How to Pay Your Salespeople

Figuring out how to pay your salespeople is tricky. You’ve worked hard bootstrapping your company and have done all of the sales yourself. But as your company grows it gets harder to give sales the attention it needs.   It’s time to hire a dedicated sales staff. Getting the right people with the correct incentives in place will be the primary driver for the success of your company. For the purposes of this article, let’s assume that the person you will hire is the right cultural fit for your company and your customers.   This post will focus on a few ways to pay the people you hire to be your sales staff.

Commission-Only Independent Sales

For start-up companies, it’s wonderful to find a capable independent salesperson who is dedicated to work full time for straight commission. In the natural foods business, the commission is usually around 8% to 10%. This person will not be an employee. They will be an independent contractor who starts from near-zero and works to grow their territory until they are able to earn a living.  But, unless they represent other brands or have other sources of income, they will not be able to pay their living expenses for a while.  Since you have already been growing sales yourself, consider handing over the management of some customer accounts to your new salesperson so they have some commissions coming in.  They will work to grow these accounts while also adding new customers.

Benefits of an independent sales rep:

They are incredibly motivated. Your financial risk is low because they don’t get paid unless they are successful.  You also do not need to provide benefits or incur other employee related expenses.  They will need to pay all of this themselves. You will be sending them a 1099 rather than a W-2 tax form at the end of the year. Just like owners, independent sales reps never “clock out”. Their income depends on being available for customers.  If they also represent other brands, they will already have relationships with buyers. 

Downsides of an independent sales rep:

Since they are independent, you cannot set their work hours or dictate that they represent only your company’s products.  Their compensation structure means they are more likely to focus their energy on a few larger clients rather than accumulating many smaller clients.  It’s difficult to keep someone new in the position unless they have some existing accounts given to them or have some other income that allows them the time and freedom to build up a solid income selling your products.  An experienced person who represents other brands may demand a base fee until they build sales.

Hourly Plus Commission Employee

The most common method to pay your salespeople in our industry is to offer hourly pay along with a sales commission. These people will be employees of the company. An informal survey of business owners in my network yields an average of $15 per hour plus 3% to 5% commission in addition to benefits such as health insurance and PTO.  Companies selling consumable products such as diapers, granola, and batteries, may see steadily growing sales throughout the year. This consistency provides a stable commission income.  Businesses selling more durable goods like tractors or MRI machines have a much longer sales cycle with irregular commission income for the sales rep. They may work many months on one sale while receiving only their base pay. In these cases, it is common to allow the rep to “take a draw” against future commissions. You may also want to offer draws if your business is highly seasonal.

Benefits of hiring Base + Commission employee:

It is nice to have the energy of in-house sales employees.  They are available to help answer phones and take over other responsibilities within your company.  Especially in smaller businesses, it’s helpful to have all employees cross-trained on other duties. Employees are focused on selling only your products.  They are more willing to spend time working with your smaller clients as well as the larger.

Downsides of employee salesperson:

Unlike contract sales reps, you are paying wages and benefits regardless of performance. A non-productive hire can really weigh heavily on a company.  For a bootstrapping start-up company this could mean the difference between success and failure.  Some managers argue that in-house sales staff are less motivated than contract reps.  This bias can be overcome by adding incentives for growth in sales, such as a bonus for growing their overall sales over previous years.

Salary Without Commission:

There are a few companies in our industry (organic foods) that prefer not to pay commissions.  This is more in line with their corporate values and recognizes that the success of a company depends on all employees, not just the salespeople.  In these cases, the wages tend to be lower than the market compensation (salaries plus commission) of commissioned salespeople within the industry.

Benefits of no commission:

Provides a stress-free, collaborative sales culture.  Other employees do not harbor any resentment toward salespeople because they earn more money or feel that the sales team is afforded special treatment.

Downside of no commission:

They may not be as motivated to increase the customer base.  When preparing to write this post, I spoke to one of our customers who operates this way.  She confided that they are going to change to a base-pay plus commission structure and asked me to provide details about our in-house sales commission program. A successful salesperson will often move to a company with a commission structure.

How to pay your salespeople – final thoughts:

In 2006 we brought on our first independent sales reps. As we grew, we decided to replace independent reps with in-house employee sales staff when the independent reps quit. The independent sales reps that stayed on gradually began making a very good income and still play a significant role in the success of our company. 25% of our sales staff is still comprised of independent reps.

There are many possible variations of how to pay your salespeople, but overall, it is important to align your sales department’s goals with those of the company.  I would be happy to discuss these with you if you send us an email marty@singingdogvanilla.com or give me a call.  In the end, your sales team will be the engine of your company.  Treat them well and smile every time you sign their paychecks. Their success equals your success.