How to pay a salesman?

April 30, 2011

So you are considering hiring someone to sell for your business? You’re not sure how they should be compensated? Asking how to compensate a sales rep is something many contractors have asked me time and time again. The way I see it: It can be done one of three ways.

1) Commission (net sale) only.
2) Profit sharing (gross profit).
3) Salary plus commission or profit sharing.

Each method starts with identifying how much you feel this new salesman should earn. Let’s say $100,000.00 per year.  Then identify how much this person can sell per year. Let’s say $1,000,000.00

From my point of view if I went back to being strictly a salesman I would want profit sharing on my jobs. 40% of the gross sounds fair, but I’d take less if various perks were included like company truck, cell phone, benefits, etc… When I was a full time salesman, before I started my company, I was paid a very small salary like $250 a week. Then 25% of the gross profit from each of my jobs. I also had a company truck and cell phone.  I did more than sales though too, I did all the marketing management for the company and I managed my jobs from beginning to end. To be honest I really didn’t want the salary, but my boss wouldn’t up my commission.

I have hired very many salesmen since I started my roofing company in 2003. Most of them were ultra hesitant to work on the profit sharing model. They always have the same lame argument “How can I control the crews? I don’t want to be penalized for their mistakes.” That’s the difference between a salesman and a project manager IMO. A salesman just wants to sell and usually doesn’t have the know how to manage the project. In this case I was paying the salesmen 11% base plus monthly bonuses for hitting certain targets. I was also giving gasoline reimbursements up to a certain ammount. Having said that I find that most companies around here pay a flat 10% of the sale ammount. You sell $10,000, you get $1,000.

If I ever hire another salesman, will lower the 11%, increase the bonuses and compeltely do away with the gasoline reimbursements. They can put their mileage on their taxes afterall. This is assuming they don’t opt for the gross profit sharing model, which again I personally prefer.

Using the profit sharing model, and excluding any salary, you need to know your average daily gross profit target. Let’s say your average job lasts one day only and will yield $2,000.00 gross profit. You will also need to know how many working days there are in an average year, let’s say there are 200. If the salesman is to earn $100,000 here is the formula I would use… gross profit x working days = yearly gross then earnings divided yearly gross = gross profit sharing…

$2,000 x 200 = $400,000

$100,000 / $400,000 = .25 = 25% Therefore using this model the person would need to sell enough to cover $400k of gross profit at 25%. Sounds very reasonable if you ask me. If he sells more or sells at a higher gross you both earn more. If he sells less or sells at a lower gross you both earn less. Therefore it is in the salesman’s benefit to really maximize profit on every job he sells.

Using the commission model, it’s much much simpler. Yearly forecasted sales / yearly earnings = commission %. So…

1,000,000 / 100,000 = 10 = 10% commission.

The pot hole in this formula is that the jobs must be sold at a certain markup or you can lose money on jobs and the salesman can still be paid. Trust me It has cost me many many thousands of dollars through the last few years. This method of paying on the net sale is somewhat flawed if you ask me. This is why I prefer the gross profit sharing method.

If you decide you want to pay a salary in addition to the commissions or profit sharing, well that’s simple. Just deduct the salary from the earning equation and run the formulas again, and you will have your commission or gross profit sharing percentages. For what it’s worth the salary plus type model is very common in commercial contracting or indoor sales.

The method you use is up to you, but now you understand the formula. Keep in mind that if you are having someone selling your services or products you should also implement some form of checks and balances to ensure mistakes are not being made.

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