Louise Ross CIMA technical expert
Simon Dolan Serial entrepreneur
Q:

What percentage of a salesperson’s pay should come from bonuses? Our new CEO says low salaries with big bonuses are cost effective and productive. I’m sceptical. What’s the best balance?

A: CIMA

The best balance would be what your company needs to attract and retain talent – and encourage the behaviour you want from your salesperson.

That second point is important – bonuses should be designed so that they do not encourage sales that are not profitable, or sales recorded in one period that are then “cancelled” by a colluding customer in the next.

An effective bonus scheme makes it clear what your sales team should be focusing on and ensures they are working towards the same goals. It rewards performance, so provides the incentive for poorer performers to“up their game”.

A bonus scheme that rewards behaviour that generates increased profitability is paid for out of those results. In that sense it’s never a drain on the company’s resources.

Conversely, if the sales force is paid a relatively high base salary and a smaller bonus, those individuals represent a high, fixed cost in tough times.

This makes their jobs more insecure. Obviously, the base salary should not be so low that an individual experiences difficulties in, for example, getting a mortgage.

But I think many sales professionals have the personality type that accepts the greater insecurity that goes with a high bonus culture.

Bonuses vary widely by industry and by type of customer (industrial, consumer etc). In some industry sectors virtually all companies will pay bonuses, but those might vary from five per cent to 50 per cent.

I suppose a super salesperson who was highly motivated by bonuses would be attracted to those sectors or companies who paid the most generous bonuses – and one who was a great salesperson, but appreciated a bit more security would be attracted to companies whose base salary was higher.

Which brings me back to my opening sentence – bonuses should help you retain talent and encourage behaviour that generates profit.

A: Simon

I think that the low salary and high bonus model is neither cost effective nor productive – it is merely a lazy way of recruiting people.

Assuming you have found the very best salesperson you could, why would you want to pay a high bonus?

The very best people will achieve the greatest sales and therefore cost you the most money. They are also less motivated by money and more by the desire to simply do a great job – to attract these people you therefore need a high starting salary.

Why? Because they can demand it in the marketplace owing to their excellent, proven credentials.

Contrast this with the low salary/high bonus solution. People willing to take a low salary evidently can’t find a job paying a higher salary – there is a reason for this.

It may be a lack of experience or ability, but either one means that the likelihood of success is very low. You only need to look at the calibre of commission-only sales jobs out there to see evidence of this.

Some of those models work well, of course, but in very specific markets, and certainly not a professional sector. The logic is, of course, that by paying a low salary you are protecting the downside, ie if it doesn’t work out you can always get rid of them and have lost very little.

This is an erroneous belief – it is very expensive to recruit, train and equip new staff, so the real cost of employment in the first couple of months is far greater than the low salary you are looking at.

The most cost-effective and productive solution is to get the recruitment right in the first place, and offer a high salary and a modest bonus.

Simon Dolan, 41, is a serial entrepreneur best known for founding SJD Accountancy, which has more than 10,000 clients. His empire includes holdings in financial services, aviation, publishing and motor racing.

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