How to pay your salespeople
by Troy Harrison
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.
Notice that I didn’t reference paying on overall revenue, but on gross profit. That’s because you should always pay on gross profit generated, not on overall revenue. That gives your salesperson a stake in your profitability – and will result in stronger profits generated.
Finally, the best compensation plans include a bonus. A bonus, as the word implies, is extra pay that’s earned by overachievement. I would recommend not paying a bonus until the salesperson has achieved at least 10% over quota for the year. Your bonus should be at least 10% of the salesperson’s annual earnings in order to be large enough to get the salesperson’s attention, but probably not more than 20% of annual earnings so as to keep the profit of the company intact.
There are, of course, other components that you can include, but I prefer to keep compensation packages simple. Complication breeds distrust; the best compensation packages are simple enough that the salesperson can calculate their commission when they win a piece of business. Some additional components, and my thoughts on them, are below:
- Draw against commission: I’m only in favor of a draw as a short-term measure designed to help a new salesperson ramp up (and even then, the draw amount should be small). A draw is not a substitute for a salary. Draws can work against you; a salesperson can dig a ‘hole’ through a draw, perceive that they can’t get out of it, and you can lose a salesperson that might have been very successful.
- Guarantee against commission: Again, I’m only in favor of these as a short-term measure for ramp up. The difference between a guarantee and a draw is that the guarantee is non-recoverable; i.e. you’re not going to charge the guarantee amount back.
- Commission caps: I hate them. Period.
- Commission “kickers” or accelerators: Here’s one that I like, if it’s done right. Adding a point or two on top of the existing commission for high levels of sales can be a real incentive to reach high sales levels. Keep in mind the 25% to 40% rule here.
- Fade Aways: This is where the salary fades away to a smaller amount over time. Do this and you’ve lost most of the benefit you were trying to achieve through paying a salary; the salesperson will perceive the job as a straight commission job – and not apply.
Paying your salespeople really doesn’t have to be that difficult or that onerous a task. Just keep the rules above in mind, and any company can develop a compensation policy that’s fair to the company and fair to the salesperson.
Troy Harrison is the author of “Sell Like You Mean It!” and a speaker, consultant and sales navigator. He helps companies build more profitable and productive sales forces with his cutting-edge sales training and methodologies. For information on booking speaking/training engagements, consulting, or to sign up for his weekly E-zine, call 913-645-3603, e-mail Troy@TroyHarrison.com, or visit www.TroyHarrison.com.
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