Best Ways to Pay Your Sales Staff

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Many companies use bonuses, calculated based on profitability and paid in cash or vacations, gift cards, luxury items, or other swag, to get employees to hit sales targets. That way, you pay for your staff's achievements after your company has been fueled by them.

RAMPED OR FLAT RATE?

The next step is defining how commission will be paid. Ideally, a rep's commission is a percentage of either revenue or profit generated over a month or quarter. Unless you're trying to dump excess inventory, it rarely makes sense to tie commission payments to the number of units sold. But Matt Haselhoff, sales and marketing director at Installation & Service Technologies in Prairie Village, Kan., a provider of point-of-sale hardware and software, once worked for a company that did just that. "I still can't believe they did this," he says. Reps would practically give away units rather than risk losing a deal.

Haselhoff kept that example in mind when designing the compensation plan for his team. Each rep should be able to earn $85,000, he figured. Of that, 35% is base salary, while 65% is commission that's paid in full if the rep generates $100,000 in profit for the company. (Reps can earn more if they beat that goal.)

To translate the general commission percentage into an amount to be paid on each sale, you'll need a good understanding of your company's financials. Say you own a home appliance store and sell refrigerators at $3,000 a pop. You'll need to know the profit on each fridge after taking into account everything from overhead to how much you paid the manufacturer. "If I have one salesperson, maybe I can give that person 10% to 15% of the profits," Bremen says. "If I have 100 salespeople, I can probably give them 5% to 6%. It all goes into the calculus."

You'll also want to consider flat vs. "ramped" commissions, where the percentage paid out rises as reps sell more. A flat payout rate is often applied to less profitable products or services. Ramped commission rates are commonly used for best-selling items or a company's primary product. A ramped rate "definitely motivates them to achieve more," says Cobb.

It's working for Haselhoff. His reps get paid 17% commission on the first $50,000 in profit and 24% on the second. For anything beyond the annual goal, reps earn 30%. For each plateau a rep reaches, he or she gets an additional $1,000. "You can incentivize by the stick, and you can incentivize by the carrot," says Haselhoff. He projects that sales will climb as much as 20% this year as a result of the new plan.

The last step is to iron out such details as who gets the commission if a national rep and a territory rep oversee a single sale. It's also a good idea to have an attorney review the plan.

At his masonry company, Wilson started revamping reps' pay plans in March 2008. He wanted to give them the chance to make $70,000 a year, about twice what most were bringing in. After reviewing his company's sales history and goals, he settled on a ratio of 35% base salary to 65% commission. He used software from Makana to set different, ramped commission rates for popular items, such as granite countertops or porcelain tiles. As further incentive, reps can make up to an extra 8% when they sell the company's installation service along with its custom cabinets.

Selling the plan to his staff wasn't easy at first, because the base pay was lower. But, Wilson says, "Once they saw the benefit to it, they were all very excited." Every rep made more than he had the year before, including one whose pay jumped $12,000. Says Wilson: "They went from almost hiding at their desks to—when someone comes in the door—almost fighting over them." Sales for 2008 shot up 22%, to $9.9 million. Wilson is pushing for 12% growth in 2009 and considering hiring more salespeople. Because now he knows they'll earn their keep.

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