How can a business choose a proper compensation plan for its sales reps?

Answer

Sales commissions, in incentive-based plans, usually account for 30 to 50 percent of a sales rep’s cash compensation and are typically based on sales revenue or gross profit margins. 

Remembering that one size doesn’t fit all, the ratio of base salary to commissions and bonuses for your business may not entirely fit the above rule of thumb. A business owner should consider the sales environment and requirements when developing a sales-compensation formula. Here are some questions that may assist you in picking the right mix:

  1. Is the sales cycle longer than six months?
  2. After landing a sale, will the salesperson need to dedicate a significant percentage of time revisiting and servicing the account?
  3. Is your overall gross margin significantly lower relative to the industry? (Note: Custom apparel decorators typically command 40 to 60 percent gross margin. If it costs you $4 to produce a decorated garment and you sell it for $8, your gross margin is 50 percent. Contract printers and embroiderers can usually capture 25 to 35 percent gross profit.)
  4. Did you hire your sales rep more for his/her technical/industry knowledge and expertise rather than his/her ability to sell?

The more “yes” answers you gave yourself, the more your sales force’s compensation should be made up of salary. The combination of short sales cycles, selling highly profitable goods and services without the need for highly-developed technical skills to make one-time or once-a-year sales is a case for a mostly-commission compensation plan.

This is not to say that total compensation is necessarily lower for salespeople with greater technical knowledge or those selling products with slower sales cycles or less profitable goods. Instead, the mix of pay is weighted more toward base pay and less toward commissions, provided those products are an essential part of the overall corporate strategy. 

Your Personal Business Trainer