The essential criteria for the salary of a sales representative are that it should be motivating for the employee, coherent with market sector averages and realistic for the company. And setting the fairest and most attractive compensation for sales representatives can sometimes seem like a bit of a challenge. But it is really just about respecting a few essential rules and making rational choices. Let’s look at how you can judiciously and reasonably calculate a sales representative’s salary.
Select the right sales representative status
To calculate a sales representative’s salary, you need to start by selecting the right status for this type of employee. This choice will depend on the company situation, requirements and market context. Using a pre-established roadmap setting out the economic stakes and the type and difficulty of the negotiations that the sales representatives will have to manage, the employer should be able to determine which skills they can expect their sales representatives to have and select the profiles most likely to meet the company’s specific challenges.
Sales representatives should therefore be selected according to their relationship with the company, either as an employee, for sales assistants and VRP (Travelling sales representatives), or as an agent. Another criterion is raised by this status: technical support, sales assistants and VRPs all receive payslips whereas a sales agent invoices their services. The type of compensation preferred by the company can also be a defining criterion, sales assistants and exclusive VRPs receive a basic pay plus a variable element whilst multi-brand VRPs and sales agents are paid in commission on their sales.
The company’s financial resources, age and business sector will help them to decide on the specific status of their sales team. Younger businesses tend to go for independent sales teams whilst older and more stable businesses will benefit more from recruiting their sales force as employees. To refine their choices and calculate the salaries of sales representatives as fairly as possible, it would be wise to establish a detailed list of the company’s global objectives.
Basing the calculation of a sales representative’s salary on the company’s needs
Calculating a sales representative’s salary involves linking their wages with the company’s main objectives. The established strategy can involve increasing company revenue or cash-flow, reducing overheads, increasing the client-base by increasing the number of contracts signed, increasing the number of additional sales, increasing sales of a specific product or increasing the profit margin.
Having a clear and precise list of objectives is essential to achieving the correct balance between the degree of individual performance expected from sales representatives and the company’s overall performance. It is essential that sales teams know exactly what is expected from them in order to construct the best possible strategy for achieving their objectives and managing their compensation. The more a sales representative can deploy techniques that will increase their income, the more the company will benefit directly as a result.
There are two ways to fix these objectives: the bottom-up and the top-down approaches. The bottom-up approach involves setting objectives in terms of the sales representatives’ capacities and the opportunities presented by their sales territory. The objectives should therefore account for the number of sales representatives involved, the number of prospects and their conversion rates, the value of the contracts and the average income of each sales representative. The more experienced sales representatives can easily exceed the number of sales and this means that the company will have to re-evaluate their quotas on a regular basis.
On the other hand, the top-down approach involves first setting the company’s global objectives and linking them to the market realities. This combination provides an idea of the results expected from the sales team, how many sales representatives will be needed to achieve those results and what profiles would be best suited. This data will be essential to calculating each one’s salary.
Sales representative salaries: fixed or variable compensation
Whilst multi-brand VRPs and sales agents receive no basic pay, the companies generally opt for a combination of the two for employee sales representatives. It will be essential to select the right balance between these two wage components and decide on the type of incentive compensation, which can be a genuine sales performance lever.
Commission based pay and its variants
The oldest form of incentive compensation in France is commission-based pay. Sales representatives are very familiar with this type of compensation and often work with commission based pay schemes involving minimum and maximum amounts, calculated from the gross profit generated by the company, the number of sales or turnover. Commission based pay is very popular with employers who see it as a way of very closely associating the wages of their sales teams with company revenue and therefore its global strategy. The main forms of commission-based pay are:
- Commission based on turnover in addition to a fixed base wage: this is the most popular model; it involves paying a fixed basic wage to the sales representatives to which is added a commission calculated from additional sales. This system’s success comes from the coherent relation between the fixed and variable wage portions, the variable portion must be sufficiently high to be motivating but reasonable enough to avoid being discouraging.
