Compensation For Sales Personnel

PROBLEM:

I am ready to hire my first sales person and I am very confused as to how to compensate this person.  I have heard several horror stories about how companies make a mistake and it takes years to recover and it is very costly.

SOLUTION:

You are correct in that appropriately compensating a sales person can be very tricky.  It is important to think through various scenarios and “what if’s.”  Begin with the end in mind.  What are the on-target earnings you are striving to achieve?  In other words, what should the total compensation be for this person when they hit their sales target?  The next step is to decide what portion should be at risk (commission) and what portion should be base salary.  It has been my experience that both 100% commission and 100% base are difficult to administer.

I recommend beginning with a split of 75% commission and 25% base.  The base covers such things as doing the admin work required of the sales person, attending sales meetings, doing sales forecasts, etc.  The more admin and management requirements of the job, the higher the base and the lower the commission.  There is also a threshold below which no commission is paid.  That may be 85% of target.  So if the sales person does not reach at least 85% of target, no commission is paid.  In such a case, the organization needs to consider terminating the sales person.

There should be no cap to the sales person’s commission.  If fact, I recommend implementing an accelerated commission schedule so that the percentage of commission increases as the sales person achieves 115% of target and above.

There are fixed expenses associated with adding a sales person.  Those need to be taken into consideration as the compensation plan is put together.  As the sales person becomes successful, often more fixed expenses are added, such as adding a customer service person.  Since the sales person has more selling time, he/she covers a portion of the added fixed expenses by having their sales target or goal increased.

Business owner’s regularly underestimate the amount of time it takes a sales person to come up to speed is selling.  Depending on the product or service, it usually takes a minimum of six months for sales to be at or near target.  A system of paying a higher base salary and ratcheting it down over six months is a good way to handle that period.  A draw system can also be used but it tends to be de-motivating for the new sales person.