Here at Sales Cookie, many of our customers ask us what a reasonable revenue-based sales commission percentage should look like. Our customers are trying to determine which exact percentage of revenue should be assigned to sales commissions in order to deliver a viable sales incentive program. Should their commission rate be 7%, 8%, 9% of revenue? Understandably, our customers want to control the total cost of their sales incentives while creating some motivation for their reps.
However, it’s often not the best approach to start with a percentage of revenue to define a sales commission program (the same way you should not price goods based on their cost, but based on perceived value). Instead of picking an arbitrary percent of revenue, and then defining a commission program around this percentage, it’s best to first define expected rep compensation and results, and backtrack to a percent of revenue.
The best way to do this is define a base salary, and a variable pay mix for each role. Together, these two components define the “expected” total target compensation – ex: 60K base + 40K commissions = 100K on-target compensation. Instead of controlling sales commission costs using a percent of revenue, this approach allows you to control it by defining labor costs. We’ll show you how you can convert your expected labor cost into a percent of revenue to pay in commissions.
Once you’ve defined the variable pay component, you must decide which sales results must be obtained to earn it in full (ex: $1 million in revenue), and calculate the percent of revenue required to pay for commissions! This backtracking approach also explains why there is no “standard percent of revenue paid in commissions” – except in very specific industries such as real-estate.
The other benefit of using a target total compensation approach (and backtracking to a percent of revenue) is that it ensures your business remains competitive. Just assigning an arbitrary percentage of revenue to commission payouts does NOT help you ensure you will be able to hire or retain good reps. Defining pay mixes, on the opposite, helps you do this. And you’ll have an opportunity to set sales expectations as well.
Most businesses want to provide special incentives for attaining higher levels of sales performance. This means using tiered commission models, which makes the total payout somewhat unpredictable. In other words, it’s hard to enforce an exact percentage of revenue using a performance-based commission model – regardless of which way you started. Note that assigning a percentage of revenues is not the only option. Make sure to choose an SPM solution which offers multiple options!
A Simple Example
Let’s say you want to calculate the correct percentage of revenue to use for sales commissions. Start by defining a base salary for each role:
Next, define a competitive, yet reasonable, total on-target total compensation for each role:
|Role||On-Target Total Compensation|
The difference between the two represents each role’s variable compensation when meeting goals:
Next, define the average revenue you expect each role to bring in (or manage):
|Role||Average Total Revenue|
Next, divide your expected revenue by each role’s variable compensation, and you have defined a percentage of revenue to pay in commissions. If reps meet their sales goals, this percentage of revenue paid as commissions will ensure they receive their full on-target compensation.
|Role||Average % Of Revenue Commission|
|Junior ADR||3% to 4%|
|Senior ADR||4% to 6%|
|Junior BDM||5% to 10%|
|Senior BDM||5.7% to 8.5%|
There is no “standard” percent of revenue you need to pay to your reps. Instead, start by defining an expected, on-target compensation for each role. This will allow you to better manage costs, set reasonable expectations, and keep your incentive program competitive. Converting on-target compensation numbers to an average percent of revenue to pay in commissions is an easy process. To further automate your sales commission program, visit us online!