- Commission based on gross profit: instead of turnover, gross profit is used to calculate the commission. The greater the gross profit generated by the sale of a product, the higher the commission. This method incites sales representatives to restrict price discounts and focus on selling the most profitable products. This system involves carefully calculating the gross profit of each product according to its cost and context as well as allowing the sales representatives to manage pricing.
- Absolute commission: the salary is entirely variable and sales operatives are compensated uniquely for the sales they make. The wage is calculated from turnover multiplied by the commission rate. This form of compensation can result in very irregular but sometimes very high income amounts; it is not suited to all sectors and does not generally guarantee employee loyalty.
- Progressive commission: this form of commission includes tiers beyond which the commission rate increases. This progressive form of incentive compensation can be very useful for inciting sales representatives to increase the value of their sales provided that the products on sale and the associated market are suitable for this approach.
- Sales territory-related commission: sales representatives are compensated depending on the results of the whole of the sales territory in which they operate and not for their individual sales. This system can be an interesting way to motivate teamwork and conquer new sales territories. However, it is not likely to respond to the personal ambitions of sales representatives in a satisfactory way.
The more the sales representatives sign off sales and achieve high financial results, the greater their commission. However this form of incentive compensation may limit the company’s overall performance to the individual ambitions of its sales representatives and force them to recruit staff with an entrepreneuring profile, which is not always possible or even interesting for all companies.
Objective-indexed bonus schemes and their potential
Whilst wages in France are expected to increase, companies are looking to propose attractive pay packages that are adapted to their financial capacities. More and more companies are opting for objective-indexed bonuses exclusively based on performance requirements that are both quantitative and qualitative. In addition to the revenue that the sales representatives allow the company to generate, these can also be evaluated using other criteria such as customer satisfaction.
The principle of the objective-indexed bonus is simple: the sales representative receives an amount related to their reaching or exceeding a set objective. If they fail to do this there is no bonus. Far from being an additional expense, objective-indexed bonuses are an investment for the company.
However objective-indexed bonuses do require detailed and informed preparatory work on the part of the employer, they will need to come up with objectives that are realistic, measurable and pertinent for company strategy and its short, medium and long term needs. The difficulty of the exercise explains why many employers prefer the commission-based pay system, generally considered more accessible.
In reality, the ideal incentive compensation for a sales representative should be based on an intelligent combination of commission and objective-indexed bonus, allowing them access to commission calculated using turnover as well as bonuses for each objective reached or exceeded. In addition, opting for different and specific performance cycles can also boost the motivation of sales representatives and propose an attractive wage package that will contribute to keeping talent on board.
Whatever type of incentive compensation is chosen, this will not fulfil all of its potential unless it is accessible for the sales representatives. To define the salaries of sales representatives, it is best to opt for a ratio that does not exceed 10% to 30% of the variable part.
Sales representative salaries: it's all about dates
The best time to compensate sales representatives depends on the chosen type of compensation. This could be when the customer signs the contract. The signature is very symbolic and readily associated with the concept of reward; it will be very motivating for the sales representative. But if there is a significant delay between the contract signature and the actual customer payment, this may generate cash-flow issues for the company. This is why many companies prefer to wait for the first payment from the customer, even if there is a risk of a delay between the commission payment and the date that the contract is paid up in full.
The company could also opt for a phased commission structure. This monthly cycle system will be able to release the payment, using a progressive rate, as soon as the sales representative has exceeded a pre-defined threshold. Inversely, the commission rate could be revised at a lower rate if the defined threshold is not met. To this payment schedule we can add another performance cycle for the payment of objective-indexed bonuses.
The sales representative compensation payment schedule must not put the company into any financial difficulties and correspond with a rhythm that will motivate the sales representatives and be coherent with the market sector and activity. The regularity of the selected cycles will also depend on the incentive compensation form chosen by the company.
If calculating sales representative salaries might seem complicated at first, the operation simply requires deciding on their status, considering the company’s needs, selecting the most suited compensation type and deciding on a coherent compensation payment schedule. These essential parameters will allow you to calculate a fair wage and propose a compensation package that can be both attractive to employees and a source of greater performance for the company.
