Definitions of and suggestions for eight types of sales compensation packages
If your initial offer isn’t big enough and you’re in sales, instead of negotiating more salary, you can negotiate a bigger salary package. Here are some of the more common combinations:
- straight commission
- variable commission
- draw against commission
- advance against commission
- base plus commission
- salary and bonus
- residual commision
I will define them here and discuss the rationale behind each package:
Sometimes straight-commission jobs are the bottom of the sales barrel – the company isn’t willing to invest anything in you. Sink or swim. Good luck. On the other hand, a straight commission puts your income in your control. On straight commission, your compensation is strictly a percentage of your sales. To many people that arrangement seems like the most risky, but it’s actually the purist compensation. If you sell well, you’re safe; no one will fire you. If you sell great, you’re not only secure, you can practically write your own ticket.
Bottom line, every job is “straight commission” of a sort. If you don’t bring in more than they’re paying you – you’re fired. Draws and advances are not gifts; they come out of your sales. They simply represent payment ahead of time of a portion of your future earnings. If you don’t sell, you’re no more secure on salary than on commission.
The best salespeople love straight commission because they know they get every dollar that’s coming to them and that their income is entirely in their control. However, straight commission is not practical if you can’t make sales right away. When the sales cycle is lengthy, straight commission is ordinarily not workable.
Negotiating tip: See if you can get the commission percentage increased or tiered (increased at certain intervals of sales).
Same as straight commission, but the rate goes up or down depending on sales circumstances. You might be paid a higher commission on new accounts, on larger sales or on total volume over a certain amount.
Negotiating tip: An increase in commission rate for top performance can be very lucrative and motivating.
Draw against commission
Also straight commission, except the employer lets you draw a certain amount of money each pay period to help you get started. So if you have a $3,000 draw and you make only $2,000 in commissions, you would get a check for $3,000 and pay the company $1,000 back out of future earnings. Most draws are “forgivable,” which means that if the job isn’t working out you could quit and not have to pay back any money you owed the company. Draws may last indefinitely or for a specified number of weeks or months, and the draw itself may be reduced or increased over time.
Negotiating tip: Do check this out, and negotiate it as “no payback” if you can.
Advance against commission
Like a draw, but it is normally an occasional, rather than a continual, event. It usually will not exceed the amount of commissions already earned.
Negotiating tip: Try to get an advance if they’re not willing to give you a base and you need more money to cover your life expenses while on the job.
Base plus commission
This is the same as ‘salary plus commission.’ Here the company pays you a certain salary, called your base. That’s yours to keep and rely on. Above that, the company gives you a commission according to a mutually agreed-upon formula. Most sales groups use this combination. The longer the sales cycle, the higher the base needs to be.
Negotiating tip: Base salary first, then commission rates and tiers.
Some sales jobs pay a straight salary; no commission. These jobs almost always come with bonuses. If not, you can try to negotiate one. Some companies like to advertise “no pressure – our sales people are not on commission, they are there to help you.” As referenced above, all sales jobs – all jobs for that matter – are ultimately straight commission. So a salary may take the pressure off any individual sale, but rest assured you have to earn your keep.
Negotiating tip: Follow the normal salary negotiating rules.
Salary and bonus
A bonus is a one-time payment of a fixed amount of money for achieving a certain volume of sales. It could be a weekly, monthly, quarterly or even annual bonus — or a bonus that automatically kicks in when you reach your goal.
Negotiating tip: Bonuses usually have to be uniform across the sales force, but you can still try to negotiate it higher – there’s nothing to lose in asking.
This is a type of commission that keeps on paying even if you quit the company. In insurance sales, for instance, after you’ve been with the company for a certain length of time, you’re entitled, for a period of time, to a commission on the payments clients make to the policies you sold them whether or not you work for the company any longer.
When your sales work involves a lot of new-account generation, you would be wise to negotiate a residual commission on those new accounts. The justification here is that the reward for selling the account belongs to you; after you leave and the account is maintained, a portion of the income should still be yours for a while.
Negotiating tip: Negotiate both the commission rate and the duration.
Watch out! Don’t get cheated out of your commissions when you leave. One of the most common, but avoidable, misfortunes in negotiating sales commissions is not being clear about what happens when you leave the company.
Whatever your commission structure is, make sure you get clear exactly how commissions and pay are handled when you leave the company.
What sales do you get paid on, and when is the payment due? Often, commissions are payable when the client pays, not when the client is billed. Those payments may lag several months after the sale is made. Get it in writing now, when you begin. You don’t want to fight this battle when you’re gone; you’d lose.
So, when the salary isn’t good enough, negotiate a draw, a bump in commission, a performance bonus or residuals. There are lots of ways to sweeten an offer.