What Percent of Gross Revenue Should Be Sales Compensation?
Developing a pay plan in a sales-related industry can be a significant challenge. The difficulty is in establishing an equitable pay plan that will attract quality salespeople to your sales force, without necessarily breaking your bank account. Compensation plans are sometimes built on the basis of gross revenue, either for each individual sales or for a certain period of time.
The amount of gross revenue that should go towards an employee's commission depends partly on the industry you are in. Industries have different pay structures that are often industry-specific or at least similar across the industry as a whole. For example, automobile dealers will pay salespeople anywhere from 20 to 30 percent on the gross revenue made on each vehicle they sell. These numbers will sometimes be adjusted based on volume bonuses or other special promotions, but many automotive sales consultants are generally paid this general range of pay. In the office equipment industry, the commission is lower, somewhere around 10 percent. Retail salespeople may only make 3 to 5 percent, but this depends on the product being sold.
Industry-based comparisons can be useful to help you determine if you will be competitive with other employers, but you should develop your pay plan based on other factors as well. For instance, Bob De Contreras of Research Triangle Business Advisors recommends basing your commission structure partly on your overall expenses and available funds. You also have to determine whether part of the pay that employees receive will be guaranteed pay in the form of a base salary. If so, you may want to reduce the amount of the commission so that what employees earn will match up with others in the industry. The main difference will be in terms of guaranteed pay versus commission pay.
Another plan of attack when developing your compensation structure is to base it on total sales volume. This gives you an opportunity to pay employees a fair industry commission or slightly less, but allow them to make up the difference in pay through a generous bonus plan. For instance, if the standard commission in your industry is 10 percent, you can pay 7 percent and offer volume bonuses in the form of a set amount, or raise the percentage to 12 percent when your employees reach performance goals.
In reality, there is no one specific way to develop a sales commission pay plan and there is no specific gross commission that you necessarily have to pay. Instead, take into consideration your own business finances, a realistic assessment of the amount of revenue that a business in your industry can generate and what an employee in your industry would want to make. The key is to find the right mix of compensation elements to present employees with an attractive pay plan. Offering comprehensive insurance and retirement plans may also affect your decision about how much you are willing to pay.