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Aug 17
2012

Does Capping Commission Make Sense?

Posted by: Steve Marr

Tagged in: Untagged 

A business owner asked me how he could cap the commission he paid his best sales person. The concern was that this salesperson was going to make more than the owner. The business made around $10 million in sales and employed 6 salespeople who received a commission of 9% of gross sales. The “star” sold $3 million, earning $270,000, a high salary. The next best salesperson earned just over $100,000 while others earned between $60,000 and $75,000 per year. 

 

My first question was “Why do you want to cap commissions?”  The owner explained that he didn’t believe that staff should make more than he did as the CEO.

I told him that one of two things would happen if he put a ceiling on commission:  either his star salesperson would consider different options, or would simply slow down sales to stay near the cap. After all, there is no reason to  work harder for the same reward.

The company was earning a 22% margin after sales expenses. I pointed out the star was bringing $660,000 to the bottom line after commission. My thought was that the more sales, the better; even with the commission.

A key element for any business is to understand what it costs to make a sale. Sales’ costs may include salaries, staff commissions, advertising, and marketing. For example, an Internet merchant may have a 25% profit margin. They can afford to pay 20% or more in Internet advertising and still make a profit.  You wouldn’t want to place a maximum commission on Google, right? The key is to increase sales at a cost that generates a profit.

I told the owner that he increased his net value as a result of the increased sales. Why should he limit sales?  It is better to see $4 million in sales and increased profit to the business than to cap commissions.

King Solomon wrote “A worker's appetite works for him, for his hunger urges him on.” (Proverbs 16:26, NASB)  Workers respond to motivation. Remove the motivation to earn commission, and the hunger departs. The result is that your sales staff gets stagnant.

Instead of restricting the leading salesperson, have him work with the rest of the sales force to share his methods.  Consider paying this person a bonus for teaching others how to succeed. Since the business was already profitable, profit will only increase as other sales personnel improve.

Steve Marr, Your Christian Business Coach

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Comments (3)add comment

Chuck Nielsen said:

...
Steve, thanks for another insightful article. Even though I'm looking at it from a different angle, you have helped me see where I can simplify the way we pay salespeople and mathmatically be more sound.
Chuck
 
August 17, 2012
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