Sales commissions

loaders

loaders

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Feb 26, 2008
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I would like to pose a question regarding sales commissions. We have a couple of sales people who are paid a base salary and a commission (a percentage of the profit on each of their customers shipments). I have had conflicting advice about how long they should receive their commission. Some have suggested a diminishing scale, i.e. 100% first 2 years, 50% next two years, eventually to 0 and the customer becomes a "house account". Others, probably former sales people, argue that the commission should go on in perpetuity. The argument can be made that once a sales person reaches a certain "comfort" level, their incentive to develop new business will decline. I would be interested to hear how others handle this situation.
 
This is (or will be) a topic that will split the sales and operations people right down the middle. The question Loaders you need to ask yourself is "how do you want to run YOUR business?" (The quickest way to get rid of sales reps is start messing with their renumeration).

Pulling commission away from a sales rep after a certain amount of time is a COMPANY philosophy to keep the rep seeking new revenue/accounts and keeps them from becoming "comfortable" and keeps the company growing. However, it can cause animosity and territorrial fueds leading to the rep leaving the company and taking those accounts with them anyway and the company then doesn't get any of the revenue.

Keeping the commissions with the rep indefinitely is a SALES philosophy that ensures the account stays with the company because the rep maintains/looks after them because they don't want to lose the commission. However this does cause the rep to become comfortable with a certain level of income whereby they stop producing and the company doesn't grow but merely maintains a certain level.

I will go out on a limb here and say that any good rep with good accounts will only work for a company that pays them commission indefinitely as these are viewed as "their" accounts. The exception to this is where the salary is very high and the rep understands that they are getting paid a good wage every pay day regardless if "their" accounts shipped that week and are held accountable to management to continue to produce.

A very easy solution is to have the commission kick in on all accounts indefinitely only AFTER their salaries are covered. This way the sales reps are always covering their costs to the company. If they fall below this threshold continually you know you will need to replace that individual but it keeps them "hungry" to secure more business.

There are numerous other views that one could write but there are TONS of books on this issue. Find the one that fits with your corporate philosophies and go with that one.
 
We have a hybrid strategy

We do a base plus commission. In the first year they bring on a customer they get a high commission per load. After that it diminishes, but never stops. They always get some benefit for keeping the account.

PS -I've recently seen adds in the US where the brokerage is offering 80% commission, paid in 7 days to attract agents. They have a mission to get it up to 90%. I don't know how they do it!
 
Thanks to Pablo and Packrat for your replies. I agree Packrat, that it is really an indication of the company culture as to which method is applied. What prompted my query was a question from our accountant as he prepared our year-end financials. I have always had a bit of a socialist streak in me and like to see my employees rewarded and share in the company's success. As a result, I believe I will continue with the "in perpetuity" plan. Then again, these musings could simply be caused by the re-appearance of the sun on a rather slow, Friday afternoon and the introspections one has on their birthday.
 
The right question to ask is...What are you getting in return for your money? Does the salesperson really provide value AFTER the sale? If so, then by all means continue paying the commission. Otherwise you're simply blowing your money and making your sales people lazy. Ever tried to get a hold of a sales person on a Friday afternoon? Bingo. Many companies feel beholden to sales people and fear that their accounts walk if the sales person does. The best remedy to that is for other people at the brokerage/carrier to become directly involved with the account.

If you're going to pay a commission in perpetuity, then make that sales person responsible for covering the orders..sure...make him/her WORK for that commission check...and work doesn't involve chatting up the account..it means arranging trucks for pickup, dealing with claims, and solving the customers' problems.
 
You're correct FreightBroker, and that is exactly what we are starting to do. Kind of a "womb to tomb" program where the sales rep is more than just a vehicle to acquire new business. Surprisingly, there has been very little resistance to this new plan and in fact the sales reps feel more empowered and involved in the company's overall operation.
 
I am glad that the system is working and hope it continues...BUT...I am not sure that I entirely agree with you FreightBroker. If the Sales Rep has to secure new business AND do all the operations that what do you need operations people for? I would like to put the caveat on it that they need to be involved in all aspects of the customer retention process. But the sales reps job is to get and maintain business. As long as the customer continues to give you business and the sales rep is involved they deserve the commission. And if you make the sales rep responsible for moving the freight also...then is the operations person who is supposed to be doing that going out and making sales calls and securing new business? I find it very interesting when people start to comment on what a sales person's responsbilities are AFTER they have secured new business and helped grow their company. If a sales rep is profitable and more than contributes to the value of the company....leave them alone to do what they do best...SELL!
 
Hey ... I am a salesperson and definitely believe that commissions are paid in perpetuity. There is no way that one can maintain and grow a book of business by bringing in the client and walking away from it. The salesperson has to stay entrenched ... but booking the trucks, micromanaging etc ... for the most part no. I think in produce it is necessary though.

A salesperson's job is to keep abreast of how the industry is doing and what it means for the relationship between the company and its clients (who by and large do move with the salespeople, albeit not always immediately). The salesperson then tailors the solutions around this.

When a salesperson is established with a solid book, a good salesperson will not stop calling on new business but will be more selective of which business he/she pursues. It's as much a benefit for the employer than him/herself.

