How to get sales commissions right

Q: How much should I pay in sales commissions?

A:

Several months ago, I wrote an article to help you figure out if you are ready to hire a salesperson,

If you already have a sales strategy in place, and you have sold your product or service at least 10 times or $1 million worth of it, then scaling through a sales team could make sense for you, and a sales commission model might be right to reward your team for their efforts.

Here are some considerations when building a sales commissions model:

1) Current cashflow - if I want to offer a base salary for my team, how much could I afford to pay someone without any incremental sales? (it might take someone a few months before they land their first sale)

2) What sales targets would this salesperson have? Will they have to hit any minimum sales targets before their commisisons kick in?

3) What are market comparable commisson rates for my industry? What is the candidate expecting? Try and come up with a range (ie. 5 - 25% ).

4) Once I have come up with a range of sales targets and commission rates, I can model out a few different scenarios where the base rates goes down and the commisison rate goes up.

5) Next, you might want to pick the scenarios that work best for you, once you understand what total compensation would look like under each scenario. You will also have to align these scenarios with their expectations. You could present them with your top two scenarios and give them options to choose from.  

6) Last, circle back to cashflow. Make sure the commissions you are agreeing to pay align with your cashflow and you are not promising to pay commissions before you receive the payment from your customer.