Sales and Sales Management Blog

I’m pleased to offer a new article by a friend of mine who also happens to be a great trainer, Frank Rumbauskas.  He lays out the advantages and disadvantages of the three most common pay structures in sales.  Since many salespeople have found themselves jobless due to massive layoffs in some financial services industries, this is a timely article for many. 

Salary or Salary + Commission
By Frank Rumbauskas

One of the most common questions I get lately is from people who have been out of work or lost a job due to a layoff, and are now faced with the decision to take a straight-commission job due to a steady decrease in the number of available salary + commission jobs.

It’s not an easy answer simply because each has its own advantages and disadvantages. Personally, I think the straight-commission world offers greater opportunity and higher overall potential, but everyone’s situation is different and what is right for me may not be right for the next person.

So, with that in mind, let’s take a look at each.

Salary or Salary + Commission

Advantages:

1. Economic security. In a job with a base salary, you know you’ll always have a paycheck and paying your bills will never be an issue.

2. Stability. Along with the steady paycheck, most jobs offering a base salary generally expect you to stick around for the long-term. In fact, longevity of a potential salesperson is usually highly scrutinized during the job interview and selection process. They expect you to stay with them for at least a few years, and they assume that you view them as a long-term, if not permanent, employer.

3. Training. Part of the stability and structure typically offered with a salaried position is a training program. Nearly all salaried sales positions have a formal new-hire training process, and most provide valuable ongoing training. This training will not only help you improve in your current job, but will be considered highly valuable by any potential employers in the future.

4. Expenses. Most (but not all) salaried positions provide basic expense reimbursement, usually mileage and cell phone at a minimum, with some providing more.

5. Benefits. With few exceptions, a salaried base + commission job will offer health insurance, possibly along with other fringe benefits.

Disadvantages:

1. Reduced commissions. Nothing in this world comes without a price, and the price for the security of a base salary is a lower commission rate. In most companies, the difference can be staggering. My first straight-commission job paid 17% compared to the 2% I was previously earning in the base + commission position. The reason for this is obvious. Employers decide upon how much money you should make at 100% of quota, subtract your base salary and the cost of benefits and payroll taxes, and whatever is leftover becomes your total targeted commission. However, if your base salary is rather large, a low commission rate may not be an issue after all.

2. Less freedom. Another price for a steady base salary and the structure and stability of that type of position is that you are obviously an employee and will need to meet certain requirements. At a minimum, most salaried salespeople must show up for meetings, come into the office at set times or otherwise report in, complete certain reports and forecasts at set intervals, participate in company activities, and so on.

3. Time management. All the activities that a salaried salesperson must complete seriously cut into productive selling time. All that time you spend commuting to and from the office, filling out forecasts and reports, attending sales meetings, going through ongoing training, filling out expense reports, etc., is time that you cannot spend selling. The end result is reduced productivity.

4. Questionable security. While a base salary guarantees that you can pay the bills while you have it, there is always the risk of being laid off, or of losing your job thanks to a couple of poor sales months. Companies are really tightening the leash these days when it comes to sales reps who are not at quota. I know of companies who used to keep non-performing salespeople for six months or longer, and today they’ll drop the same people in less than 60 days.

5. Lowered competitiveness. A salesperson who is an employee of a company can only represent that company, and therefore must continually battle the competition.

6. Higher taxes. 9 times out of 10, an employee will pay higher income tax rates than a self-employed commissioned agent who has consulted with a good accountant and structured his or her operation for maximum tax advantages.

Straight Commission

Now, let’s take a look at the advantages and disadvantages of working as a straight-commission salesperson:

Advantages:

1. Higher overall opportunity. A straight commission opportunity almost always pays a drastically higher commission rate than the same position paying salary + commission. When I was faced with the decision to take the plunge that first time, at first I was terrified at the thought of not having a steady paycheck. However, after I sat down with a calculator, I realized I couldn’t lose. The commission rate was so high that only one sale would pay as much as I made every month in salary, and making only one sale in a month at that particular job didn’t take much. In the end, I quadrupled my income by switching to commission only, even though I wasn’t selling any more than I had before.

2. Freedom. This one can be a double-edged sword. I always hated going into an office and trying to work in an environment in which I wasn’t all that comfortable and that was full of distractions. I’ve always gotten far more accomplished working from home. However, this isn’t the case for everyone, especially those of you with families. (If working from home won’t work, executives suites are plentiful and inexpensive.) In addition to the home office, you have the freedom to structure your time as you see fit. This is why it’s a double-edge sword – some people don’t have the discipline to make this work. But if you do, you can be FAR more productive than the person who must stick with the company’s plan.

3. More productivity. Going back to the advantage of freedom, without mandatory meetings, forecasts, cold call blitzes, and the other many activities that are usually required for regular salaried salespeople, you have a lot more time to sell. Just the time spent commuting will free up at least an hour each day for most people.

4. More competitive. As an agent, you can sell whatever you want for whoever you want. As I said earlier, an independent agent representing every company in his or her respective industry need not fear competition.

5. Lower taxes. If you consult with a good accountant, you’ll almost always pay less in taxes than a salaried employee.

Disadvantages:

1. No financial guarantees. If you’re on straight commission and you sell nothing, you earn nothing. Zero sales means no paycheck and low sales means a very small paycheck. This is the trade-off for getting the high commission rate. If you don’t sell, you don’t eat.

2. Freedom. I added this to the list of disadvantages as well as advantages because, as I said earlier, many people have not yet developed the self-discipline to “be their own boss” and as such, they wind up in the situation described in the previous paragraph.

3. Higher expenses. You won’t be reimbursed for mileage, cell phone allowance, and all of the other costs, including ones you might not think of. Agents are generally required to carry a business insurance policy, and my first straight-commission job required me to carry one million dollars in auto liability insurance. It not only took me weeks just to find a company offering such high limits, but also wound up costing over $400/month. (The flip side is that, if you’ve structured things properly, all these expenses are also tax deductions, including part of your rent or house payment as a home office deduction.)

4. The Government. You’ll need to file paperwork to form a business entity, you’ll probably need to get at least one or more licenses or permits, and you’ll need to be meticulous about having all your
necessary tax deposits and paperwork in on time if you don’t want to get into trouble.

5. Questionable security. Just like with a regular job, the company you represent may decide to drop it’s agent program, they can terminate you without cause, or they may go bankrupt at any time. Unlike a regular employee, you won’t have any severance pay or other compensation coming to you if any of these things happen.

Conclusion

As I stated earlier, I’m in favor of working on straight commission. I made far more money doing that than I ever did at a regular job, and I enjoyed it a thousand times more because the freedom it offered fit perfectly with my independent personality.

So I really can’t give a “yes” or “no” answer to all the people who write in asking, “I’m having difficulty finding a regular salary + commission job, but I’ve been offered this straight commission opportunity – should I take it?” It really depends on yourself and your requirements. Hopefully the information in this artcile will give you some guidance and has brought up some points you may not have thought about in making your own decision.

New York Times best-selling author, Frank Rumbauskas is a sales trainer and consultant focusing on training salespeople and teams on how to institute sophisticated prospecting and marketing strategies.  His NYT best-selling book, Never Cold Call Again, and his second book, Selling Sucks, show salespeople how to they can capitalize on marketing methods designed to reduce prospect resistance and open doors that traditional marketing methods can’t.  Frank’s website is http://www.frankrumbauskas.com.