Estimating Sales Compensation

I've been operating under the assumption that I want to set the commission rate for my commission only sales reps based on: (# of sales) * (average deal value) * (r) = compensation or r = c/(N*V). c and V I have a good handle on but N I'm a little unsure about. All sales thus far have been done by a co-founder and we don't have a very good estimate of how many deals a fulltime salesperson who doesn't have operational and R&D responsibilities should be able to close.

So my questions are:

1. Is the methodology sound or naive, as it was simply intuitive to me and I may be missing something?
2. Are there any good resources for data on this subject (hard data like sales quotas split by at least the dimension of average deal value and maybe dimensions like inside sales vs. outside sales)?

This is B2B btw and our sales cycle is typically about a month.

OK, there are a lot of ways of dealing with commissions, what you need to understand is that whatever you put in place will set the way they behave. The law of unintended consequences, have a read of Freakonomics and listen to the early podcasts to get an idea of just how strange setting the wrong incentive can turn out.

As for your questions, what you haven't said in your equation is

• The type of thing they are selling? Is it a complex, long term, relationship based sale or is it walk in the door show the product and get a yes/no and move on?
• What is the average expected total sales from a sales person in 3 months or 6 months?
• What is the price point for what they are selling? cheap, mid range, premium?
• What is the revenue model of what they are selling? Single sale, ongoing service fees, subscription?
• Do they act independantly or do they have to work together?
• Is that their sole job or do they have other jobs?
• What sort of relationship do you want with the customer after the sale is closed? Don't care through to they love you and will continue to buy off you for the next 10 years.
• Do you pay commissions if the sale has to be refunded within the cooling off period?
• Do you pay commissions if the sale has to be refunded
• Do you need to followup independantly with the client to ensure they are satisifed (say a 5 question survey) before paying?

All of these factors, and many more play into the variables you would consider when engaging a sales team especially when it is on commission. Every time you setup an incentive scheme you have to ask "how is the person going to behave", "not how would I like them to behave". To answer that you need to think through how they can get their commission with the lowest amount of effort.

From their perspective

• If I go it alone, can I make more? Teamwork is out the door.
• If I pressure the weak prospects can I close quicker and higher? You clients aren't happy even if they paid, there will be no referals, no long term growth.
• If I bend the truth can I close and move on? This kills any long term good will you have building up.
• If I spend my time building up a network of happy people will my long term income be significantly higher? If so you need an ongoing time component to your equation.
• If they touch a sale OR are part of the team do they get anything? do they get the same as if they didn't. We setup a 2% of sale rule and one person started claiming their 2% for simply answering the phone and handing it to the actual sales person ... we killed that scheme and had a total commission per sale that was the pool that could be dragged from.
• Is there a lead salesperson and support sales people. If so you want to encourage teamwork, the best I have heard is the lead person is responsible for deciding how to split the commission (5% of the sale price for example) between the team members based on their contribution to the sale or to the sales effort in 3 months ... there was always more than 1 lead person ... This made everyone play together and made the lead salespeople quite generous with the split if they wanted to get help the next time they were leads.

So your equation will most likely work if they are door to door salespeople, with low indivdiual, high volume sales (many a day or week) who don't expect to go back and the individual sale price is low so goodwill is not you key priority ...

Otherwise I would look at reformulting it based on "what do I want the end result with my customers to be" and playing through senarios with a few people to see how they could game the scheme. I would then play through the scheme in Excel to make sure your still profitable given the rest of your business model outside of the sales arena.