Can a Commission-Based Pay Structure Work for Your Company?
Want your employees to focus on increasing your company’s profitability? Paying commission can provide them with an excellent incentive to do so. Here’s how the performance-based payment model could work for you and your company.
Offer a base salary. If employees aren't confident they’ll be able to pay their bills each month, they’re unlikely to give you their all. Consider providing a modest base salary with benefits and a performance-based bonus system based on how well your employees meet their goals. Offering 30 percent base pay and 70 percent commission is customary for many sales positions, according to Bloomberg Businessweek. This approach also is more likely to help you retain talented salespeople who might otherwise jump ship for a more lucrative opportunity.
Pay attention to federal labor laws. The Fair Labor Standards Act requires you to compensate all employees — commissioned or not — at least the state minimum wage for the number of hours worked. That means that if your base pay is very low or nonexistent, you’ll need to track carefully how many hours each employee puts in. If it’s a slow month and his commission payments don’t add up to an equivalent minimum hourly wage, you’ll need to make up the difference yourself. (This also applies to hospitality industry workers who rely on tips for the bulk of their pay.)
Don’t use sales numbers as the only indicator of performance. Sales figures are directly tied to your company’s revenues, of course, but it can be dangerous to rely on them as the only milestone for success for commission-based employees. Consider incorporating an employee scorecard assessment tool (such as the Balanced Scorecard), with milestones based on key indicators that are connected to the company’s long-term goals, such as generating new business leads instead of merely closing a deal. By basing commission and other financial incentives on criteria that support the company’s growth, you can help employees prioritize the tasks that will help you succeed.
Kathryn Hawkins is a business writer for Intuit and is passionate about solving small business problems.