Revenue Generators – Follow-up on Putting it on the Line


Tim J. Smith, PhD
Founder and CEO, Wiglaf Pricing

Published August 1, 2002

Earlier this month, we examined compensation packages for revenue generators. In regards to compensation plans in which sales people put 100% of their pay at risk, we asked: (1) is 100% incentive based pay a sound strategy? and (2) is it practiced? The results of our reader survey and interviewing have arrived. (See Revenue Generators)

Unfortunately, the survey response level was to low to provide a statistical sample. Readers and interview subjects did respond however with a high level of input regarding compensation strategies to provide for the basis of a strong qualitative study. From their comments, we are able to gain an understanding of the industries that use 100% incentive based pay and significant hidden costs within these compensation plans.

First, did anyone take 100% incentive based pay? Yes. As a means to make cash in this recessionary time, I did come across one individual doing work for 100% incentive pay with zero draw. This individual added that she would drop this arrangement once a better job was found.

Other people work with a 100% commission structure but they added that they have a draw. The draw, for non-salespeople, is a guaranteed minimum level of pay, handled somewhat like a credit account. When the salesperson is creating revenue, they are paid completely based upon commissions. When commissions are low, they receive a draw. Once the commission pay is greater than the draw, these individuals usually pay back the house (company) until their account is in the black. Once they are in the black, they relinquish their draw and return to 100% commissions.

These 100% commission structures can be costly for the firm. Results from this research found commissions reaching 30% of the revenue earned. This would imply fully loaded costs near 45% of net income. While this may sound like a high cost-of-sales, we should note that other industries outside of technology have similarly high commission structures, for instance Art Galleries routinely take 30% to 50% commissions and boutique stores often use 100% mark-ups.

Hidden costs within 100% commission based pay structures are in the salesperson turnover of the firm. People added that when their expected level of commissions is not achieved, they often search for new opportunities. This can increase the cost-of-sales even further as new sales people take longer to reach their optimum performance level.

While some individuals are willing to take 100% commission jobs, many are not. Many subjects surveyed expect a significant base pay in their compensation package or an equity position if the company is at the entrepreneurial stage.

The most insightful result of this qualitative research is regards to understanding the determinant factors that incline salespeople and companies toward 100% incentive based pay. Salespeople selling products and services that require long sales cycles, or salespeople using complex approaches such as Solution and Value Added selling, are most resistant to taking 100% commission based structures. While salespeople selling products and services on a more Transactional basis are far more open to 100% commission based structures.

Transactional selling is often associated with commodity sales where price is a key factor. In a Transactional sale, the prospect is usually familiar with the product category, has a preconceived notion of the benefits, and selects according to availability, costs, and relationship. Often, the purchaser has identified their goals and is looking for a transaction that will facilitate their achievement. The selling/purchasing cycle in transactional sales is often short. While some of the features of the product may require explanation, usually this discussion can be completed in a single face-to-face or telephone conversation. The decision to purchase is sometimes made during the discussion and usually made within a few weeks. Therefore, 100% commissions for Transactional selling are strongly aligned with the hustle factor of the salespeople. Their actions can directly affect their pay and the revenue of the firm. Also, very few outside resources are required to complete the sale. Their role is to facilitate a transaction in short order.

Solution and Value-Added selling is often associated with complex products or services where the benefits are more important than the price. Expensive goods and revolutionary products/services often require a Solution and Value-Added sales approach. In this more complex sale, most prospects may be unfamiliar with the value offering and may require education to understand the benefits and values before purchasing the product or service. If the value offering comes from a break-through technology, predicting the benefits from the product or service requires a re-thinking of multiple business processes. Often, the sales cycle is long, from a low of two months, reaching to three years and longer. Sustaining a sales-process with a single prospect for a long time is also accompanied with other strategies and tactics, such as team selling, proposal writing, and firm level activities. Therefore, base pay requirements are seen in complex selling environments because the results of a salesperson’s actions may not be observable for many months or may be dependent upon the collective action of the sales team or entire company.

While this research did elucidate some of the issues in compensations structures, areas for further research include questions of the quality of the firm standing behind the pay structure and issues of equity and pay within firms at the entrepreneurial stage. We can suspect that either high-quality firms or an equity component to compensation would encourage salespeople to put larger portions of their annual salary at risk.

As a conclusion to this examination of compensation packages, we can determine that 100% incentive compensation plans for sales people do happen, but within a limited number of product/service categories related to transactional sales and with commissions/cost structures that can be quite significant as a portion of revenue.

The May Report, TECH BUSINESS BRIEFS, Aug 1, 2002

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About The Author

Tim J. Smith, PhD, is the founder and CEO of Wiglaf Pricing, an Adjunct Professor of Marketing and Economics at DePaul University, and the author of Pricing Done Right (Wiley 2016) and Pricing Strategy (Cengage 2012). At Wiglaf Pricing, Tim leads client engagements. Smith’s popular business book, Pricing Done Right: The Pricing Framework Proven Successful by the World’s Most Profitable Companies, was noted by Dennis Stone, CEO of Overhead Door Corp, as "Essential reading… While many books cover the concepts of pricing, Pricing Done Right goes the additional step of applying the concepts in the real world." Tim’s textbook, Pricing Strategy: Setting Price Levels, Managing Price Discounts, & Establishing Price Structures, has been described by independent reviewers as “the most comprehensive pricing strategy book” on the market. As well as serving as the Academic Advisor to the Professional Pricing Society’s Certified Pricing Professional program, Tim is a member of the American Marketing Association and American Physical Society. He holds a BS in Physics and Chemistry from Southern Methodist University, a BA in Mathematics from Southern Methodist University, a PhD in Physical Chemistry from the University of Chicago, and an MBA with high honors in Strategy and Marketing from the University of Chicago GSB.