A Guide to Giving Sales Commissions

This story appears in the June 2014 issue of Entrepreneur. Subscribe »

Q: What should I give my salespeople in commissions?

A: I know you're looking for a straightforward number here, but there are so many variables that--you guessed it--there's no single answer (as with most every decision in business). The amount of commission depends on a host of factors--notably, the typical commission structure in your industry. But there are others as well.

• If this year calls for a major new-product push, then the sales-compensation plan may call for bigger incentives to move that new product.
• Are sales based on existing personal connections and relationships? If so, then higher commission rates are needed.
• If deals in your industry take months to close, it makes more sense to have higher fixed salaries with small commissions/bonuses.
• Are your salespeople "hunters" tasked with finding new customers, or "farmers" selling to existing customers? Typically, hunters are motivated by higher commissions; some may even be unhappy with anything but 100 percent.
• Do your salespeople have some control over prices? I worked at a printing business where we paid the salespeople 50 percent of the profit of each sale. This achieved the perfect balance between holding the line on prices to maximize commissions and lowering prices to get sales.

However, all the factors above depend on what you can actually afford to pay, and for that you'll need to crunch some numbers.

Start with your budgeted sales targets for this year and figure out what your team needs to sell in order to meet your goal. Then determine whether the commissions are to be based on gross revenue, gross profit or some other calculation, such as units sold. Last, determine what bonus structure you'll use to reward those who exceed their sales targets and what deductions you'll take for failure to hit those numbers. These can be powerful motivators that lead to sizable sales increases for your company.

I like to build these variables into a spreadsheet, then run various scenarios to see what makes sense for my industry and my company. If you're still confused, get help from a financial advisor or part-time CFO. They can be a voice of reason when you become bogged down or crippled by the numbers.

Get the commission structure right, and you'll have a crack sales team you can trust and--more important--one that trusts you to treat them right.

Commission Command

Tips on managing the sales department

1. Resist the temptation to cap commissions. I recommend that there be no upper limit to what a great performer can earn, even if it's more than the owner takes home.

2. Keep the plan as simple and transparent as possible, so it's easy for everyone to understand.

3. Try not to change the commission structure too often, if at all. Salespeople get confused and resentful if their plans are messed with. And, in my experience, it's your best salespeople who leave first if they feel this way.

4. If you do adjust the commission structure, be warned of unintended consequences. Salespeople will immediately gravitate toward the biggest potential. Say you decide to pay a much higher commission on a new product and cut commissions on the existing line. Don't be surprised when your salespeople suddenly neglect your bread-and-butter product to chase those higher commissions.