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SMART ANSWERS
By Karen E. Klein

11.4.99  
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 experience.

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 commission.

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.


Have a question about running your business? Ask our small-business experts. Send us an E-mail at editors@businessweekmail.com, or write to Smart Answers, BW Online, 46th Floor, 1221 Avenue of the Americas, New York, NY 10020. Please include your real name and phone number in case we need more information; only your initials and city will be printed. Because of the volume of mail, we won't be able to respond to all questions personally.

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