People work for a reason. To make money to support a living. There is a whole section in Management Accounting devoted to employee compensation because the pay structure affects their behavior. For example, a CEO with a higher proportion of stock options will make different decisions than one who is on a flat out salary and performance bonus. There are many things in-between that can have an effect on stock price or year to year performance. Like when to write off the losses for a failed project, this year or next.
For the man on the street running a small business, most of your staff would be on a flat monthly or hourly pay. Some positions like sales, however, will have a variable component built in. To help you structure your sales rep compensation, I have created a matrix for each variable pay structure to help you better decide which is better for you. The numbers are based on my own opinion, each industry or business is different. Tailor them to suit your own needs.
1 Of all the factors involved in creating a sales rep compensation plan, this one tops the list. The employee must be able to affect the outcome. Meaning that there is no use giving employees stock options if they have no control over share price (like a CEO, CFO or Sales Director). Similarly, if you are paying commission for sales where the employee cannot directly impact more sales (a passive sales position like talking phone orders), then the result can be discouraging for the employee.
2 The second most important advice for small business owners is, you must be the first sales person. Hiring sales reps is just a way to increase sales, NOT as the main source of revenues.
Full Commission Sales Pay
To structure a full commission sales rep compensation package, you need to have a business track record of 3 years. This helps you determine how much a good sales person is able to sell a month. As with most businesses, you, the owner might have your own sales track record. Ideally, you should try to structure a commission that will pay 50% more than a regular job or if the margins allow, even 100%.
* You can only use a full commission structure for sales rep compensation when there are no costs for the employee. ie If they need to travel or incur business expenses, it won’t work. The only types of industries this could still work are realtors, insurance agents, or brokers because the compensation can be very lucrative and people are willing to work for it. More importantly, it has decades of proven track record that people do get paid a lot for hard work.
How to Structure it
For a small business, total “earnable” income has to be much higher than a regular salary to entice people to take the job. Not 10 – 20% but 50-100% more.
Full Commission: 10-30%
Regular job pay: $3,500 / mth
Ideal good performing full comm pay: must be able to earn up to $7,000. Some companies, sales reps can make over $10k.
Total sales needed at 25% comm: $28,000
This reduces your sales profit but also reduces your fixed cost commitment. You only incur costs when there is a sale. Obviously this is ideal for all businesses but it is harder to implement in practice. Most employees are risk adverse. That’s why they work for people and not run their own business.
- Puts all the risk on the employee to perform.
- Reduces slack. Employee works harder because they directly reap the benefits.
- Easy to weed out poor performers.
- Puts business/economic risk onto employee.
- You can hire as many sales reps as you need and that your inventory can sell. Make sure you have enough business so that all staff can make a decent income.
- More difficult to find employees to accept an offer. Unless company has a proven track record and past employees made good money.
- Employees may get easily discouraged or some who don’t understand commission pay may not take their work seriously because they are not “paid” for their time.
- Unfairly puts business/economic risk onto employee.
Fixed Plus Variable (Commission) Pay
A more common form of sales rep compensation for sales positions is the fixed plus variable pay. The fixed component will include the basic minimum wage plus any expenses incurred like mobile phone bills, transport expenses, etc. Many large companies use this compensation structure because it solves many of the problems of the employee uncertainty faced in a full commission job. However, because there is a fixed expense portion, the hiring process needs to be more stringent. I have had employees who took a position with my company with a fixed component but did not make a single sale. I later found out that they did not do much work either, they were going for interviews with established companies during their supposed “client meetings”. They just took our position as a stepping stone and earn the fix pay while job hunting. There was no way we could prevent this because everyone behaves their best during interviews. At least we found this out 3 months along the way.
How to Structure It
Depending on your locale, the starting fixed component of a sales pay varies. Check around and determine what is the norm in your area. An upper range would be for more specialized positions like office automation experience, software sales needing engineer background, etc.
Fixed pay: $1,100 – $2,500
Performance Bonus: 1-2% of total sales paid quarterly or bi-annually if they hit your target.
Regular job pay: $3,500 / mth
Ideal Fixed + comm. pay: $5,000
Total sales needed at $1.5k fixed and 10% comm: $35,000
- More fair to employees. Everyone has bills to pay.
- If your product or service is proven to sell, you reduce your sales costs because commissions are lower.
- The employee may be more productive because they have the basic tools and expenses to help them get the sales in the first place.
- The hybrid system lets you fine tune the most ideal balance for your business type.
- You take on more risk of poor performers. Even if they had solid experience before, you never know their intent. ie take this job while trying to jump to a larger corporation despite you paying higher. Job security.
- Employees on a hybrid package will not have an “ownership” sense for their position.