Best Ways to Pay Your Sales Staff

If your sales reps aren't producing enough, it may be because your compensation plan is askew. Some tips on tailoring it to your business

Stephen Webster

By Steve Cooper and Colleen Debaise

Matt Wilson needed a top-notch sales staff—and he was no longer sure he had one. His 70-person masonry company, Holland (Ohio) Wilson Tile & Stone, had prospered during the real estate boom, posting $8.1 million in 2007 sales. But as conditions soured, his four reps, no longer enjoying the ease of a quick sale, didn't seem particularly hungry to close deals. "Too many times, I'd see customers in my showroom, and there was no eagerness either to upsell them or even to push the sale," says Wilson.

It turned out the reps' compensation plan was partly to blame. Salespeople received 80% of their compensation in base salary, which gave them little incentive to hustle. When they did make sales, commission payouts were low—and complicated: 3% of gross profit, but only after they hit a monthly quota. "I have no problem with my salespeople making money," says Wilson, a vice-president at the company his father founded in 1985. "But we wanted them to get rich off selling, as opposed to just getting rich off being here."

Figuring out how to compensate your sales staff fairly is no easy task. Many business owners only learn that their plans are curbing reps' motivation or encouraging them to sell the wrong products when sales fall, they lose market share, or reps defect to competitors. Only 41% of business leaders say they're satisfied with their sales compensation plans, and fewer than half say the plans do enough to encourage the right selling behavior, according to a September 2008 survey by Deloitte.

The most common mistake entrepreneurs make is simply to copy a competitor's plan, tweaking it slightly to fit his or her own budget. But compensation plans should be unique to your products or services, to individual reps' experience, and to your sales goals or profit margins. If you're looking for a one-size-fits-all plan, "The answer is no, it doesn't exist," says Liz Cobb, chief executive of Makana Solutions, a Lexington (Mass.) company that makes sales compensation software.

As the economic landscape changes, plans that were once perfectly serviceable may need a redesign. If sales have slipped, either base salary or commission may now be too high, cutting into profits. If you're trying to build brand recognition, increase market share, or energize your sales staff, you might consider boosting payouts. "You can't 'cut' your way out of recession—you have to grow revenues," says John Bremen, global practice director in the sales compensation group at Watson Wyatt in Chicago. "Sales compensation plans are very useful tools in the current environment."

CALCULATING BASE SALARY

Getting your plan up to snuff is as much art as science. Once you have a general idea of how much each rep will be paid in total, you need to find the right mix of base salary and commission. A 30% base/70% commission mix is fairly typical, but make sure to adjust from there. An established sales rep with years of experience might demand a higher percentage in base salary, while a greener rep fresh out of school might be willing to work almost exclusively on commission.

If your company is well-known and has few competitors, you might set a higher base, perhaps using a 50/50 mix. In those cases, "It almost feels like the salespeople are taking orders," says Randy Ramirez, a compensation consultant at BDO Seidman in New York. "There's still a very defined skill set . . . but the salespeople offer a more consultative service." On the other hand, if you have multiple rivals and need an aggressive sales push, you could do with a 20/80 mix or even make reps' pay commission-only.

A base salary should cover reps' basic living expenses (rent and food, not lease payments on a fancy car), or a minimum of $1,500 to $2,000 a month. "The reason you offer base pay is not to make people hungry," Bremen says. "It's to help them manage cash flow." If you can't pay that much, don't bother paying a base.

Then consider additional incentives. Startups often recruit talent with the promise of stock options. It's common to designate options worth, say, 5% to 10% of the company's value, to be divvied among top performers.

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