B2B Commission-Only Sales Reps? Beware!

Several start-ups and mid-size companies have adopted the principle of hiring commission-only sales reps. Sales organization concerned about cash flow may find this compensation method quite appealing, as they only compensate sales reps for occurred sales. 

Real Estate has used this commission structure for years. Used cars sales often used draw against earned commission method. Some companies have adopted the strategy of nominal base salary plus a commission plan. Some work better than others depending of the product sold and the industry nature.

In some industries, providing a lucrative commission-only compensation plan can draw experienced sales reps with a sizable Rolodex and deep C-Level industry connections. However, these sales reps loyally often shifted to the highest bidder. These independent professional contractors focus on selling everyday products within familiar channels and verticals where they have the most impact.

There is often a reliability and trust issue attached to these sales professionals. The primary focus is to sell as much as possible, as fast as possible to generate a commission check. The organization revenue target attainment while necessary is not a priority nor an individual focus. Many business CEOs question these independent reps dependability and predictability. Senior management, deprived of leverage over these sales reps, may feel powerless when business revenue targets are missed.

These independent sales reps tend to be well polished, industry expert, capable, hardworking and astute, relationship-driven professionals who revisit and resell successfully the same Rolodex relationships over and over.

 These specialists know the ins and outs of few products whom they position exceptionally well to their customers. Motivated to sell more because their paycheck is tied to performance, each sale means higher income, higher gain, better results and increased recognition.

Factors of concern

The most prominent drawback for commission-only sales reps is that it offers no job security and no stability. Many sales reps feel no bond or belonging to the company. Their single job security is their market performance. Many pay their expenses as an investment in their own selling business.

“When determining appropriate levels of compensation, management must determine if the employee turnover rate is too low, too high, or just right. If turnover rate is high enough to adversely impact the entity's performance, then employee compensation is probably too low.”—Jason Chaffetz

Company performance matters but it is not a significant concern, as these sales reps never feel like an integrated part of the organization ( often the company management makes them feel as such). That is why they primarely focus on what works for them within the specific verticals they serve. They focus on the familiar with a sense of urgency, they are quite capable of learning and selling complex products and service, but why try to learn or go the extra mile? Their longevity is not guaranteed. They know they are temporary movers of products, contractors for hire! They focus on their agenda and individual financial gains, not the company priorities.

These independent reps handle customer’s objections, pressure and demands exceptionally well, the very best go above and beyond to serve their customers, knowing well that they will be working with these same customers again and again in the future. Their reputation matter to them. However, they handle poorly pressure coming from the organization they serve. Aware that they are free agents, they will walk to the next company on a whim, or shift focus to other companies products if they serve more than one.

Practices that hurt independent sales reps

• Commission-only sales reps are prone to leave the moment a new commission compensation structure is perceived negatively.
• Caps on commissions, decrease high-performing reps’ motivations and effort.
• Ratcheting quotas, (raising the salesperson quota, if he exceeded it last year), hurt morale and speed exit. 
• Companies with deficient product or uncertain sales cycle better opt for salaried reps.
• Straight-line commissions work best (keep it simple- the same rate no matter how the sales rep sales) accelerators may spur sales. Complicated formula driven sales compensation will confuse sales reps and create fast turnover.
• Eliminate claw-backs. Sales reps despise to be penalized when the product is deficient. 
• Turnover tends to be high due to product appeal, displeasure with management or sales culture. Being money-driven, products in high demand tend to be more attractive, while hard to sell products that require long sales cycles tend to decrease appeal.
• Lack of product innovation will turn these free agent towards opportunities elsewhere.
• The wrong sales culture will drive them away fast. Good sales managers and companies with good value systems can be a retention magnet.
• Independent sales reps are statistically more likely to consider more attractive competitors offers.

Conclusion

Most organizations, including start-ups, will be better served to hire the right salespeople, pay competitively well (I suggest to pay 10% -15% above market average), and cultivate a healthy workplace that encourages creativity, loyalty, and performance.

Additionally, removing caps on commissions is a must, or at least set ceiling as high as possible. Companies sell more when they eliminate thresholds at which sales reps marginal incentives get reduced. Its possible that top sales reps earning may exceed a C-suite executive’s compensation, but the company will benefit in term of revenue generation and becoming a magnet to top competitors talent lured by limitless compensation caps. 

Just for clarity, I understand that start-ups may have limited cash flow, in this case equity grants may be a motivational factor to keep high performing commission-only salespeople on board, as the company grows and becomes more profitable, these sales reps should transition to a better comp plan that promotes employee retention.

By the way, I have no issues with commission-only reps. I believe they are outstanding professionals. However, I strongly believe that companies should do a better job making everyone feel as an integral and critical part of the company success.

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