In a 100% commission sales role, there is no base pay. The only compensation earned is that generated from a commission, which is based on sales volume (in units, sales value, margin value, etc.). Commission arrangements range from simple (e.g., $5/widget sold) to sophisticated (commission rates accelerating as quota is met or exceeded, higher rates for new customers, limited acceleration until a hurdle is cleared on a particular product category, etc.). But across all these possibilities, the underlying mechanism is that payout is linked to volume sold.
Some businesses provide a commission plus a base salary, while others may provide only a commission. The commission-only pay plan is appropriate in situations in which the sales person is highly independent, and sales success (or failure) results primarily from the skills, effort, and personal network of the sales person (vs. the price, product features, delivery schedule, location, brand quality created by the company).
100% commission plans drive motivation, focus and accountability for sales like no other plan type. They also link the cost of compensation directly to sales volume so that costs go up and down with revenue (or margin, or volume). They send the clear message that the sales person gets paid when they create value for the company, and doesn’t get paid when they don’t.
So what does a vacation look like in this world, and in what sense is it “paid vacation”?
While there are many nuanced ways of handling vacation pay for 100% commission sales people, they fall into two big “buckets”:
You can take time off, but while you’re not selling you’re not earning
Many 100% commission sales people are paid a draw against commissions to smooth out the month-to-month (or quarter-to-quarter) ups and downs of the business cycle. A draw is a payment made in advance of earning the money – so you’ve got to sell enough to earn the money to cover the draw, or you will owe the unearned amount to the company. If a sales person continues to be paid their draw through a vacation period, but those payments are still part of the draw and must be earned in order to avoid an arrears position, then in truth there is so “paid vacation.” The sales person must sell enough to pay their own vacation.
Alternatively, it may be the case that there is no draw and the sales person just goes unpaid for the time spent on vacation. Either way, vacation will cost the sales person money in total, and there will likely be a dip in payout immediately following the vacation.
You need a break, so take your vacation and we’ll pay you while you’re not selling
Some businesses truly pay for vacation time. This may take the form of a pre-determined daily rate for vacation (same for everyone) , or a variable rate that is higher for the most productive sales people (for example, many businesses calculate average commission earned per day for the prior quarter and pay that amount per day for vacation time). This vacation pay is earned outside of any commission/draw calculations.
Those who design these paid-vacation plans do so anticipating the paid time off, so the commission rates are somewhat lower than they would have been if there had been no true paid vacation in the package.
Either of these approaches can be designed to cost the company the same amount in total comp. The key difference is the message. The first sends the message that the sales person is valued as long as they are producing, and if they are comfortable with the reduced compensation that accompanies time off, they are welcome to take vacation time. The second approach encourages sales people to take allotted vacation time and sends the message that the company believes that time off is important for the health of the employee and the business.