You've Decided to Hire a Salesperson: What to Pay Them?

Image by Ev Kamikawa

Congratulations!

As a small business owner you've decided that you are ready to make the leap and hire a salesperson. Now you're up to your knees in alligators trying to figure out what to do first.

Before you place your ads and start your interviewing process you need to decide what you are going to pay your salesperson. There are usually three types of pay plans:

1. straight commission

2. base salary + commission

3. draw on salary + commission

As a general rule salespeople like to know that while they are out in the field getting doors slammed in their faces they will have enough money to pay the mortgage and car payments.
The rest of their toys or kids education should serve as motivation.

I suggest having a lowish-medium base + commission. Find out what that salesperson needs to live on and what their dreams and goals are.
Pay them just enough to cover big expenses, but not enough to make them comfortable that they don't need to sell.

Someone out of school can get by on less money than someone in their 30's with kids and a mortgage. The graduate might work for $1,500 base per month and 10% commission. A person in their 30's might work for a $3,000 base and 15% commission. On the surface the older salesperson is more expensive, however what it costs you should not be the only criteria for hiring.
An experienced sales person will have a broader network of people to contact. They should have more expenses and will be hungry to get all the things their family wants serving as motivation. The training ramp up time should be shorter and provide a quicker return.
A new salesperson will be cheaper in the short run, but will take more time to train and a longer time to be producing at a higher level. There are however some really hungry new members of the work force. If you can afford to spend more of your time with a new salesperson and will continue to keep up your prospecting and selling then a new salesperson might be the way to go, however I'd caution against it for your FIRST hire.


Don't even think about capping commissions! You might hate writing bigger checks to your salesperson, however don't forget as they sell more you might pay more commission, but you will make more money too!
In the scenarios above at least 80% of the revenue from a sale goes to you. How much of that 80% goes to the bottom line depends on your business plan.

A good salesperson should never be afraid to work on straight commission and should have done it at one time in their career successfully. It is not for everyone. If commission is all you can or are willing to pay, you will have to search longer and harder for a special salesperson who is not only motivated to make money, but has a good stash of money to support themselves. You will also have to worry about them bolting for another job that offers a base. Don't be cheap. Consider offering a base for the first 3-6 months. If the salesperson does all the right daily activites to be successful then they probably won't miss the base once the commissions start rolling in. 

Draws against commission I've found are confusing and serve nothing except to motivate salespeople to look for a new job. Draws are stupid. Sales isn't an exact science. A good salesperson can bust their butt and have things not close for reasons beyond their control. So instead of paying them for all the good work they did prospecting and servicing and reinforcing their behavior, you're going to take money away from their next checks? That pisses the salesperson off, not at themselves but YOU! Paying a draw and then recovering it when "the salesperson is doing well" is even more damaging. Suddenly the salesperson is paying back big chunks of their current commissions for base pay received months ago. They still had to do all the right activities back then to allow themselves and you to be successful now, so don't punish them by taking away money they are finally receiving from clients who insist on not paying for 90-120 days (collection issues are a seperate topic).
 If you need to recover draws in any way you never had the money to support a salesperson or you are too cheap to begin with.

If you don't have enough business to support a salesperson's base salary, benefits, expenses, and training for at least one year, DO NOT hire someone. Pass "GO" and earn another $200 or land on "Free Parking" to use Monopoly references. Don't count on having the salesperson earn their keep completely by 90 or 120 days. That may not be enough time depending on your product's sales cycle and the type of salesperson you hire. Does that mean you have to wait a year before firing bad salespeople? No! You just don't want their salary to be a sword of Damicles over your business.

Keep in mind that any sales activity done today will bear fruit or be moved out of the pipeline in 90 days. If you hire someone thinking they will be able to sell your product by 90 days and all will be well you are in for a shock. Even in the best circumstances with the best salesperson it will take time to build relationships and get sales through the approval process.

When figuring out what you can afford to pay, you also need to figure out how long it will be before you can recover your investment in that person. To do this find out what your average time is to make a sale (i.e. four months). Double that (8 months) and add one more (9 months). As a general rule you should start to see a return on your investment in the 9th month. Notice I said "start" to see a return. I actually like to figure 3x the average sale time plus one to get a more accurate time.
Why? Stuff happens. The best laid battle plan never survives first contact with the enemy.
If you can't afford to carry a salesperson's base and expenses for 13 months in the above case, don't hire someone until you can either speed up your average sale OR increase profit margin, AND have enough cash reserves. You'll have less sleepless nights and a more motivated salesperson.
Been there. Done that. I like my sleep.

I've written several blogs about how to recruit salespeople so just search this blog for "job ads."


Ev
"A Heck of A Nice Guy"