More than ever before, business owners are wondering, “What should I pay a sales rep to assure our revenues will grow?” At the risk of sounding like an election-day politician, my typical answer is, “It all depends.”

 

Recently, I attended a company’s annual sales meeting where the 60 sales professionals were asked to compile a ranking of things they value about their jobs. Interesting work, a sense of accomplishment and a great boss were among the dozen or so items mentioned… and, to no surprise, money was ranked among the top three on every salesperson’s list. 

 

But what is a fair compensation structure to offer a sales representative in the sign and digital graphics industry? One thing is for sure: Your compensation program needs to compliment and support your business perfectly. So let us explore what options you may want to consider.

 

Principles of Compensation

Before we consider the different combinations and components of a good compensation plan, one should fully appreciate and understand three key principles that drive salespeople to produce in the desired manner:

 

• an organization will receive only the behavior from its employees that it consistently reinforces, recognizes and rewards;

• the price for which anything is sold is directly related to the ability of that salesperson to sell; and

• you will get what you pay for.

 

The first principle is fundamental to sound leadership and management, regardless of the role of the employee. When a worker is not given feedback about job performance, it is left to chance that desirable performance will be repeated in the future. 

 

In my first sales job, I was eligible for a year-end bonus for reaching my sales forecast and securing new business at a certain level. The cash bonuses were distributed in February for the previous year’s achievement. I remember getting my first check, being excited about it, but not really associating what specifically I did to earn it. Bonuses were awarded yearly and, when I received it, it was so far removed from what I did that I didn’t take the time to make any connection. Whatever facets you incorporate into your sales compensation plan, remember that you should reinforce, recognize and reward positive performance early and often.

 

The second principle tends to make some sales reps very uncomfortable and irritable. Candidly restated, this principle means that when mediocre sales reps fail to make sales—or make them, but at unprofitable, bargain-basement prices—compared to the accomplished sales professional, the root cause of the problem is simply their selling acumen stinks. Ever hear the expression, “That guy could sell ice cubes to Eskimos?” Top salespeople do that all day, every day.

 

For a business owner or sales manager, this creates a catch-22 situation. True, in compensation plans that are heavily weighted by incentive rather than base pay—as has become the norm rather than the exception in these recessionary times—companies don’t have to issue large commission checks to sub-standard performers. However, a cadre of average salespeople will not generate enough revenue and profit to sustain adequate growth. 

 

Consequently, if you do not proportionately compensate your sales superstars, they will leave to work for a competitor… and take your best customers with them. It amazes me the hesitancy of sales organizations to reward, train and develop its sales force for fear they will take their newly-acquired skills elsewhere. Wouldn’t you think a well-managed sales force would be more appreciative of the opportunities and source of knowledge you are providing them, and show greater loyalty?

 

A superior sales professional is worth her weight in gold. It is the consummate salesperson who places her reputation, integrity and expertise on the line each and every day. The cardinal rule of sales is that people buy from people who they like, trust and with whom it is convenient to do business. Most often, when your customers think of your company, they will envision the face, voice and mannerisms of your employee—their sales representative—rather than you, your shop or your logo.

 

If you want skyrocketing sales growth, you need to be willing to share the fruits of your success with the sales force. Salespeople understand cash. It is not necessarily because they are money motivated, but what that money represents—security, status, putting food on the family’s table, whatever. The motivation is as different as the personalities on your sales team. Money is merely a means to an end.

 

Align Compensation with Business Goals

Early in the design or review of a sales compensation program, the business’s mission and goals must be considered. If you want to dramatically improve revenues quickly, you will need to hire or develop great listeners and strong closers for your sales team. 

 

Typically, the sales cycle—that is, the elapsed time from initial contact with a prospect to a signed order and its fulfillment—for our industry is relatively short. But a good rule of thumb is the longer the sales cycle, the more the sales professional should be rewarded for landing a decent-sized account.

 

Another consideration when drawing up a compensation plan is the gross margin of your products and services. If your overall gross-margin percentages—calculated by subtracting all costs incurred in producing the goods (a.k.a. cost of goods sold) from gross revenues, then dividing by gross revenues—are high, you can afford to pay your sales people better. Low-margin items require a very high sales volume in order for a sales person to make any real money.

 

A good rule of thumb is to base total compensation of the sales force on 25 to 35 percent of your gross profit. As an example, if a sales territory generates $500,000 in annual sales at a gross margin of 40 percent—$200,000 gross profit on those sales—you can afford to offer that sales rep a total compensation package of $50,000 to $70,000. However, if your gross margin is only 20 percent—or $100,000 gross profit—the sales rep should earn only $25-35K. That makes sense as it takes twice the sales effort to sell something commanding a 40 percent gross margin than a product line that only enjoys a 20 percent margin.

 

Divvying up the Pot

The next important decision to make is about how to break down sales compensation into salaried wage and incentive pay—bonus and commissions. These days, more sales reps are willing to accept a job with a 100-percent commission arrangement than before the onset of the Great Recession and double-digit unemployment. Although no two of their pay checks are ever the same, full-commission salespeople like the fact that they control their own destiny and have no upper limit on what they can earn. From the business’s perspective, when you employ full-commission salespeople, you minimize the exposure of paying out large wages without the sales revenue to back them up.

 

One drawback to hiring only full-commission people is keeping them motivated during seasonally slow periods. Often, the organization will offer a monthly draw against commissions so that those sales reps can count on some money each payday; but they also know they will need to “pay back” the drawn amount when sales—and their earned commission—catch up.

 

The balance of salary-to-commission I prefer is a 25:75 ratio, respectively. Let’s consider the same example from above. If you budget to pay a rep $60,000 because her sales territory generates $500,000 in forecasted revenue with $200,000 gross profit and you decide to pay 30 percent compensation on every gross profit dollar, you may want to pay her a modest $15,000 in salary and anticipate that you will pay out $45,000 in commissions and bonuses. Provided you tightly control your selling prices and not allow sales reps to make concessions, you can pay $15,000 in salary (or three percent of everything she should sell) and 22.5 percent of every profit dollar (since $45,000 is 22.5 percent of $200,000). 

 

Now, let’s say you permit your sales reps to offer price discounts. If they cut prices 10 percent—in other words, gross revenues would be only $450,000 and gross profit drops to $150,000—then, even though that rep’s salary would remain at $15,000, her commission would only be $33,750 (for a total compensation of $48,750). I’d say that represents disincentive enough to not arbitrarily lower prices. 

 

Pay for Actual Sales, not Forecasts

One final issue should be considered. Many organizations will assign a wildly arbitrary sales goal to a territory, and base a sales rep’s commission rate or bonus on a forecasted figure, while ignoring the historical sales for the territory. This is a huge mistake. When upper management dictates what next year’s sales will be, without regard for the input from the sales pros in the trenches, that forecast is not owned by the person who is largely responsible to make it happen—the sales person.

 

Compensation of all salespeople should be commensurate with their performance. Now is the best time of the year to revamp your sales-compensation program to re-energize your salespeople and improve your business’s chances of having the best sales year ever. If you think through your compensation program and “sell” it to your sales team, I’m confident you’ll meet—and likely exceed—your sales and profitability goals. Good selling!