I am starting a new business and will have to hire a person whos sole job will be trying to sell my product. I have a person in mind who has lots of sales experience and who I think will be successful at selling my product. At her last job she was paid a straight salary without commision to sell health care programs. She wants the same arrangement from me.
I, on the other hand, would prefer a commission arrangement that has some incentives attached. I have also heard the term draw used when talking about sales person compensation. How is a typical sales person compensated (not amounts) and what structures are use to provide incentives while assuring a livable income?
At the paper company I worked for, the salesmen were paid a straight salary until they built up their territories. Afterwards, they would draw a salary based on what they thought they would sell (I forget the commision rate).
If, at the end of the month, they sold more than they thought, they’d get the additional amount in a separate check. If not, it would count against them the following month.
Example:
If you thought your commission for the month would be $2000, you might take a $400 check each week. If you did make $2000, you’d get an extra check for $400 (assuming 4 weeks in the month). If you made $1500, you’d be in the hole for $100 the following month.
It really depends. Compensation packages range from straight commission to straight salary with thousands of variations in between. My wife is a sales manager and here is what she does:
Salespeople get a fairly low base salary (very low for new salespeople).
One commission is a percentage of monthly an yearly sales that gets added on to the base salary.
Another commission is even more lucrative but it is limited to selling certain products. This commission is reserved for hard-to-sell items that are very profitable to the company.
I think what you are looking to do is provide a base salary that makes it possible to live but is not all that comfortable so there is a strong incentive earn commissions. You need to look at what sales this person could conceivably achieve and make the high end very generous (but not ridiculous) but also make the more realistic reach seem worthwhile and fair to the person.
I have sold commercial real estate since 1987, and am strictly on a commissioned based salary. With all due respect unless your product is spinning straw into gold no experienced salesperson with a brain in their head will go straight commission + incentives with a start up business and product, unless they are desperate or stupid. If you want decent sales people with a start up product, you’re going to have to pay a decent salary initially until the product is a proven entity that a person can make a decent living selling on commission. At that point you can start talking about commission + incentives.
It’s a two way street. Your business model has to prove itself to a productive salesperson as a viable source of income, just as much as the salesperson has to to prove themsleves to you. If you go cheap on salespeople you usually get what your pay for.
Based on what you’ve described, I suspect you won’t have a lot of luck hiring someone on straight commission basis. The idea would be a base salary, plus commissions. The guaranteed straight salary could be linked to customer service/satisfaction (for example) while the commission is based on sales volume.
Milkovich’s text COMPENSATION says that the factors that could impact the design of the pay program would include:
(1) the nature of the people you’re trying to hire. Salespeople are often motivated by money, with recognition and appreciation coming in second. (Scientists, for instance, generally have different motivations);
(2) your business strategy – how much can you afford? can you link the desired behaviors of the salespeople to your business goal? Where is the balance between stress on customer service and stress on sales volume? What kind of market are you moving into?
(3) market maturity – as markets mature, the ability to sale becomes more limited, and you may focus more on customer satisfaction and retention rather than new sales.
(4) competitor practice – this may not be an issue for you, but if you’re trying to hire people who are currently employed, you might consider what their current pay package looks like.
(5) size of company – not relevant for you as a start-up
(6) economic environment – in a crummy economy with decreasing level of sales, you’ll balance pay different than in a great economy with roaring sales. In short, how easy is it for the salesperson to earn a living (a good living)?
(7) the nature of the product you’re selling – how much technical training is necessary for the salesperson to understand the product? To what extent does the product “sell itself”?
The key will be setting the targets or quotas. Ask yourself how much money the person “should” receive if performance is adequate/average/expected. Set the commissions percents and straight salary so that standard performance can make that much money.
The process of setting sales commissions and compensations is actually quite complex. Good luck!
In response to the responses, I see I need to be more specific: The product may sell for as much as $100,000. The actual cost of the product should be about 40%, so the other 60% goes for salary, commision, overhead, and profit. This is a highly specialized new product which will be sold to a specifically targeted clentele. The sales process will focus mainly on relationship building and dealing with resistance. Our sales goal is to sell six in the next year beginning April 1st. Given this scenario can anyone say what sales compensation migtht look like? We’ll have enough start-up money to keep us going until the first couple of products are sold.
Typical labor costs for many companies run in the 20-30% range. If you are looking at 20% labor costs.
Just to spin an extremely simplified example.
1,000,000/yr business
4 sales employees making $50K/yr. Total 200K/yr Each sell approx $250K in product a year
As the business owner you can let those sales people in ways determine their own package. Since 1 person = $50K a year and a 1% commission = $2500 let them pick 25 units of “compensation” in units of $2K a year in salary or 1% commissions.
