Finding the Right Pay Scale for Your Sales Force
It's complex, but consider such factors as how long it takes to sell your product
Q: I am trying to pull together some information for my small business. Is
there a recommended formula for salary-to-commission ratios? Any guidance you
can provide would be appreciated.
J.T., Davis, Calif.
A: There is no tried-and-true formula for pay structure that holds across the
board. The manner in which you compensate your salespeople will vary,
depending on many complex factors, including your particular industry, your
sales cycle, your company's market position, the strength of your product or
service and -- not least -- your individual salesperson and his or her
Experts say that your best source of information will be found in the trade
organizations and publications that serve your industry. Trade journals often
do annual compensation surveys that should be helpful, and they
will give you a sense of the pay standards that have been developed in your
industry. "There are basic formulas for people who sell shoes, or insurance.
There are mores in each market that have been developed by trial and error,"
says Ben Tenn, a sales, marketing, and distribution consultant who owns Tenn
Consulting in Northridge, Calif. "You should reach out to other people in your
industry. Ask salespeople that interview with you what they're being paid, and,
if you get a chance, talk to your competitors about how they pay their sales force."
In general, companies that sell highly predictable products or services with
very short sales cycles weight their compensation heavily on commissions. An
outside sales rep, someone not a direct employee of your company, will make
100% commission. So, typically, will an insurance agent, and people who sell
health club memberships, time shares, or dating services. Salespeople in food
service and retail, such as waitresses and sellers of shoes, tend to make
minimum wage as a base salary, with most of their income derived from tips and
On the other end of the spectrum are those selling consulting
services or enterprise-wide software, industries where the sales cycle -- the
time between initial contact with a prospect to closing a deal -- may be 6
to 18 months. In order to keep the salesperson from starving, he or she will
need a reasonably good base salary until commission can be earned. In the
middle range are those industries with sales cycles of three months or more --
executive recruiters, technology salespeople, and those hawking
telecommunications services who tend to get salary-to-commission ratios
in the 40-60 or 50-50 range.
If your business is a startup with a volatile product that may be a hit or a
dud, you'll need to compensate your in-house sales force with a livable base
salary, at least until they make contacts and sales take off. "In a small
business, everything is negotiable. What you want is a sales staff that is
hungry but not too hungry, or they will be thinking about their own personal
living situations too much to be effective in developing relationships with
potential customers," says Sam Parker, co-founder of justsell.com, an
Internet sales and marketing portal based in Fairfax, Va.
Parker's site is a good resource for sales information, including articles,
discussion groups, commentary, and links to other Web sites on sales. Also
helpful are the Web sites of Selling Power Magazine (www.sellingpower.com)
and the Sales & Marketing Executives International (www.smei.org), a
nonprofit organization based in Atlanta with 65 regional chapters offering
networking meetings, seminars, and training for salespeople and sales
managers. If you want to find general information on compensation by
industry, try recruiting boards such as monster.com or headhunter.net, Parker
says, or check out the compensation and benefits surveys at the Web site of
the Bureau of Labor Statistics (www.bls.gov). If you have sales
representatives spread out across the country and you want to make their
salaries fit their regional cost of living, go to the real estate section at
www.money.com, where you can find cost-of-living indexes and housing prices
for 300 U.S. cities.
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