Since commission reps may not be your employees, the key is to establish clear communications regarding what you expect from them, and what rewards they will get in return.
General guidelines
- Establish in advance, in writing, what the commission or bonus arrangement will be.
- Set a target amount of what you expect an average sales rep should be able to earn.
- Establish how much of the total remuneration is to be retainer and how much is to be commission. As a guideline, at least 30% of total pay should be incentive based. The target amount will vary depending upon the industry, product, and how well established the company is. For example, you expect your reps' earnings to average $1,000 per week, made up of 30% in commission ($300) and 70% in retainer ($700). If your turnover is $10,000 (
GST exclusive) per week, a commission of $300 amounts to 3% of turnover. You would therefore set your commission at 3% of turnover.
- In a new sales environment consider starting on a month to month basis with a fixed dollar reward for achieving a certain sales goal. You can then adjust the goal each month as you learn more about what to expect. It also gives a new rep a more tangible goal to strive for.
- The general tendency is to pay a commission based on sales, not on margin. However, if you have reps who you expect to be with you for a while then a gross profit based system could work better - especially if your margins frequently shift and your reps have some control over what the margins are (that is, the ability to offer discounts).
Using the above example, say your gross profit margin on sales is 40%. Therefore the gross profit on weekly sales of $10,000 (GST exclusive) is $4,000. A commission of $300 amounts to 7.5% of gross profit. You would therefore set your commission at 7.5% of gross profit.
Should you split your reps into territories or let them roam free?
If you go with a territory approach, or perhaps designate reps by industry if that is more appropriate, then:
- You have greater control over the reps.
- Your customers will receive a higher degree of personal service.
- Reps remain motivated since they are not in direct competition with your other reps in the same area.
- You do not run the risk of customers being solicited by more than one rep.
Commission reps or employees
If you're a new business then consider independent commission reps, rather than employees, to avoid the fixed cost and commitment to building an in-house sales force.
