How Well Do You Incentivize Your Salesperson?
A top 10 question I am asked all over North America is “How should I compensate my salespeople.” Well, that question to me is both easy and complex.
My name is Scott Lollar and I’m a DYB Coach and I want to give you some thoughts that might help you with your comp plan for your sales team!
The first question you need to ask is “What is this person going to do on your team?”
I specifically have used the word “Salesperson” yet many companies are unclear what the job description for Salesperson really is.
After listening to the list of all of the tasks that this position might do, it usually never sounds like a salesperson.
If you want a handyman type salesperson that does anything and everything (except be successful at selling), then ignore everything I’m about to say.
This isn’t for you. But if a salesperson is what you want, I think this might help.
Download Your FREE Checklist...
3 Steps To Get Leads On Facebook
E-mailed To You NOW!
I want to emphatically declare that a salesperson should never include project manager in their job description. The reason is clear.
If my skill is securing work for the company and I am great at it, I should do nothing else.
And if you are not good at selling, then you should do something else.
What about a job walkthrough on the first day you ask.
This is after all great customer service you declare and the salesperson should do it.
You think you’ve got me. You don’t.
If this salesperson sells $1,000,000 dollars a year and works 2000 hours to do it, their time is worth $500 per hour in revenue to the company.
Can you figure out a pre-job walkthrough solution that might cost you less than $500 an hour? Maybe a better scope document?
Maybe a video in some project management program?
Or how about addressing the process of how you go from proposal to completion in your organization so the customer for one knows what to expect and 2 knows why they will never see you again!
By the way, they will never miss you because they are going to be handed off to an excellent operations team that will blow them away with excellent customer service right?
So how should you compensate salespeople?
Ready for it!
My core belief is that salespeople should be paid 100% on commission based on gross profit.
I’ll give everyone a few minutes to throw things at me and tell me why this won’t work and how it’s a terrible idea.
Ok, you feel better?
Why do I feel this way?
Commission on gross profit rewards a person for their level of effort while protecting the company from sloppy or short selling and allows you to pay them for their results which is what a salesperson wants.
A pure breed salesperson will be attracted to this type of comp plan because it directly rewards their efforts including improving their sales skills and does not put a ceiling on their income.
Of course, you need guard rails in place so they do not become so focused on their own success at the cost of anyone else including the company.
This is why hiring for culture is so critical in all positions including this one. They need to fit into your purpose statement and values.
Their success has to be in line with the success of the team as a whole.
So here are the bones of what my thoughts are on salesperson compensation:
Pay a commission on gross profit which is:
Revenue minus the cost of materials, minus direct labor, minus labor burden (which includes Federal and state unemployment, the company’s side of FICA, work comp and liability insurance and any other direct job costs like rented equipment, per diems, etc…..)
That’s it. No other variable expenses or G and A. Just what I have listed.
They should be provided with a Company Vehicle or be paid mileage.
While a company provided car controls the image you want to portray in addition to logos, it is also a significant expense. You might consider this as an incentive for hitting a certain level of sales in a year say $500,000.
They should have an expense account to network, entertain, or give an appropriate customer gift at their discretion.
This also needs to be tailored to the industry you serve.
Someone in the commercial area would very likely spend more money networking with prospects than say a residential salesperson would.
They should have all of the other standard company benefits.
I don’t really think PTO is a real issue here.
If you want to put some expectations in the job description that would be fine.
They are only paid when they sell so as long as they are closing what you and they have agreed to, they can take as much time off as they can want.
Of course, the million dollar question is how what percentage of gross profit should they earn?
This is the complex question that will take some number crunching.
A solid gross profit target is 50%. Some markets will be more and some less. This is up to you to wrestle with.
But assuming 50% Gross Profit, I think a reasonable comp plan would be about $100,000 of total comp on sales of $1,000,000. Now, this is not all cash.
I would count vehicle and health benefits as well if you offer those. So cash comp would be closer to $80,000 on sales of $1,000,000.
In addition, some of the overhead you incur on this position is recovered on the front end say the first $500,000 with less and less after that.
So a good plan might incentivize them with a bonus or additional commission say at $500,000 and another one say at $750,000. And maybe the first $500, 00 has a slightly lower commission.
This sends the message that they need to get from 0-500K quickly to get into the super commissions.
You will have to play with this and see what makes sense for your company.
They are most certainly going to need a draw against the commission to live while they build their book of business.
$1,000 per week is my thought.
They should be able to pay their day to day bills but no more.
Understand that this is absolutely an investment on both your parts.
You may or may not recover the draw in the first year and the salesperson will most likely not earn what they hope for the first year.
To offset this, you might begin with a base plus commission structure and wean them off the base portion say after 12 months.
I would suggest paying a quarterly commission earned over their draw based on projected sales. This helps them feel the reward from their efforts but be careful to not advance money against unrealistic projections.
You want them to feel the rewards and shouldn’t wait until the end of the year to show them the money if it is clear they are going to hit their sales goals.
So there you have it. What do you think? I would love your feedback on what you have done and what works and what has not.
You can reach me at Scott@DYBCoach.com with any feedback you might have.
And feel free to reach out if I can help you crunch your numbers to see what might fit for you.