected, employers should be wary of viewing salespeople as having portable turnover and seeking to directly buy in that turnover.” Often clients don’t follow the individual as they’re frequently tied into service agreements.
One thing is certain though, the market rate for a given role is well established and to a large degree standard within each sector. Novick says that the exceptions to this are usually in companies where they haven’t recruited for some time, for example owing to low staff turnover. “When these companies come to market they may find their pay structures are out of step with the going rate. This causes two issues, firstly they have to offer more than expected and secondly they have to manage the impact on existing staff and pay scales.”
While base pay or commission is the question, its answer depends how a firm wants to leverage profit-related pay and whether they’re in a bidding war for a given individual.
In recent years, says Brown, there’s been a shift from low base and high commission to higher base and lower bonus and commission. “This is particularly so for key account roles selling high-value items over longer time periods. Further, employers are paying more attention to total rewards for salespeople – promotions and recognition – they’re rewarding valuable behaviours rather than just paying on end sales results.” Interestingly, Brown believes that base pay should reflect the core skills and competencies that someone brings to a job, while variable pay, commission, should reflect their performance in the job and the scale of the impact they have on the sales outcome. He adds: “It’s a myth that all salespeople need to be motivated with short-term commission.”
But once pay structures are set it appears from what Novick says that companies rarely review them – she suggests that firms generally only change when HMRC provides new tax incentives. She adds that the wider issue for this range of benefits is that they may be useful in securing or retaining staff but quickly become the norm and expected – they stop becoming incentives or motivators.
There is one further point to note here: parity of pay. There is a strong desire within people for fairness. If unfairness is perceived it can cause some very negative reactions. Pay structures should be transparent and open – that everyone is on the same footing if they perform. However, actual pay clearly needs to be confidential.

Other incentives
Of course, while cash is king employees also look to other forms of reward such as profit-sharing, share ownership and pensions. But do they work?
On this Giffords sees incentives as a way of further tying employees to the company more directly – to give them interest in the longer-term financial status of the company. But there is a problem: “The difficulty with incentives is that we tend to focus on the short term rather than the long term when it comes to rewards; many want their rewards immediately and would rather have half a cake now than a whole cake in a year’s time. In other words, the psychological value of long-term benefits can be less motivating.”
Novick agrees, seeing logic to the argument: “Even commission paid on ‘house’, pre-existing or long-term accounts is effectively static and so quickly becomes taken for granted.” She adds that however generous an overall package may be, employees become numb to any incentive effect.
This is why Giffords says that with long-term incentives organisations need to continually communicate their benefits. Further, share ownership in the broader sense could be linked to decision-making. Consider the John Lewis model where partners are involved with the decision-making process and see company results linked to their pay.
Themistocleous thinks that giving an employee shares in the company can increase their commitment. “For incentives to work the employer needs to set a certain long-term goal or target for a key employee to achieve – for example, to double the revenue by 2020.”
However, she points to other incentives that firms can offer: “Employees can also elect to give up part of their entitlement to salary or bonus which is subject to income tax and National Insurance contributions in exchange for a new or enhanced non-cash benefit, which benefits from a full or partial exemption from tax or National Insurance (or both).” But with a note of caution, Themistocleous says that the government recently outlined its intention to restrict the benefits that attract tax and National Insurance advantages when provided as part of a salary sacrifice arrangement. Soon the only benefits excluded from the restriction will be employer contributions to registered pension schemes; pension advice; employer-supported childcare; cycle-to-work schemes – and ultra-low emission cars.
None of this prevents firms offering other benefits, it’s just that they can’t be set off against tax. And talking of tax, Brown says that it shouldn’t drive your sales reward strategy: “It’s a relevant contextual factor, and the government’s changes have at least rendered the reward landscape pretty neutral. Share schemes can be an effective tax-free retention device.”

Pay goes beyond base pay and commission; there’s also the issue of bonuses and how they’re paid. Themistocleous says that while all payments should be paid via payroll and the necessary deductions for tax and National Insurance should be made, payslips should however stipulate what elements of pay are base pay and what elements are bonus or commission.

In conclusion
At the end of the day, the pay structure is whatever works in the given circumstance and will vary according to a firm’s needs and place in the sales cycle. The key is to have an eye on profit, fairness and the market rate as employees are mobile and the power of the web makes pay far more transparent.