How to pay your salespeople: VP Sales & sales team
I NEVER TRUST A SALESPERSON THAT TELLS ME IT’S NOT ABOUT THE MONEY BECAUSE YOU ONLY USE THAT EXCUSE WHEN YOU’RE HIDING SOMETHING MUCH WORSE.
So, how should you pay your salespeople? Your compensation structure is an integral factor. You want to incentivize more of the behaviors and results you want and de-incentivize what you don’t want. It is just that simple.
I’ve set up a few hundred different commission structures in my day, and they all, more or less, come down to this simple fact.
SHOULD YOU HIRE 100% REMOTE COMMISSION-ONLY SALESPEOPLE?
If you’re trying to run an info products business, work a 4-hour workweek, or establish a passive income hustle, you can hire remote salespeople.
If you’re running a real business, one that will be worth something, you need in-house sales representatives on payroll, not contractors.
I say this, having started my career in door-to-door sales, where I was paid exclusively off commission with no base salary. But those days are long gone.
With today’s job market, I won’t touch anyone prepared to take a 100% commission role that doesn’t have a seven-figure On-Target Earnings (OTE).
Essentially, providing a salesperson a base salary denotes your commitment to that salesperson:
- Employment commitment
- Financial security and stability
- Investment in their future
- Vested interest in their well-being
So, in return, you can ask them to commit to certain behaviors and activities that will lead to your company’s success.
It’s unreasonable to believe that a contractor will have the same level of commitment as a salaried employee. Contractors on 100% commission are paid for what they sell. If they don’t sell anything, where is the accountability?
It’s not like you paid them to sell something; you’re only paying them after they sell something.
In their eyes, they don’t owe you anything because there is no fair exchange. That mentality, at best, serves for a short-term gain in reducing risk but substantially sacrifices long-term revenue growth.
Whether experienced or a junior salesperson, find a first-class professional that wants to work. However, understand that this person will have a reasonable expectation to be paid a base salary.
INCENTIVIZE INDIVIDUALS WHOSE ACTIVITIES YIELD GREATER RESULTS
The base salary covers their commitment and daily activities to support the business, but I recommend incentivizing individuals and their behavior which deliver more significant results.
Therefore, in addition to their base salary, you need to pay them a commission percentage for every dollar of revenue they bring into the company.
Each industry and role have a different standard for what is appropriate, so research that before setting this commission percentage.
When calculating commission percentage, you base it on the total contract value or off profit margin.
So, should you calculate commission percentage on the total contract value, or just off profit margin? This is dependent on whether or not your profit margin has a high variance. If it’s consistent, set a small commission percentage based on the total deal value. Industries that habitually negotiate prices incentivize them with a larger percentage, based strictly on the margin they can maximize.
In more detail, if your profit margin is consistent, I recommend that you set a small commission percentage based on the total deal value to allow for less ambiguity and more transparency for the salesperson.
Psychologically, this is more satisfying for the salesperson because they’re paid from a more significant number than a subset.
However, if your industry regularly negotiates prices, you want to motivate your salesperson to hold your margins. You incentivize them with a larger percentage, based strictly on the margin they can maximize.
SETTING REVENUE TIERS TO ENFORCE BEHAVIORS & EXPECTATIONS
Another creative strategy for organizing commission structures is setting revenue tiers that denote new commission rates.
For example, if their standard commission rate is 5%, and their goal is $200k, you can set a tiered commission system that increases the commission rate to 6% at $300k, 7% at $400k, and so forth.
This prevents your sales team from sandbagging deals into the following month once they’ve hit their quota.
You can structure this in two ways: incrementally or retroactively on the total amount.
Incrementally – once they cross into $300k, you can pay them 5% on the first $200k, and then the 6% on the additional $100k.
Retroactively– you pay them the total additional rate for the entire month. So, 6% over the whole $300k.
I recommend you pay on the total amount. Incrementally, salespeople will meddle with arrangements, adjusting to get higher value deals to close after the commission bump. You don’t want them doing that; that foolish behavior will burn and lose deals.
Remember, never underestimate a salesperson to cut a corner or make an extra dollar.
You can also use this as a forcing function for hitting quota, reducing their commission rate if they miss their monthly quota.
For example, they are supposed to sell $200k of revenue for the month, getting a 5% commission on target. The salesperson only sold $150k; you reduce the commission to 3%. You enforce a 2% penalty for missing their quota. This forces your sales team to take their goals seriously.
Hitting quota is a non-negotiable for me, and it should be a non-negotiable for you.
Hitting quota is a non-negotiable for me, and it should be a non-negotiable for you.
WHEN SHOULD YOU PAY OUT THE INCENTIVE?
Many companies charge monthly or sign deals today but don’t get paid until some time in the future.
