The Sales Coach Newsletter
March 1997
© 1998 by Galante & Company

How much should I pay my salespeople?
Once you analyze this question, you realize that it can be worded differently and still mean the same thing: "How much of a risk should I take on this person or that person." The amount to pay is contingent upon the amount of risk you are willing to take. Failures take risks, successful people take calculated risks. I have read volumes on the subject of sales compensation and given the fact that this is being read by owners, managers and salespeople, most of whom are in different industries, I will outline the fundamental elements of an effective sales compensation package. You can decide how to apply this information to your industry and/or your position.

First let me say that these principles apply to sales reps that are knocking on doors as well as anyone within your company that can influence a customer to purchase more goods. Don't be afraid to review all of your sales/marketing positions and implement some kind of performance bonus for each.

An effective compensation plan will be have three key elements. They are, it should be fair to both parties, competitive within your industry and with other industries, and motivate people to perform above average tasks.

Being fair means that the company and the salesperson should share in the rewards of success and the pains of failure. Whenever a salesperson opens an account or sells something, they should be rewarded. Many companies put minimums in place or don't pay on renewals. My theory is, if the salesperson was instrumental in getting the customer to say yes, then they should be compensated for it.

Being competitive means that you have to offer job applicants more than your competitor and anyone else who is trying to hire quality talent. Give yourself an advantage over the competition by offering a better overall compensation package like, better working conditions, more opportunity to sell and grow, a stronger product line, better company reputation etc. Salespeople want to work for a winning organization because this gives them a chance at winning. Take a look at the free agency market in professional sports and then tell me why you shouldn't use head-hunters or give sign-on bonuses to above average performers.

Motivation comes from commitment. The thought that 100% commission will out-motivate a base salary plus commissions is as antiquated as the horse and buggy. Salespeople want to see a commitment from the company. Sure, I can earn more money on 100% commission, but who says you are not going to cut down my territory next year, or cut my commission rate when I start to earn more than the company president?

Commission is certainly a motivator, but a strong base salary for when sales are slow shows salespeople that you are in this relationship for the long haul. If you are tight on cash you can always put someone on a draw for the first 90 days to get them started, then move them into a salary plus commission arrangement. A monthly, quarterly or yearly bonus program consisting of perks like, all expense paid trips, training sessions, prizes etc. goes a long way in the motivation department. Ask them what they would work extra hard for, then create an incentive program around it.

Limit your risk with the use of a rating system. A salesperson classifies as an "A", (the most likely to succeed) if he has a track record in your industry that you can verify through non-partial parties. Ask them to show you tax returns and/or W-2 forms to prove income. Call previous employers and ask for salary histories. Once you are sure you have a winner, you will feel much more comfortable giving this person a higher salary.

A person with a "B" rating has a track record in another industry (verifiable of course) and has a reasonable chance to succeed based on his ability in a previous position. Invest a little less in this person from the beginning until they know your product.

A person with a "C" rating has a little or no track record in sales. This person has the highest chance of failure and should be given the least amount of financial consideration. They will however need the most nurturing and investment in time.

Another thing to consider when creating a compensation plan is the length of the sales cycle. The longer it takes from the date of sale to the date the commission is paid, the more you need to pay a base salary. Short pay cycles, lead to lower base salaries, longer pay cycles lead to higher base salaries. Sometimes you can substitute a draw in place of a salary in order to keep the salesperson going.

Compensation plans vary by industry. There is no right or wrong plan, only effective and non-effective ones. My number one suggestion is to gather as much information from industry associations or other reliable sources as you can. Many industries publish compensation surveys that tell you what percentage of sales you should be spending on your sales personnel. This number is very important. It will help you establish a sales compensation plan as well as tell you if your sales staff is effective. The higher your sales expense the more likely your sales force is inefficient. So my question to you is: "What percentage of sales should you be paying your salespeople?" If you don't know, you could be paying to much. Ouch!

All compensation plans should include things like paying for marketing expenses, full health and dental, life insurance, vacation, sick and holiday time, pension plans and performance bonuses.

Salespeople are like athletes and everyone wants the super stars. Truth is, it is rare for a company to get a full team of Michael Jordans. If you end up with a few heavy hitters, a few above average players and a few average people, you're doing a great job.

Major league teams (in sports and in business) pay top dollar for the best. As the saying goes; "If you pay them, they will come."

Quotes to sell by

I pity the man who wants a coat so cheap that the man or women who produces the cloth will starve in the process.

- Benjamin Harrison

Don't be afraid to take a big step if one is indicated; you can't cross a chasm in two small jumps.

- William Lloyd George

Sometimes the best gain is to lose.

- George Herbert

Lighten up
Long Island employment is up
Home sales are the strongest in 12 months
The Fed hasn't raised rates
The Knicks are on a roll
Spring is right around the corner

Galante & Company is a sales training and positioning firm.Our mission is to help entrepreneurs, executives, managers and salespeople realize greater success.Our purpose is to increase the performance of individuals and organizations.Our role is to understand our client, set realistic goals, help create practical action plans and follow through to completion.Coaching, consulting, speaking and training services are available nationwide via telephone, e-mail and in person.The Sales Coach is a free newsletter. Please copy it and pass it on to your associates or anyone who you think would benefit from it.

Thank you.

Michael J. Galante

GALANTE & COMPANY