HARDISON’S TIPS – OCTOBER 25, 2021 – It’s OK if Your Sales Rep Makes More Than You
In my consulting practice, one question seems to cause more concern with small business owners than any other: Would you mind paying your top Sales Representative more than you make?
Base vs Commission:
When an owner is used to paying Sales Representatives a large base salary with little or no commission they invariably answer this question – YES, paying their top Sales Representative more than they get paid is just NOT going to happen! Likewise, when the owner pays “commission only” they generally answer this question – Sure, but it is never going to happen! I generally agree with this answer since “commission only” Sales Representatives are seldom great, and when they are, the owner often develops or changes the commission plan so that it will not allow for sustainable financial success.
Once I’ve discovered the owner’s thoughts on compensation, it is time to discuss balance. Personally, I prefer to develop a compensation plan that is balanced – 50% base salary and 50% commission/bonus. (Note: a good compensation plan will drive the Sales Representative to perform the actions and win the types of sales that we have determined will make the company successful.) Once we have discussed appropriate compensation plans, I have to ask the question again …Would you mind? Unfortunately, many owners still have trouble accepting that a Sales Representative could actually make more money than they personally take home.
Funding Commissions & Bonuses:
For those owners who are still on the fence, it is now time to discuss how commissions are “funded.” A good commission plan is based upon a percentage of sales or profits and should be as simple as possible. To make it easy for the owner, I provide an example – let’s assume that 50% of the Sales Representative’s compensation for commission is derived from 10% of the profits for the sales that Sales Representative made and 90% of the profits from those sales goes to the company for operations, etc. I then ask the question one more time … Would you mind? It is almost universal at this point – WOW, they can make as much money as possible since I get to keep 90% of the profit!
Profit vs Gross Sales:
I realize that it isn’t always easy and can be unfair to the company or Sales Representative, but if at all possible, commissions should be based on profit and not just gross sales. To be fair to the Sales Representative, use a standard cost-of-goods (COG’s) so that cost overruns (scrap, rework, excess labor, etc.) don’t adversely penalize them for things out of their control. To help protect the company, let the Sales Representative sell on value and not just cost or a “standard list price.” Establish minimums, but let your Sales Representatives price your product and increase your bottom line as well as theirs.
You want your Sales Representatives to make as much money as possible if you have a good compensation plan. Why? Because the company will make more profit, you will be able to hire the best Sales Representatives, and you will keep them at your company.