How To Build Your First Sales Team (Pt. 4) — Sales Pay
Welcome back to our multi-week series, How To Build Your First Sales Team: The 4 Ps Of Sales! In Part 3, we talked all about the second of the 4 Ps, Performance, and answered the question, “How many sales do you need to make to be successful?”
If you haven’t read the earlier parts in this series, we recommend doing so before continuing on.
- How To Build Your First Sales Team (Pt. 1)
- How To Build Your First Sales Team (Pt. 2)
- How To Build Your First Sales Team (Pt. 3)
Let’s get into the third of the 4 Ps of Sales: Pay. Simply put, how much should you pay for sales?
You need to come up with the right salary to pay the employees on your sales team, but this can get a bit tricky when you really think about it. First, we need to review the basics of sales compensation plans to make sure we’re on the same page.
Sales Compensation Plans
While there are likely few — if any — identical sales compensation plans, there are two core elements to them all.
- Performance Expectations, which are typically referred to as sales quotas. Think of sales quotas as a specified number of sales a salesperson is expected to reach during an agreed-upon time frame.
- Payment Details, which are more commonly known as sales commissions. Traditionally, commissions are calculated by a percentage of the overall sale. If a sale is $100, a salesperson’s commission might be 10%, so they get $10 on top of their base salary, and the company absorbs the rest. Think of sales commissions as how they will get paid for meeting their sales quotas.
When coming up with your own sales compensation plan, you need to work through three steps: 1) What’s a realistic sales quota, 2) What’s the net sales benefit each salesperson will contribute to your business, and 3) How profitable will salespeople be to your business?
We’re going to break these questions down. So, grab your calculator and settle on in for some fun math problems.
1) What’s a realistic sales quota?
Say that you need 34 sales at $10K per sale to reach your profit goal. From your experience selling your offerings, you believe the average salesperson can realistically make one new sale per month or 12 per year. Divide 34 required sales by 12 per salesperson to figure out that you need to hire 3 salespeople to achieve your performance goal.
Now, just simply multiply the number of sales per salesperson (12) by the average sale price ($10K) to determine that each salesperson will contribute $120K per year in revenue. That’s your sales quota!
2) What’s the net sales benefit each sales person will contribute to your business?
Net sales benefit is before compensation. Keep in mind that sales compensation should include how much salespeople earn, as well as the expenses the business pays, like payroll taxes, benefits, incidentals, etc.
The only thing needed to figure out the net sales contribution is to subtract salesperson compensation from your gross sales contribution. Remember this number as you move to the third and final step.
3) How profitable will salespeople be to your business?
This last and final step brings us to the moment we’ve all been waiting for! To answer the question, “How much should I pay for sales?” you need to consider overall profitability.
Salesperson profitability is the net sales contribution after compensation (which you just calculated), less a proportionate share of operating expenses.
Once you have your last 12 months of operating expenses totaled, use the total sales made over the same period to calculate operating expenses per sale. Multiply this value by the sales quota, and then subtract this from their net sales contribution. That’s your estimated salesperson profitability!
Generally speaking, the higher this value, the better — but proceed with caution if you find yourself with a negative number here.
We’ve covered a lot here and it’s always a bit tricky when there’s math involved. Be sure to take your time and watch this lesson in our full online sales training course, Sales 102: How To Build Your First Sales Team. And remember: you’ve got this.
‘Til next time!
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