How much should you pay your sales reps?

Determining the remuneration of the sales staff in your company requires taking into account many parameters, including:

• Market wages
• The salary historically offered within the company
• The salary of the other functions of the company (to not create too great of an imbalance)

An equation that is already difficult to solve... The most difficult thing is certainly to assess whether the salary is worth the work done! 

However, the advantage of sales functions is that their performance is very quantifiable. Indeed, it is easy to know what a sales person brings to the company.

Through a concrete example, we will show you how to define the ideal budget to allocate to the compensation of sales representatives, but also how to adapt in case of too high or too low remuneration!

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1. Steps for setting sales reps' remuneration

Use the CAC to define the remuneration of sales reps'

One of the most scrutinized indicators of a company's health and growth potential is the Customer Acquisition Cost (CAC). 

In concrete terms, to determine your Customer Acquisition Cost (CAC), you need to combine all your Sales & Marketing expenses and divide them by the number of customers. 

As the remuneration of sales staff is a charge to the Sales department, it seems appropriate to reason in terms of CAC when estimating the budget to be allocated to the remuneration of sales staff.

To determine this budget, let's take an example with the following parameters:

• New customer targets for the year: 400
• Maximum customer acquisition cost: €15,000
• Marketing & Sales tools budget: €2.8M.

The formula for calculating the maximum budget for sales reps' remuneration is:

• ‍(New customer targets x maximum CAC) - Marketing expenditure and Sales tools

For example: 

• (400 x €15,000) - €2.8M = €3.2M

For this example, we will consider that the team consists of : 

• 20 Account Executives (AE)
• 20 Sales Development Representatives (SDR)

And that AEs are paid 67% more than SDRs.

Thus, the calculation formula for determining the maximum remuneration package for sales staff (fixed salary + commissions) is :

Employer's charges x (Nb AE x Gross AE Package + Nb SDR x Gross SDR Package)

For example: 

• 3.2M€ = 1.45 x (20 x AE gross package + 20 x SDR gross package)
• 3.2M / 1.45 = €2.2M = 20 x AE gross package + 20 x (SDR gross package/1.67)
• Gross AE package = €2.2M / (20+(20/1.67)) = €68,800
• SDR gross package = AE gross package/1.67 = €68,800/1.67 = €41,200

Once the gross remuneration package has been defined, it is then necessary to determine the split between fixed and variable pay for both SDRs and AEs of the companies. In a second step, it will also be necessary to choose the indicators on which to base the variable remuneration of sales staff.

"The split between fixed and variable pay should be continuously reviewed in line with the maturity of the business and the products."

Vladimir Ionesco, Director of Global Sales Performance at Doctolib

‍Adjusting the sales compensation

With the above method, each company can determine the remuneration package that provides the best balance between profitability for the company and the retention of salespeople.

However, it is quite likely that the results obtained do not coincide with the reality of the company's wages. After all, it is only an estimation, not an exact science. 

So, here's how to react in the case of lower pay than the estimated results:

• Paying salespeople better. 
• Invest in marketing (if the ROI is interesting).
• Keep things as they are. After all, the CAC is better than expected!

And here's how to react in the case of higher pay than the estimated results:

• Reduce costs related to marketing expenses and sales tools.
• Improve the effectiveness of marketing campaigns and sales strategy.

Use customer acquisition costs

The cost of customer acquisition is one of the most relevant ways of estimating the budget to be allocated to the remuneration of sales staff because it is based on the company's indicators and its commercial context. 

However, it is also important, once the remuneration packages have been defined, to compare them with market salaries. 

As an example, below is a benchmark from The Balderton B2B Sales Playbook, and a second from the Uptoo study of sales salaries in 2020:

Finally, beyond remuneration, to motivate sales people to reach their objectives, to perform well, but also to build loyalty, it is essential to give them visibility and transparency on their commissions through commission calculation and management software like Qobra!

As proof of this, 61.9% of employees using commission calculation and management software exceeded their targets, compared with just 30.1% of those using Excel or Google Sheets. (Qobra & Modjo study on variable commissions in France)

"Since we've had Qobra, we've seen between 15 and 20% improvement on target achievement."

Tomas Hons, GTM Strategy & Operations Manager at Make

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2. Key points and advantages of our method

The customer acquisition cost is a relevant starting point for estimating the budget to be allocated to variable commissions for sales reps. It is based on indicators specific to the company and its sales reps' context. However, it is inevitable to compare the remuneration packages defined with market salaries to ensure that they are competitive.

As an employer, you need to put in place a remuneration policy that includes a system of commissions and bonuses aligned with sales targets and the performance of the sales team. This commission plan should motivate sales reps to achieve their annual targets and maximize business results.

To achieve this, it is advisable to equip your company with management tools such as Qobra, which enable the amount of commission and bonus to be calculated precisely according to the percentage of targets achieved, thus offering total transparency.

This kind of strategy helps to retain talent, ensure optimum performance in a sector as competitive as France, and maintain a good sales dynamic within the company.