As far as being reachable, I can tell you that I am ALWAYS reachable, not just M-F 8-5 ... that's what a Blackberry is for. A good salesperson NEVER closes for business. But we don't chain ourselves to our desks either. The only time I don't answer is when I am in a situation where it is inappropriate for me to do so (ie when I am with a customer). When you are with a customer, regardless of in person, on the phone, or in email, that customer deserves your full attention at the time -- not divided between other parties. Customers need to feel important.

I'm not saying that there are not lazy salespeople out there who bring it and leave it ... or are unreachable, that sort of thing. I'd say the majority do ... but this is what seperates the sales leaders from the mediocre ones. I'd say in all honesty that 80% of those who call themselves salespeople, no matter what the industry, can be like this, and it shows in their paychecks ultimately.
 
oy... I don't want to even get started with this (but I'm going to (and will try to be brief)). There are way too many sides.

As a carrier or broker you almost have to treat each sales rep individually as (in my opinion) it's tough to paint them all with the same brush. As their clientele is as unique as the rep (some are high maintenance, some not so much).

Bottom line...

Bad sales reps... drift from company to company looking for the never ending cash cow and cushy gig. They fool carriers and brokers in the short term (they're salespersons after all).

Good sales reps are coveted by the companies they represent and there fore should be fairly compensated for what they bring to that company.

Just my couple of pennies...
 
No question, they should be fairly treated and compensated. But they shouldn't be paid a commission just because eons ago they got the account. The operations people have something to do with customer retention, thus perhaps they should be getting at least part of the sales commission (which would more aptly be called the retention commission).

Maybe the best way to go about it is to pair ops people up with sales people...if an order moves they split the commission.

Commissions for sales people are problematic when the ops people are on straight salary. I used to work for a brokerage that regularly lost the business I brought in because the ops people just didn't care about my freight...
 
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Wow, great points offered by many members! There is no question that both sales and operations staff should be treated and compensated fairly.
As salaried employees, operational staff are paid the same amount regardless if sales are up or down, busy week or slow. Sales staff however can suffer during periods of slow economic growth like we have witnessed recently. As was mentioned earlier, the decision to pay sales commissions in perpetuity is up to the owner. I believe that by involving our sales people in the operational side of the business, we enhance their knowledge and ability to sell our service to new customers. As well, they become more valuable to the company as better equipped employees. Certainly these decisions are easier if the company has just a few employees such as mine.
 
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I agree with loaders. It's a big mistake for salespeople not to be at least engaged and in the loop with ops ... but micromanaging it, no. Once you do that as a salesperson, you get stuck in a rut and your effectiveness in driving income is diminished.

I actually fully believe in performance based compensation as a whole -- meaning that everyone has a benefit from going that extra mile sort of thing.

Salespeople generally have a higher risk tolerance than ops people particularly in transporatation ... and with that risk, there is higher return, but yes ... bigger fluctuations. Don't get me started.

Even if you're salary plus on a sales job, it's a big deal. If it's not, then you're either not doing your job or you're at the wrong place.

As far as ops people not caring about a salesperson's freight, a few reasons why that would happen:
a) Freight doesn't fit the strength of the particular 3PL
b) Lack of respect -- and this is a mutual thing -- treat the ops people with respect and you'll get it back. You have to empower ops to handle the day-to-day, if you tie their hands behind their backs, they won't support you.
c) Company culture -- in some companies the culture from the top creates an unfortunate animosity between ops and sales.

I've been on both sides of the fence. I spent 7 years in ops before jumping to sales. I finally decided that the reward was worth the risk. I would never turn back.
 
I've been in sales most of my life... straight commission, salary plus commission, tiered commissions on accounts, you name it. The most effective I found was a fair base salary with a good commission percentage.

I currently have this with my sales staff now.

set base salary
set commission of 30 % of revenue

For operations, I have bonuses when the company reaches a certain revenue figure each month.

This keeps both parties focused on making as much money as possible and for which they are rewarded.

I don't believe a sales person's commissions should ever be taken away from them on an account..that's part of sales. I also do not believe operations should get paid for these sales as it was not their job to take the risk and land the client. They get bonuses for keeping the numbers up on their end, which means the sales persons clients need to be shipping. I also increase the revenue figure slightly every 6 months.

My reasoning for 30 % commission on revenue is also simple as I see some other numbers which are extremely high.
1 ) I am taking the risks if the client doesn't pay or goes bankrupt.
2 ) I float the invoices till they are paid which could be 15 - 60 days
3) The sales person is paid a base salary which comes out of the remaining 70 % of the revenue.


Let me know your thoughts.... I did like the idea someone had about getting paid commissions only after they exceeded their salary. Problem I can see with that for many sales people is they would want a high salary and probably wouldn't exceed that for some time.
 
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30% of revenue, how does this work in todays market when carriers are scrambling to make 2%?
 
Ok thanks for the clairification - 30% of the net profit, how would you determine the net profit on LTL freight that has been handled by 2 drivers and 1 dock worker? This is difficult to track the actual profit made, so would you suggest 2-4% on the amount billed? And what about this salary? $ 200 per week?
 
Simple.....it costs the company for example, $400 to complete the LTL shipment (broker or carrier). The customer gets invoiced $500.00. The net profit is $100.00 of which the sales person gets 30% = $30.00. If you do not have a good grasp of what your costs are for each and every movement you do, then you're a long way yet from worrying about paying your sales staff.
 
Thanks for the reply, I know what our costs are or should be, its just that we have been approached by some independant outside sales force....we have never used this type of service before therefore just trying to get feedback from others.
 
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