Management 101:
Compensating Salespeople - Part 1: Salaries & Quotas

In an earlier ISP-Planet column, we explored the process of attracting a sales force, but once the beast's in your barn, how do you feed it to maximize its productivity?

by Jason Zigmont HowToSell.net [August 20, 1999]

A question I am asked repeatedly is "What should I pay my salespeople?" The simplicity of the question suggests a simple answer. For better or worse, however, the answers (note plural) are quite complex. Nevertheless, in this column--and next week's--I will attempt to provide some useful guidelines by exploring some possible solutions.

Disclaimer: That there are dozens of books on salesforce compensation--and thousands of different strategies. You can even outsource your commission structuring to outside experts. So, again, these columns should not be viewed as a comprehensive treatment; rather it sketches out some practical solutions, based on what some ISPs are offering--without delving into the theories behind the solutions.

The first debate in designing salespeople's pay structures is commission-only vs. base+commission or some other variant. Personally--and there are those who vehemently disagree--I would never again hire a commission-only salesperson. I've done it, and I've learned from my mistakes.

Commission-only: Not recommended
While hiring salespeople on commission only may sound attractive, there are many pitfalls. Under normal circumstances, experienced salespeople will never take a commission-only job. Salespeople paid on a commission-only basis not only have problems doing their own budgets, they also have a very rough time getting credit, loans, or any type of credit cards because banks want to see a stable income.

In addition to attracting inexperienced people, commission-only plans can make salespeople desperate, and desperate people sometimes do desperate things. This is not a negative reflection on salespeople (I am in sales, after all), but your salespeople have lives and expenses. A slow month--which may well be completely out of their control--may interfere with their putting food on the table: financial desperation. This will increase the motivation to stretch the truth or flat-out lie to get a sale. Desperate salespeople are not the ones you want representing your company.

If you have decided you want commission-only salespeople, then skip down a few paragraphs to the section on quotas. If I've persuaded you, the next question is what base salary should you pay your salespeople?

Base salary basics
Employers have different philosophies on base salaries, but personally, I believe that a salesperson's base should be just enough to barely cover their normal expenses. Salespeople are money-driven; your goal is to avert anxiety by having the base cover food and shelter, and let the salesperson's drive for money and toys drive them to make sales.

Base salaries vary from area to area, of course. The range I've seen runs from $20k to $70k, with the upper end being in areas like New York City. To determine a reasonable base for your area, start by calculating your cost of living. (There are many cost of living tools available on the web. For example, Career Builder has a good set of tools.)

Tip: You can also use a higher base to entice a salesperson to come to your company and to reward your 'senior' salespeople.

Quota quotients
The next step is to determine what quota your salesperson will have to achieve in new sales each month. Quotas are generally defined in terms of a total of new monthly recurring revenue, but I have seen combined quotas of recurring revenue and non-recurring revenue. Ideally, you would like to have your salespeople bring in new sales equal to or greater than their monthly base salary. That is, if they have a base salary of $60K, then you would ideally have a monthly quota of at least $5K. This approach works equally well for junior and senior salespeople, as it's calculated from their base salary.

While dividing base salary has the virtue of being a simple method, it glosses over two significant factors that you need to consider. The first of these is your product set. Quotas for salespeople selling higher priced products (high-speed access, co-location, etc.) can be higher. The opposite is true also. The second is what level of sales are actually possible both given your geographic and market area, and your system limits. That is, if you can't handle $5k in new sales each month, then it makes no sense to set quota that high.

Stat: Average ISPs have a quota of between $3K and $4K in new sales every month.

Quotas function as both a goal and a calibration tool. If a salesperson constantly misses his/her quota, and the rest of the sales force is beating it, then it is probably time for that salesperson to shape up or ship out. If no one is beating the quota, then maybe it is a little high. You need to experiment with quotas to see what is right for you.

Tip: Beyond quotas - Quotas are necessary and good, but you need more: You should also have an incentive for salespeople to beat their quotas. As noted, salespeople are competitive creatures, and contests motivate them. Some companies have a 'commission accelerator' or bonuses for exceeding quotas. Many companies have a 'President's Club', which is usually a company-sponsored trip for salespeople who beat their yearly quota. (Monthly quota x 12)

We'll give you a chance to let all this sink in. Next week we'll be back to cover the delicate art of Setting Commission Rates. Please join us then.

Your in service,
Jason Zigmont

—End

read Part 2 of Compensating Salespeople
read other articles by Jason Zigmont