There are two sides here:
If the delay in commission is too long, the salesperson will lose motivation as the fruits of their labor are not in real-time.
On the other side, if you don’t get paid for 3-6 months or longer, you can’t pay today with future earnings. In the worst-case scenario, the client cancels, and the sales rep is long gone. Not only did you not make money, but you also lost the money you paid out.
If the initial deposit is enough to cover admin costs and the cost of sales of the deal, I recommend you pay out the commission upon closing.
For payments with significant delays, I recommend waiting to pay until the deal is actualized.
You may be thinking–”That still leaves me with a delayed gratification problem.”
In those situations, while you can’t pay your sales rep in full for the deal, you can pay a small bonus that will give them some reward. Additionally, you gamify the desire to continue closing deals.
I typically set up the pay structure to pay a small bonus for particular opportunities at specific stages of the deal.
For example, an ideal client meets specific qualifications and reaches the proposal stage. I will gladly pay out 3-5% of the commission.
Note: not the commission rate, but 5% of the actual commission. If the commission is $1000 for the deal, I’ll pay $50 for every ideal opportunity that makes it to that stage.
Or another example, you don’t get paid until 9-12 months after the deal is closed. You shouldn’t expect the salesperson to wait that long. Pay up to 10% of the commission upon the signed agreement.
If the commission to the salesperson is $1000, then I give them $100 upfront. Now, the salesperson has made $150 for a deal, and they will get the remaining $850 once I get paid. That is the best-case scenario.
My recommendations reward the salesperson and keep them motivated, but simultaneously prevents you from overextending yourself on payment delayed deals.
PROTECTING YOUR ORGANIZATION FROM REP’S ACTIVITIES
Establishing a reserve account
Another primary consideration is protecting your organization against salespeople selling a large number of deals, then abruptly quitting having never set appropriate expectations with the client.
I see this scenario regularly. These companies can only lose because they’ve already paid out the salesperson and have to either void the deal or refund the amount paid.
To counterbalance, I always recommend a reserve account. Effectively, it’s a reserve of money that gets held back from the salesperson in the described situation.
This reserve account fills to the rate you deem appropriate. I believe that 2-3% of a salesperson’s annual incentives are suitable.
For example, if someone is expected to make $100k in commissions, I’d keep the reserve account limit to $2-3k.
HOW IT WORKS:
- All commissions are paid into the reserve account.
- Every time you pay out monthly or quarterly incentives, you complete what is known as a clearing –everything over that $2k limit is paid to the sales rep.
- Any clawbacks in commissions come out of the reserve account, and future incentives fill it back to the limit.
- Now, the salesperson leaves, but you still hold $2k of their commissions. You pay out to them upon the last of all their actualized deals.
A reserve account protects the company, but let’s be honest, it’s a small amount of money.
However, more importantly, it acts as a deterrent. The measure serves to psychologically demotivate salespeople from pushing bad deals on their way out – they won’t be paid on it.
The more significant gain is ensuring client experience. It’s not great to lose the money, but it’s much worse to upset the client.
De-incentivize perpetually bad deals
Let’s not forget about that salesperson who perpetually sells terrible deals on protecting the company.
I like to de-incentivize this behavior by only paying out bonuses, accelerators, or extra incentives to salespeople whose persistency rate is above the company average.
A persistency rate is effectively the client turnover rate.
Two examples of behaviors to look out for:
- A sales rep’s clients only renew at a 50% rate but are below the company’s client’s renewal average, say 80%.
- The rate of clients living out their agreement for a sales rep exceeds the company average.
These facts are what led me to believe that the sales rep in question is mismanaging expectations.
Unless they can get their persistency rate up, they don’t qualify for extra incentives.
I recommend you calculate this on a rolling 12-month basis if you sell annualized agreements.
I like to de-incentivize sales reps making perpetually bad sales deals by only paying out bonuses, accelerators, or extra incentives to salespeople whose persistency rate is above the company average.
There are a million different ways to pay salespeople; however, if you follow our basic structure, you’ll find that you’ll motivate the behaviors that will help grow your company.
Remember, salespeople are paid to sell. You don’t want order takers, so weed them out and only grow the team members committed to the organization’s goals.
For more information on commission incentivization, visit Rose Garden.
Rose Garden Consulting
About the author:
Ali Mirza is the Founder & CEO of Rose Garden, a national sales consulting organization, and featured in Forbes, Inc, Business Insider, The Huffington Post, Business Rockstars, and The Wall Street Journal.
Ali is a highly sought-after public speaker presenting at multiple national conferences on innovative ways to accomplish transformational growth on your sales team.
Rose Garden provides unparalleled support and guidance to growth-minded founders via sales strategy differentiation, world-class sales culture creation, and exclusive playbooks, processes, and scripts to position them for limitless growth.