Setting Sales Rep Commissions

      Here's a detailed thread about various ways to compensate sales reps, and the effect each method is likely to have on results. December 14, 2005

What is the standard commission for an experienced salesman? Is the commission tiered per sales or straight? What happens if the salesman can sell the job for a higher price than what I quoted the salesman (this has happened)? Raising the price seems the obvious answer, but I'm unsure that it's the right answer. Any suggestions?

Forum Responses
(Business and Management Forum)
As the price goes up, so will the customer's expectations, possibly to a higher lever than you had in mind when you set the price. I would be inclined to tell the salesman my price, then if he sells it for more, he should get a percentage of the extra, maybe 25%. This is a good deal for him and a good deal for you. Naturally, this bonus would be on top of the commission he would get for selling at the base price.

I've been a sales rep or sales manager for over a decade. Most of the decision making revolves around what you can afford and what benefit (profit) a good rep can bring in for you.

Base + Commission - Fairly standard package that will attract the veteran rep who is older and has commitments such as a mortgage, car payment, insurance, kids and a significant other. It also attracts lazy and rookie reps if the base is too high. My formula is to set the base at 25% of the target total compensation for the rep. Big enough to cover the bills during a slow month without wiping out the savings account, small enough that a lazy rep will walk away.

Commission with draw - Rep gets 4-5 checks a month structured as a fixed weekly salary that is subtracted from earned commissions at the end of the month. Whatever is left, they get as their commission check. This option protects you from most lazy reps and will scare off the unseasoned.

Straight commission - Attracts strong reps and nutcases (sometimes they are one and the same). These guys are usually willing to do whatever it takes to make a deal and many do not understand the concepts of repeat business as they move from deal to deal. I personally believe that straight commission is best suited to car and life insurance sales and other industries where high pressure sales are expected.

Commission rates:
If you are in a high gross margin business (30%+)
Base + Com. - 18-25% of gross profit
Draw - 25-35% of gross profit
If you are in a low margin business (under 30% margins)
Base + Com. - 8-15% of GP
Draw - 15-25% of GP

Never pay a rep on revenue unless you are making 70+% margins on every deal. They will end up cutting the price every time in order to win the business. When they have skin in the game, it's amazing what they can do.

Another issue is quotas. You must set a quota, even if you don't really think it matters. The rep needs something to shoot for and you need something you can use as justification for termination if necessary. Take the number you have in mind, add 50% (this is the quota) and offer a retroactive 3-5% onto their comp package if they exceed quota. Finally, tiering and bonuses make sense and may help motivate, but I have always found that the best plans are the simplest ones, so that both you and the rep have a complete understanding of what the check should be at the end of the month.

I used to sell for a company that had the following compensation package: whatever you sold, you received 25% of. You received a $500 draw on the 5th for the previous month and then you received the commission check on the 20th.There was very low turnover and we were all motivated. The owner sold the business and the new owner changed everything and lost quite a few folks, but that's life. That was the most profitable sales job I ever had.

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