The very first article I ever published on the SalesCompGuy.com website was about how to start your sales compensation plan off right. The reason I wrote it was that many organizations, especially startups or expanding ones, tend to jump right into competitive research or respond to external action. We all want to be able to offer market-level compensation, and sometimes, that desire gets in the way of what I consider to be the right place to start: What can you actually afford?

Starting Sales Compensation with What You Can Afford

While there are many types of sales roles and many ways of paying them, some of the future questions of compensation development, like how much pay to put at risk or how to allocate territory and opportunity, will rely on what you find when you dig into your financials.

Knowing what you can afford to pay will help you craft a strategy for how to define a job role, how to compete in your market, whether to use a commission or bonus plan, how much base vs. variable pay to assign, and much more. So, how do you assess what you can afford? You’ll need to start by looking at these three factors:

1. What are the up-front costs of hiring?

If you’ve hired before, you understand just how long it can take, especially for a salesperson, to ramp up to full capability. In addition to the costs of the hiring process, you also have to account for the costs associated with onboarding, training, and ramping up your salesperson.

Obviously, they’ll need to be paid during that time as well, so if you’re planning on them eventually operating under a high pay-at-risk, lower base compensation plan, you’ll need to have a plan to supplement their pay in the beginning.

2. How much base salary can your company afford right now?

Figuring out what your company can afford to pay may require running a few different scenarios. In addition to factoring in the cost of onboarding, you’ll want to figure out how much your company can pay in base salary without any level of sales productivity. And for how long? This has yet to account for the more holistic review of the pay mix, given the actual role selected. Having a financial understanding of the organization’s fiscal situation will help as you then proceed to look externally. It is also helpful when talking to a prospective salesperson about the reality of the business situation you are in and where you desire to get to with their help.

3. What is the reasonable expectation of how much your salesperson can produce once they’re at full capability?

Based on a scenario somewhere between the worst and best case scenario, how much revenue (profitable revenue ideally) can you expect an average salesperson to bring into the organization? To answer this question, you’ll need to evaluate the territorial assignments, market opportunity, historical productivity, average deal size, and average length of the sales cycle to establish a reasonable expectation.

Once that’s done, you want to focus on the following two questions:

• Does the expected revenue cover the cost of your salesperson’s fixed and variable pay?
• Will it help the company meet its financial goals?

What if you can’t afford a new salesperson?

Ideally, once you’ve established what you can afford, you move into the process of market research to see how you compare and to set goals as to how you want to pay compared to the market. After that, you can begin working through the rest of the details of hiring and onboarding your salesperson.

However, sometimes you find that either you can’t meet market pay, the expected generated revenue doesn’t justify the cost of the salesperson, or some other factor negates the value of a salesperson.

In the event you find you can’t hire at median market pay, you have several options, which I’ve covered in past posts. Those include:

• Revising the role and expectations (new level or type of sales job)
• Reassessing your goal or finding new paths to reaching it (shift of focus)
• Put more pay at risk (greater shared risk with greater upside)

Whatever your situation, the main goal is to hire or promote a salesperson only when doing so furthers your organizational goals and not at the cost of the financial stability of the organization (or the loss of their job).