How do I pay sales commission to sales representatives in a services business?
Did you miss our case study from when we assisted a full service marketing agency to set the right sales compensation plan for their first Sales BDM hire?
The right sales commission plan is critical to your first and subsequent hires, particularly within a new or growing business. Some of the considerations and challenges raised in this blog are particularly relevant to business owners or directors who have come from a non sales background who might be unsure where to start.
Some practical tips for structuring sales commission and planning:
1) Preparation and planning
- Consider the line of business you are in and what the market rates are for your industry sector.
- Talk to some of your industry peers about their experiences.
- Do your research with some benchmark insights or recruitment reports.
2) Sales budget on FTE (Full Time Employment)
- Know your financial figures first in terms of your operational and fixed overhead costs, average profit margins and revenue goals.
- How long are your average sales cycles per service? This determines how your sales pipeline can be developed to reach your monthly required targets based on speed and size.
- Do you know your cost of sale and what type of sale you are making – invoice upon delivery or on purchase order?
- Have you calculated your sales revenue targets and established what is realistically achievable?
3) Individual role requirements
- Do you receive payment on invoice or signing of a contract upfront?
- Do you need to consider any client KPIs or credits?
- Are you paying the commission coming out of the client pricing profit margin or from a revenue target?
- Different structures are appropriate for different businesses and the type of services and products you are selling.
- Is your sales hire going to be responsible for acquisition or retention business and accounts?
4) Commission considerations
- Is it a flat fee percentage uncapped?
- Do you have a staged payment plan or bonus plan for the team?
- Have you considered if a contract is cancelled or mis-sold what happens to the commission component?
- Is there a sliding scale achievement plan based on monthly quotas and for overachievement?
- Is there a team component to incentivise and motivate team performance around ongoing account engagement or retaining high value accounts?
- If you are to set a foundation standard, ensure that this will be consistent with how you pay different sales people in the future.
- Consider how to continuously keep the sales people motivated – what happens if they overachieve or underachieve depending on your sales cycle?
Sales commission and planning – what next?
Often smaller or growing services businesses don’t have a structured sales plan, rather the sales responsibilities may be shared between the team.
There is a correlation that sales performance and behaviour is determined by the sales plan and culture created by an organisation. Leadership from the business owner or sales manager needs to develop this.
Sometimes a multi level sales compensation plan is required to guide the sales person to sell the right services, i.e. higher profit managed or retainer services versus a product based transactional model.
If you pay commission on annual or monthly revenue targets without any breakdown then this can lead to account issues and a disincentive to cross sell and upsell with existing or new clients for the year to maximize the revenue opportunity.
From my experience, the delicate balance of designing a sales compensation plan to support one individual may also need to consider other sales team members, either existing or future hires. The role of the sales leader and business owner here is to develop the right sales strategies and financial budgets and targets, aligned to the sales objectives.
I don’t have, or recommend, a one size fits all sales compensation model for the purpose of this article, however I can provide some scenarios to different business models – but it’s advised to arrange a consultation and customised solution and approach as required designed to specifically to suit your sales objectives and needs.
If you haven’t come from a sales background or a business owner, this might need more elaboration…. Do I pay a base and commission split of 50 base:50 commission, 60:40 or 70:30 split, or do I consider a shared risk 40:60 (60% at risk component)? Perhaps a guaranteed commission structure or a bonus might be more appropriate.
Look out for our next article around sales commission and compensation examples and scenarios which also apply to you, “How do I pay sales people for acquisition sales or retention sales?
In the meantime, if you are starting out building your sales team or first sales hire, please reach out to us for assistance or advice in making the right choices at firstname.lastname@example.org or @alchemise_cons or call our office on +61392255022 – or click below for a consultation on everything sales, including sales performance and compensation structure!