I'm helping a startup in the medical field. Does anybody have advice on a sales commission plans? Mix of salary and comm%? Rough % for commissions? Thanks! Jim in MI
Sales Commissions Plan
Answers
In general commission plans should have their foundation in the corporate quarterly sales plan, with the variable component directly related to the deliverables. Following is a breakdown of the components of sales compensation for a medical device company, this is only a guideline; actual sales compensation could vary.
• Base compensation paid semi-monthly $60,000 per year
• Variable compensation, based on deliverables 100,000 per year
• Bonus, based on a corporate objectives, e.g. exp budget 15,000 per year
Deliverables are varied and can be mixed in a comp plan
Accounts opened
Capital equipment sales
Disposable sales
Account utilization (# disposables per month per account)
Etc
Sales compensation plans and the method of payment vary widely you should be able to find additional resources on line. The sales rep variable compensation plan is telling the rep what the company wants them to do. Generally, the simple is the best.
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Jim, you might want to check out this free resource here at Proformative.
If you have to make "draws" part of your plan, make sure you tie the earning of the draws into some sort of performance plan that furthers your employees development in the organization. For instance, make the salesperson demonstrate a knowledge of the companies products, polices, and contracts by providing a sales presentation to members of
I also agree with Phil's comment to keep the plan simple. Salespeople should be able to calculate, as close as possible, their commission earned on each sale. This creates the bond between performance and reward that you're trying to instill as part of the commission plan. Plans that are complicated or that can't be calculated fail to establish that bond and then fail to drive performance.
Keep in mind that your compensation plan provides behavioral incentives. Make sure you are promoting the desired kind of behavior. For instance, paying based on gross sales may not produce the best results. You might be better off paying based on gross margin and paying when payments are received rather when sales made. You may also throw in components related to customer service and measures of their contribution to the company as a whole. I believe the traditional methods of paying sales people are shortsighted.
Steve raises some good points, both of the methods he suggests (paying on gross profit and paying when paid) I have used in the past because it made sense in the industries in which I was working (job cost manufacturing and project based systems solutions). However, if your industry doesn't have credit and collection issues and you don't have a high incidence or returned goods, you may be able to save some reconciliation work and keep your plans simple by paying 30 to 60 days in arrears of sale, depending on your customers payment terms. Otherwise if you pay when paid, you're going to get requests from salespeople to reconcile their checks with their calculations, and it is the right thing to prepare (basically documenting and tracking customers that have not paid). Since you're a start-up, paying in arrears may save some administrative work but only if you don't have the collection/returned goods issues mentioned above.
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Thanks gentlemen! Very helpful comments. What about %? Do you have a range of suggested % of sales in the early days, and later? What about caps? (can we afford to end up paying $150k to a salesperson when we're growing, even if it means their sales production is fueling our growth?)
I am from the software space and the percent is a simple calculation of the total amount of annual commission dollars divided by the quota you set. The quota depends on your industry but in SW sales the commission rate at full quota is in the range of 6 to 8 percent. The plans also have accelerators which kick in for performance above plan
I agree with the comment about sales people wanting to reconcile their commissions so if you use collection as part of the process there is an administrative burden involved in producing the statements as well as in responding to questions.
Joan
Assuming your sales team can set prices, you may want to make the commission a variable percentage based on the margin % - that helps incent the sales team to increase margins (good for them and for the company) but they are not incented to attempt to gouge customerss because they may lose sales and a smaller percentage of something is better than a larger percentage of nothing.
I've never seen caps on commissions, it's counterproductive. You're paying commissions to incentify performance and caps only serve to limit performance beyond a certain point.
I'm going to assume that you're concern that you are a "growing" business goes to cash required to fund working capital needs and therefore the availability of cash to pay the commisssions, which is why you either "pay when paid" or establish a policy to pay in arrears (ie. at some point beyond the payment terms you give your clients).
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Caps are what started EDS -- Ross Perot hit his cap early in the year, couldn't make any more and stopped working for them...
The % must be based on several factors. The GPM on each product/product line; the average sale and sales cycle and life-cycle of customer.
Our Commission plan in any ones book is very good, 10% for earning first 12 months, 5% thereafter, paid on collection. Since we're selling consulting services, the ticket prices are high.
But, we need to sell into the C-Suite, and that isn't always easy. So that is part of the reason for the higher than normal %. In addition, there is currently no base or draw. That would change the % and the plan make-up. Possibly for the better, but then again not.
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