A confident sales person might pick $20K Salary and 15% commission (potential for $57,500 but he would have to sell well to do it so you win too.
Allow them to adjust this balance once a year or quarterly, whatever works for your budget.
You can also vary how payments are issued paying bonuses in 3-4 pieces over 3-4 pay periods giving commissioned folks a little more consistent paycheck.
With any sales force beware of creating compensation schemes that do not reflect the true goal of the company. Example: If any sale carries a $100 commission you will have sales people telling customers to make multiple small orders to maximize their commissions even if the sales are only $100 each (pronounced you lost money).
Whatever you do, don’t pay just salary. Whatever salary you do pay, make it as low as possible.
The math is pretty straightforward. Decide what is reasonable for the rep to sell each quarter (or month), what you think is a reasonable total compensation for that period, and what you’re willing to give the rep in salary. After you have those numbers, it’s simple algebra.
I don’t know what your industry is, but I’d suggest an absolute max of half of their compensation in salary. If you can do a quarter, even better.
Be generous with commission, especially if you get the salary very low. The rep is taking on some of your risk and should be compensated accordingly.
If you can get the salary low enough, you can afford to hire two reps (or more) instead of one, and two reps is more than double the benefit. You can grow much quicker when reps can focus on different geographies or target markets, etc. And you can fire one more easily knowing you still have a sales force without them. In sales, it’s all about numbers, and you need to be able to replace non-performers as quick as possible. Having a loser in your sales department is not just bad because of lost revenue; even worse, every building a market and building marketshare is critical at this stage, and every lost sale hurts that.
I’ll be frank and tell you that I would have serious reservations about hiring a sales rep that hadn’t been on commission in the past. It’s a very different attitude when your paycheck is on the line.
I’ve built several startups and I know what you’re going through. You need someone to sell your product who is hungry and feels the same need you do. You must align their compensation with their productivity. If you’d like to talk more about this, feel free to email me.
A draw is where you pay the sales rep commissions ahead of time. It’s a “draw” on future commisions. Then when a sale happens, they are paid less of their commission then they normally would be paid.
The problem is that if the rep doesn’t sell, they may owe you the draw money back, but you’ll never get it.
My father worked on straight salary and prefered it that way. As his sales grew, his salary also grew, but he was always assured of a paycheck during the occasional bad month.
When I worked in broadcasting, our salespeople were paid a draw against their commissions. They were given the first three months to get their sales up to the draw level, and if they hadn’t made it by then, they were replaced.
For the record, every start-up business I’ve ever seen that managed to attract first-class sales staff did so only by offering partnership, or at least stock options.
As someone who has sold such intangibles as radio advertising and insurance, as well as tangible items, and who has been paid straight commission and various base-plus-commission deals, here’s one good hint: DON’T change the commission structure when the salesperson starts making real money. It will destroy morale to keep moving the goalposts and the result will be just the opposite of what you want. Remember, in order for them to make good money, they have to be making YOU even better money.
Even if it bugs you that they don’t seem to be working hard enough to “deserve” that much pay.
That is true. My father-in-law is a self-made multi-millionaire from a sales based business that he built from scratch. Two of his salespeople have been with him from the beginning but many of the original others left. The reason was that when they started making real money, he got pissed when his salespeople’s commisions started getting to be over 100k a year alone (this started in the early 80’s). He started changing the commission structure down so that they could be at more “reasonable levels” even though he was raking it in and sales were gowing. That was one of the worst decisions he ever made because salespeople left for greener pastures and sales declined. When his daughter, my wife, became VP of sales, she put back in the more reasonable unlimited earnings structure in place. It is more fair and better for everyone in the end.
Well, I used to work for a start-up company in the media\broadcasting industry. That company’s product was insanely expensive - in the $10m - $15m range or more, although deals worth far less sometimes came down the pipe.
I’m not sure how the sales people’s compensation was figured, but they had to earn a somewhat decent salary instead of getting huge commissions. The product was aimed at a limited number of customers - BIG names in the broadcasting industry - and it also required the customers to fundamentally change the way they did business. In other words, this product wasn’t some kind of simple “add-on” or a thing that you could sell over drinks at the NAB convention. It’s the sort of thing that a company’s CEO would have to sign off on and satellites and newsfeeds would have to be reconfigured, etc. So “everyday sales” were hardly expected.
I guess what I’m saying is that if you’re selling something that isn’t gonna sell every day, think hard about the compensation scheme. If you’re just selling razor blades, then some sort of “low pay + large commission” would be more appropriate.