Incentive-based Compensation

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    Many startup businesses set up incentive or commission-based compensation systems for their initial employees. This is often done because they can’t afford to pay staff what they’re worth. As an enticement they offer the opportunity to earn much more than a smallish base salary if these early staff achieve great success. This is common in the for-profit world, for business managers and sales staff; and today many nonprofits or hybrid organizations are exploring this kind of compensation also, mostly for the same reasons.

    We tend to get two questions about incentives: Do they work? What percentage?

    First, yes, financial incentives work. Offer to pay someone extra if certain results are achieved, and they will go the extra mile to accomplish those results. But only if those results are achievable and clearly, verifiably and consistently measured, if the people offered the incentives have the right skills, and if the rewards are commensurate with the level of effort required. Otherwise – and this happens many times — people get motivated to do the wrong things (sales staff argue about accounting issues and who gets credit for the sale), or they get set up for failure (it’s too difficult to hit targets so they become resentful). So if you use incentives, define your targets carefully and use them with people and situations where there is a reasonable opportunity to succeed. Otherwise you’ll waste money and poison the well, both problems startup business cannot afford.

    Secondly, it can be equally challenging to figure out what percentage to pay. Many questions need to be addressed first. What’s your profit margin? How hard is to get a sale? Does the product mostly sell itself or is the sales person the key to success? What do other companies selling similar products pay their sales staff? In most cases, sales commissions are based on sales rather than profits, in part because sales are easier to measure and verify than profits. You don’t want your sales person fighting with your numbers person on how net profit was calculated.

    Finally, to throw out some numbers, we’ve seen sales commissions ranging from 5% to 20% of sales. And for venture or business managers, where the commission is typically based on profit rather than sales (and base salaries are larger), we’ve seen figures in the 5-10% range. But mileage may vary, so do your homework before committing to one figure or another.

    What do you think?

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