High Base Salary & Low Commissions vs. Low Base Salary & High Commissions
A common line of thought among most companies is, “I want to pay for performance”. Meanwhile, almost every candidate for any given job is thinking, “I need a higher base salary. I have bills to pay.” So, who is correct in their thinking?
In my opinion, there is no winner here, and both the companies and candidates are justified in their thoughts. What I believe to be most important here is that they both try and see things from each other’s perspective. This opinion stems from my experience of having been both a salesperson, and a business owner. I can absolutely see both sides.
The Hiring Manager’s Perspective
Too many business owners wrestle with a fear of paying a high base salary. This likely originates from a belief that if they pay a higher rate, their salespeople won’t be incentivized to sell. Ultimately, they lean towards the decision to pay a salesperson higher commissions, as it brings their interests into alignment. Simply put, if the salesperson makes more money, then so does the business owner. Additionally, the owner doesn’t have to be concerned with the possibility of losing a lot of money on a salesperson.
As an example, if the owner is paying a $100,000 base salary, and the salesperson doesn’t sell anything for 90 days, they’re losing $25,000. This loss is in addition to the cost of benefits, overhead, technology, travel, etc. In the end, this is close to a $35,000 loss.
The Salesperson’s Perspective
The perspective of the salesperson is obviously quite different. They have bills, school loans, children, a mortgage, etc. Good luck paying all of that on a $40,000 base salary. Many hiring managers do not understand that salespeople have been “tricked” so many times over the years that companies have lost credibility.
Companies will tell salespeople all of the time, “You’ll make $125,000 in your first year.” Ultimately, the salesperson comes to discover that this is completely unrealistic. The effect of this “trick” down the line is that salespeople become much more skeptical, which is important for companies to realize.
First and foremost, I always believe in talking it out. If a company is offering a lower base salary, they should always explain why, and provide the salesperson concrete numbers. For example, telling a salesperson, “I have 10 salespeople on this team all on the same commission structure. I ran the reporting, and 8 of them made over $100,000 in their first year” is a lot more powerful than saying, “We expect you to make $100,000 in the first year.” Providing this explanation is far more effective than giving them a pie in the sky number that you think they can hit, with absolutely no data to support it.
If you’re a salesperson, be clear and explain why you need a higher base salary. Without this explanation, many hiring managers start to think that you don’t believe in your sales ability, which you know isn’t the case. Instead, explain that you can’t pay your basic bills. The base salary won’t make you feel “comfortable,” as many hiring managers seem to think. In actuality, it allows you to know you have a home to live in at the very least.
Of course, there is always room for compromise. As a hiring manager, you can explain to your candidate, “You want a $70,000 base salary, and I was thinking something closer to $50,000. Why don’t we agree on $60,000, and I’ll guarantee you a minimum of $5,000 in commission over your first 3 months? In other words, even if you don’t sell anything, I’ll still write you a $5,000 check as long as you are averaging at least 2 appointments per week.”
This approach is what’s known as a non-recoverable draw, and it tends to work quite well. The benefit being that it affords your salesperson the ability to learn the product and build the pipeline over the first 3 months, after which they’re going to have to produce.
A common understanding, open dialog, and considering the other perspective is all critical to making these salary negotiations successful for both parties involved. Without these pieces, either the hiring manager or the salesperson will walk away feeling like they aren’t satisfied with the outcome.