Sales jobs and performance-related pay are linked due to the performance-oriented nature of a salesman's job and the need for incentives. Sales managers and salespeople alike should understand the different methods of instituting a performance-driven payment system. There are many ways to compensate salespeople, and understanding them will ensure that everyone knows how to function within a given payment system.
A straight commission pay system is the most straightforward type of performance-related pay. Under this system, a salesperson earns a percentage of her sales volume without a hourly wage or a salary to fall back on. This system is advantageous for the company as salespeople are only compensated when they perform, but it can cause stress for new salespeople developing their skills or for sales associates who do not budget for slow months or dips in performance.
Draw Versus Commission
Under a draw system, a salesperson is paid an hourly wage or a salary and is given a sales goal. That wage or salary is essentially his baseline pay and is viewed as an advance on that month's commissions. Once the salesperson's commission exceeds his baseline salary, he will earn commission pay in addition to his wage or salary since he met his draw. If he does not meet his monthly sales expectation, he will only receive his baseline pay for the month. This program helps salespeople deal with the pay fluctuations that are inherent in commissioned sales.
Base Plus Commission
Experienced salespeople with a proven track record of sales success can often command a base plus commission type of pay. This system functions similar to the draw versus commission system. Under the base plus commission system, however, the salesperson is not working against a draw before earning additional commission. The salesperson under the base plus commission system is paid a base salary each month, plus a commission on top of that for any sales made. This system requires the salesperson to meet predetermined sales goals, as the base salary is prorated into her expected sales by management, and poor performance eats into the company's profitability.
At the end of the fiscal year, some companies choose to reward salespeople with year-end bonuses if they reach their sales goals, and maybe even an additional bonus if they meet a higher sales number. This is called a stretch bonus. These bonuses can be given in a fixed dollar amount or as a percentage of overall sales.
SPIFs, also known as sales promotion incentive funds, are used by managers to give a small monetary bonus to sales associates for selling a particular item. SPIFs can be used in retail environments to encourage sales associates to sell items that they would otherwise not show, or can be used to add incentive to sales associates to clear out sale items that they would otherwise overlook due to the lower commission these discounted items earn them. Brand representatives often use SPIFs during in-store promotional events to encourage salespeople to focus on their brand over products from similar companies.