It’s one of the most common questions that I’m asked. “Troy, how should I pay my salespeople?” Most of the time, I demur, because paying salespeople is a complicated topic with many particulars that depend on your company and situation. That said, there are certain guidelines to developing a competitive and fair compensation strategy, and maybe it’s time we discussed them.
First of all, understand this: Straight Commission is dead as a sales compensation policy. There are numerous reasons for this, and maybe one day I’ll take an entire article to deal with them, but for now it’s enough to say that a straight commission pay plan will not allow you to compete effectively for sales talent. That leads into a discussion of the objectives in developing a quality sales compensation plan.
First of all, we want to compete effectively for the right sales talent. Make no mistake – hiring is competitive. We want salespeople who are good enough to have options of where to work, rather than having to “settle” for your job.
Second, we want to reward sales achievement appropriately. Good compensation policies incent and reward sales achievement.
Finally, we want to generate a fair and acceptable profit for the company. Sales compensation is a balancing act; while we want to incent and reward achievement as noted above, we also need to leave enough meat on the bone for the company P&L; after all, we’re in business to make profit.
Let’s start with this as a guideline: The total sales compensation paid to a sales rep at quota should be somewhere between 25% and 40% of the total gross profit generated by that salesperson’s efforts. That leaves a lot of leeway, but typically, the more commission-slanted the compensation, the closer to 40% the overall comp should be. Again, there are many variables here, but I have found that this range allows you to achieve all three of the above goals.
A good compensation plan should have three components: A salary, a commission component, and a bonus for high achievement.
The Salary component is probably more important than you think. Most business owners that I have encountered want to believe that there is a large pool of applicants sitting out there, just waiting to go to work in an environment where there is ‘huge potential’ for big earnings but a pittance for a salary. Sorry to tell you, it’s just not that way anymore. Today’s skilled sales rep understands that he/she is a valuable commodity and looks for a company that will invest in their success – and they view the salary as a big part of that investment.
At its lowest, the salary should cover the basic necessities and cost of living; i.e. the salary should be sufficient that the salesperson shouldn’t have to worry about getting the rent paid, the electric on, and food on the table. That’s the basic level (In my home market of Kansas City, a salary should be at least $30,000 per year; adjust from there to cover the difference in cost of living to your market). From there, it’s important to understand that your salary ‘buys’ you admission to different applicant pools, depending on your needs. Do you need your applicant to have a degree? That costs extra. Need a specialized degree (such as engineering)? Extra. A successful track record? Extra. You get the idea. Research what companies in your area are paying on the job boards (like CareerBuilder and Monster), and create your salary accordingly.
Now it’s time to figure Commission. Commission, of course, is the percentage of the sale that varies depending on the salesperson’s achievement. Commission percentages vary widely, but you can begin by figuring out an overall commission amount at quota (the difference between your overall compensation at quota and the salary that you have elected to pay). Now, back into your commission percentage by figuring out the gross profit generated at quota, and dividing the overall commission amount by the GP generated to figure your commission percentage.