On our webinar with Jim Dunn on Thursday, 7/18/2024, one of the questions that was raised was, “How do I pay a salesperson?”
Here’s a recap of Jim’s advice and what we’ve seen work.
1099 vs W-2?
How you pay salespeople is dependent on your mission.
If you are trying to create a ‘rep’ model and can say, “If it works, great, but if not, no big loss,” then 1099 is the way to go – especially for non-mission-critical roles or when testing new sales strategies
However, for mission-critical roles, you need to have a direct sales force that paid consistently via W-2, even if the role requires a person recruit and manage other sales reps. This method simply provides more stability and control over the sales team.
Salary vs Commission?
In most cases, pay for salespeople should be a blend of pay and commission. That said, you need to consider basic economic safety (e.g. housing, food, health), as most people aren’t going to feel ‘safe’ in a role where they aren’t having basic needs met. That means getting the blend right.
So, how do you do that when most people aren’t going to give you actual numbers? Here’s a good rule of thumb: Use their housing cost just as a mortgage underwriter would. Look their address up on Zillow and use the Mortgage Zestimate. If you take this estimate divided by .35, you’ve got a pretty good idea of the ‘floor’ they need to gross monthly. Obviously, this can fluctuate if it’s one earner or two, and that’s likely information you also know about the person.
Here's an example: If someone has a home worth $400,000, and the ‘Zestimate’ has the mortgage at $2,800, then $2,800 / .35 X 12 months = $96,000 annually. Now, that will probably make the salesperson uncomfortable (because they would really like more), but you can feel better knowing that, if they are prudent, they aren’t going to lose their house working for you. The base could be supportable at +/- 15% of this amount.
Regarding commission, you should pay on gross profit, not sales. This prevents discounting as a mechanism for getting higher sales and higher commissions and sticking you with unprofitable customers. An easy target to hit is around 30% of this number for new customers (you might pay a little less for recurring orders).
Example: Assuming $1,000,000 in sales, $500,000 in gross profit, the commission would be $150,000. This leaves you $350,000 to cover the base salary of the salesperson and other overhead, and it also leaves you profit in that first year. It’s imperative that you don’t lose money paying commission, as the fastest way to lose a good salesperson is to cut their commission for the same performance because you ‘messed up the math.’
How Long Do I Give Them?
You should set some targets with a new salesperson based on activities. For example, if you know that you have a six-month sales cycle, you should expect that there are some qualified appointments occurring after two to three months, maximum, of starting. Monitor closely the activity to see that you are getting the behaviors you know close deals, as sticking to behaviors, day in and day out, is the best predictor of a future result.
Where can I learn more?
If you’re ready to grow your business by improving sales, we please reach out to us to schedule a quick, no-obligation call and/or sit in on one of many Growth sessions, in-person or virtually!
