What is the Best Mix of Basic plus Commission?
Virtually all companies offering sales opportunities have their own unique remuneration system. Some can be difficult to understand.They often additionally have all sorts of incentives in place. In essence, there is a basic and commission, although both of these elements can be more complex. Which is best for you depends on your current situation and career goals.
You will come across the term OTE, which is often misunderstood; it stands for On Target Earnings. This means what you will earn if you are exactly performing as expected on target. It does not in itself indicate how much is through basic and how much through commission. For example, let us say you are applying for a position that pays £15,000 pannum basic plus 5% commission. Well you will need to know what sales you can expect to realistically do to work out how valuable that 5% is. So say your targeted/expected sales were £600,000 per annum then your OTE would be £45,000. (£15,000+£30,000). If you only did £400,000 your would earn £25,000 but if you did £800,000 you would earn £55,000.
On interview you need to know how they worked out the OTE and how many people in the last year reached and exceeded it. The very attractive bonus of a sales career is that if we work hard and do well we get paid extra for that success!
High Basic No Commission
Companies with this remuneration scheme do so because they believe a high basic salary locks in highly productive experienced staff often with a valuable personal network. It also means that their costs from each sales receipt is kept to a minimum. As you might imagine such deals are only offered to very low risk sales personnel. Ironically, such personnel performing well would be better off with commission heavy deal but will perhaps see that as more risky. Whereas high basic seems secure (If your sales figures drop continually they will certainly think of letting you go) the chance of very high earning is zero. The motive of a person in this position is to achieve an ever increasing basic as they climb the hierarchy of the company. There may additionally be an annual bonus, incentives and other more usual remunerations such as pension schemes and the like. Promotion prospects to management or to other functions might be strong as well.
This formula is more likely in industries where an incentive reward to make sales does not fit the product and/or the culture. They also do not want their sales team just focused on short term personal income. It may make the sales executives very assertive for immediate business more than building long term relationships. Often in such a situation the marketing and brand might be strong, meaning that the sales team are more reactive than proactive. Often companies at this level are very concerned about long term customer service, reputation and above all brand more than just the sales figures.
High Basic Low Commission
Companies here are looking for low risk low overall cost experienced staff but still wanting to reward and recognise achievement. The commission often has more psychological or status value to the sales professional.
Low Basic High Commission
The company motive here is to offer very high rewards for high performers. The low basic is paid so as to cover priority costs of food and shelter, but deliberately low to avoid a comfort zone, believing that lack of pressure will produce low sales results.Such companies will believe that if the basic is too attractive they will attract weaker sales people. The basic takes away their ‘hunger or urgency to close deals. They believe sales people are mainly motivated by money and therefore offer high income and higher OTEs than normal. This system is very common in the financial sector and with trainees giving them a chance to prove themselves. We know of companies that will actually pay 100% commission over a certain threshold. Sounds impractical but actually it produces a strong carrot and produces very high earners as role models for new sales staff to aspire to and see how real the potential is.
So which should I go for?
Depends what you have to sell and what your goals are.
Despite the lack of high income potential, in the UK the higher basics are more popular making them more competitive. You will find that once with a company you will add up your basic and commission and divide it by your sales working out how much of each deal is your share. You may use this information to negotiate a better deal. All employers avoid losing productive sales people and do everything the y can to retain them. Once you have proved yourself is when you have a strong negotiating hand. Experienced sales people tend to think of how much they are passing to their employer of the sales revenue that they generate and negotiate from that point of strength. Care needs to be taken that a pitch for high basic does not appear as a lack of self-confidence in producing results.
If you are new to sales what you need more than anything is a minimum of one year with a reputable company ideally that backs up practical experience with training. Then you have got something more tangible to sell and have a string negotiating hand. So go for that and when you get it see it through because in the first three months you need to focus on learning as much as you can.
If a company is a start-up or less than a year old they will be higher risk. This could be a great opportunity if you pick the right one and get in early on to something that is going to be big. In this scenario at interview look for them to sell you on the potential of the business. You may prefer a small growth company to a larger established one, it is all a matter of personal choice, values and goals.
If you are looking to get a mortgage you will find it easier to secure a loan against a basic salary, until your track record of actual earnings is established.
A key piece of information on deciding can be the time cycle to a deal. If you are selling aircraft for Boeing there can be along wait for commission so you need a high basic. On the other hand if you are selling something that is usually bought following one phone call you could earn multiple commissions on day one and the commission rate becomes more important in the balance.
How established is the company? A known brand is likely to get a faster and more trusted reception than a new company and product. When the company is very established though all the good accounts may already be taken.
If the margins on the product are high and/or average purchase size large, then a low basic high commission deal could offer a substantial income. Be careful though, sales people tend to exaggerate and be optimistic by nature. Ask a potential employer for what their top earner took home last year. Get some clear figures on how many calls, conversion or visits per day, what is the average conversion rate, average deal size. Then with their basic and commission scheme you can work out your expected earnings OTE will be. However good a sales person you are you will always need a product with a clear market.
Overall the money, for most of us the most important, but you need to consider all the factors with reference to your goals. If you are making your first move the training you receive could be a more important factor to accelerate your career growth.
The real advice is to know your personal goals and at interview ascertain if the employer potentially offers you a way to achieve them. Then to sell yourself that you will help the company meet its goals.