The HOW MUCH in this blog title could be directed toward over or underpayment of your sales team. Where does your pay plan fall? Are you paying your sales people too much or could it be you are under paying them? Creating a sales pay plan isn’t terribly difficult but it’s trickier than finding a simple salary range for non-sales positions. I’ll answer the two most common questions asked of me regarding sales play plans. “How much should I pay my sales people?” and “How should I structure the pay plan?”
This blog was tough for me to write due to the mathematical elements. My goal in writing is always to help you learn without getting you lost, so hang in there with me; I’ve tried to keep it simple and useful. As always if you have any questions, you can post a comment, send me a message or pick up the phone. The first place to start is figuring out what the company goals and budgets are.
What are the company profit goals and what’s the budget for sales compensation?
Before deciding on a blend of salary and commission to offer, we first determine what the company needs from sales (gross profit after sales), and what can be allocated to sales compensation. Here are the steps:
1. Gross Profit after sales expense: Start with the end in mind. What is the needed gross profit after cost of goods (COGS) and sales compensation to fund the business operations and shareholder net profit? In the pie chart example the Gross Profit goal is placed at $1.4 million.
2. What is your COGS percentage of sales? In the pie chart example the COGS is 50%. Half of every dollar sold has already been used up in producing or delivering the product.
3. Budgeted Sales Expense Percentage: How much will you be allocating to sales compensation (salaries, commissions and bonuses). The pie chart shows 15% as the allocation.
4. Minimum Sales Revenue Goal: What is the sales revenue needed to produce the gross profit? By working backwards with the Gross Profit goal and other percentages, the answer of $4 million is our minimum sales goal to attain the Gross Profit goal of $1.4 million.
How much should you pay your sales people and how much should they sell?
5. Fair Market Compensation: What’s fair compensation for a salesperson reaching their sales goal in your market? It’s wise to find some benchmark. You can still offer more or less based on your situation, but going into it blindly could be costly. You can check with your peers that have similar sales roles to get a feel for this as well as accessing a salary database (I’ve included a few sources) to gain perspective. If you are part of an industry association they usually provide benchmark data for compensation. They also might provide you with average sales by rep. The diagram to the right has our compensation at goal attainment at $90,000.
6. Establish a realistic but stretch-worthy individual sales goal. I usually check around with others in the industry to get a feel for this. As mentioned in the previous point, ask your industry association. Try not to use your own results or the super star you hired a few years ago. Owners and superstars are rare to find so set goals based on above average performers, but not top performers.
7. How does the sales expense percentage you just created in steps 5 and 6 (9%) compare to the budgeted expense in step 3? In our example the budget (step 3) calls for 15% and working through steps 5 & 6 resulted in a 9% expense for sales compensation. You now have 6% to use for incentives, apply to marketing or invest in more support to achieve your sales goals. If your numbers are upside down with the budget percentage smaller, you will need to make adjustments to any of the factors we have discussed to find a place that will attract talent and provide the profit the company needs.
8. Once you finalize the sales expense percentage to work into your pay plan it’s time to work on the structure of the plan.
How should you structure the pay plan?
We’ll use the 9% for sale expense and $1,000,000 as the sales goal. This is a great situation to be in as you have a cushion to deal with shortfalls if they happen. Let’s look at how to decide on a salary, commission or a blend.
Commission only with a draw
Commission only is easy to figure, it’s 9%. You might need to provide a draw to help people get started and to provide stability through the ups and downs of sales.
A draw is simply an advance on future commissions. When commissions are earned, any draws are subtracted from the commissions before a check is cut to the sales rep. I prefer offering salary plus commission as it provides the company greater return on over achievement and demonstrates your commitment to the sales person. In most cases with a draw, if a sales person does not perform, the company rarely recovers the draw, so in essence it’s a salary.
Salary plus commission
Salary plus commission is a little more complicated to build and the company does assume more risk. As with most investments, if you take a little more risk and monitor and measure your investment you can realize a greater return. It’s only risky of you don’t pay attention. Commission percentages are higher on draws and lower on salary compensations. When a sales person is selling at or over goal, the company is realizing a greater margin per sale with a salary program. The last diagram illustrates this.
Salary Percentage Considerations
A lower salary or draw should be considered in the following situations:
- When sales goals can be achieved monthly due to the consistent number of opportunities in the market place available to sell. Security systems, office equipment or advertising are examples that would fit into this category. The more transactional and less complicated, the lower the salary can be.
A medium salary or draw should be considered in the following situations:
- When sales consistency happens more quarterly and monthly goals tend to be less consistent. Deal size varies more as well as sales cycle. Larger telephone or computer systems, mid-size commercial insurance or custom manufacturing can fall into this category.
A higher salary or draw should be considered if these situations exist.
- High-ticket sales with fewer sales opportunities and a long sales cycle.
- You have a proven performer and they prefer and perform better with a salary plus commission in any situation.
Commission Percentage with Salary
The chart illustrates your percentage splits in the pay planning stage. As mentioned before you forecast for 100% goal attainment. In each split when the sales rep hits $1,000,000 in sales they earn $90,000 based on the mix or blend or pay elements.
Bonuses can be used for hitting certain milestone, selling specific products, maintaining list price or whatever makes sense for your business. Bonuses should be a moving target that allows you to put emphasis on areas of the business you want to improve. You allocate a percentage of earning potential and then announce the bonus opportunities as needed.
Commission percentage In the three examples the commission percentage is different. The high salary range pays a commission rate of 1.5%. The medium salary pays 4% and the low salary pays at 6%. What happens when a sales person in each range over achieves and sells $1.5 million?
Now you can see how the risk reward works. The salesman takes on the risk at the straight commission or low salary and earns more when he performs. When the company takes on more risk with a higher salary, the company realizes more gross profit during higher performance. When companies reinvest this additional margin in marketing, service or sales incentives, a momentum can occur that results in consistently meeting and exceeding your goals. Sales people are willing to earn less if they have a great product and service to sell and a company that provides a great place to work.
There you go, easy as pie. One last thought. The compensation plan is only a piece to the success puzzle with sales people. If you have not downloaded my Free Sales Management Guide you can learn more about it here. The Sales Management Guide will layout the other critical pieces to put in place while building a high performing sales team.
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