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There has always been controversy in the business world over whether sales personnel should receive high base salaries or high commissions, and in practice, different companies adopt different approaches.
In managing a sales team, designing a compensation system for sales personnel is a headache that has long troubled many managers. The debate over high base salary versus high commission continues, and actual practices vary among companies.
So, should sales personnel have high base salaries or high commissions? Let's first look at current practices, which mainly include the following:
No base salary, high commission: For example, life insurance companies in previous years. Sales staff received a small base salary for the first three months, but after becoming regular salespeople, they had no base salary and only earned commissions. This led to significant income disparities among insurance salespeople. The advantage of this system is that it allows effective cost management and maximizes the salespeople's initiative. The disadvantages are difficulty in recruiting, low loyalty, and high turnover rates, requiring continuous recruitment and training of new staff, which demands high training capabilities that not all small and medium-sized enterprises can afford.
High base salary, low commission: This system is commonly used by project-based enterprises. Sales in project-based companies involve long negotiation cycles, ranging from months to years, making it hard to retain staff with low base salaries and high commissions. Therefore, retention relies on high base salaries. For instance, software companies engaged in custom software development have a lengthy process from initial client contact to closing a deal, with a long period spent on relationship building without generating revenue. Thus, high base salaries are needed to maintain staff stability; otherwise, if staff leave, the clients they managed may also defect to competitors. The advantages of this system are low turnover and high stability, while the disadvantages are lack of quantitative assessment criteria, higher costs, and a tendency to support non-performing staff, which does not stimulate salespeople's initiative.
Low base salary, low commission: Companies adopting this approach often lack proper business philosophy and struggle to succeed. They are reluctant to pay high salaries to attract top talent, so they hire people who have difficulty finding jobs with low base salaries. These individuals accept low commissions because they don't intend to earn commissions and rely mainly on their base salary. This approach may seem cost-saving but is actually wasteful. High-performing individuals, despite higher salaries, generate high sales and are profitable for the company, which is not guaranteed with low-ability staff. Therefore, this method is not advisable.
High base salary, high commission: This is relatively rare in practice. Such companies may perform well in the short term, but profitability could be a problem, as the company has other departments with expenses besides sales. Overall costs are likely to exceed budgets, so this approach may only be a temporary measure.
In addition to the above, small and medium-sized enterprises often use a moderate base salary plus moderate commission approach. The base salary is sufficient to retain staff, and commissions serve as bonuses. This seems like a good method, but it may also have issues, which we will analyze in detail below.
Let's first examine commissions. From an assessment perspective, bonuses are based on performance, which is a result. It does not consider how many clients the salesperson visited or how much effort they put in; it only looks at the outcome. Multiplying performance by the commission rate gives the bonus. This seems fair: those with ability earn more commission, while those without earn less or none. However, assessing solely on results has problems. The reason is that many small and medium-sized enterprises are newly established startups whose business models may not yet be validated by the market. Whether the product has a market is unknown. If salespeople have made efforts and created sales opportunities but failed to close deals due to product quality issues or failure to meet customer needs, then it is unfair to deny them commissions because they have no performance. Therefore, assessing only performance for commissions without a base salary is inappropriate for small and medium-sized enterprises.
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