What’s the best way to incentivize sales reps? How much is too much, and how much is too little?
You’re not the only one with these burning questions on your mind. You don’t want to overpay and undermine your profitability, but you also don’t want to underpay and risk losing your best sales reps to a higher-paying competitor.
Contrary to popular belief, you should pay out on a percentage of profits, not gross sales. This protects you against having to pay commissions on unprofitable deals. Plus, it also keeps your sales reps from going after a nightmare client just to make a commission goal.
Know what a profitable customer looks like, what sort of agreements will result in profit and what don’t. It can be hard to figure all these metrics out on your own. Fortunately, you don’t have to. There are plenty of business management platforms available to provide the visibility you need to determine what makes a deal profitable.
Whatever you want more of is what you compensate on. You want more profit? Compensate on profit. You want more agreements? Incentivize agreements. Want more customers? Pay on number of acquired customers.
What you compensate on may change every year, but base it on your business plan and business goals. Determine what’s more important to your organization. If you’re transitioning to an a-as-service model, it’s a great way to get your sales people to sell service contracts and the like.
Before you can begin to pay out incentives, you first need to have a thorough understanding of your total cost of goods and services. Consider the following when trying to determine your total costs.
Identify your cost of goods:
- Labor burden
- Expense account (lunch, golfing, presents, entertainment)
- Outsourced services
All these areas eat into your profitability and should be excluded when considering commissions. For instance, if your sales rep spends $1,500 on golf and drinks with a client to capture a $10,000 deal with a 25% profit margin, you should only pay a commission on $1,000 of that $2,500 profit.
Paying a base salary is incredibly important. It’s going to take time for your new rep to learn how to effectively sell your products, and most people need a steady paycheck in order to make ends meet.
We believe in having a 60-day ramp up period. During this time, there shouldn’t be any selling, just prepping to sell. Knowing that, what are you going to do to help them become successful? Here’s an Onboarding Worksheet to help you get started.
Once you have a handle on the onboarding, it’s time to think commission.
Certainly, some reps can evolve into a commission-only plan, but they require a mixed approach up front. No one shows up on day one able to close tons of business for a product they’ve never sold before. Give new sales reps time to build relationships, learn the products inside and out, and become a part of your company’s culture.
The prospect of forgoing commission for 60+ days can keep a sales superstar from opting to work for you. In special cases like these, we recommend the commission ramp-down option.
With this model, they don’t have to sacrifice commission up front while they learn how to sell your products and services. The idea is that their skill level and sales will rise to meet the reduction in guaranteed commission each month until they’re achieving 100% on their own.