How to Pay Salespeople: Base Plus 7-and-7 Formula
I get it. You do design, not sales.
Now we could talk all about how you never stop doing sales; how you’re always your best salesperson; how it’s extremely hard, if not impossible, to own a studio and not be involved in sales. But let’s leave that for another day, and simply focus here on how to actually pay salespeople, should you have them.
There’s a certain point in the growth of a design and development business when you hit critical mass with supply and production. You’ve got to keep your team busy and paid, which means you need to have a constant roster of new clients and a sales pipeline. That point of critical mass usually evolves into hiring a sales team or just a salesperson. When we got to this point, I kind of freaked out. I had NO IDEA how to do this. I had always done design, worked with clients, and made awesome stuff. But to keep up with the demand, grow the business, and stay on top of everything, I had to hire a sales guy… and I made a lot of mistakes. I mean a lot. So this article is an outline of what I finally figured out. I hope it gives you at least a good start!
Hiring for a sales role is substantially more easily said than done. Finding the right people can be an entire job within itself. But once again, let’s hold off on that for another day. Today, we’re talking about money.
Sales compensation can seem scary and confusing at first, but it’s all about balancing loyalty and job security for your employees while motivating them to sell more. The formula I use for sales compensation is a combination of base salary and commission. This is not for everyone, but it works here.
Base salary plus 7-and-7 incentives
In the Atlanta market where I’m based, the going rate for a salesperson’s base pay is between $30,000-$55,000. On top of this salary, I pay 7% of the initial contract amount. To promote upselling and cross-selling, I add another 7% for any revenue that comes from that client in the future.
Now we don’t want salespeople to land a few big sales and sit on their butts though, do we? So we have required activities. Meaning that all salespeople have to hit a certain number of site visits, calls, meetings, speaking gigs, presentations, etc.—every week, every month and every quarter. This helps them keep on top of their game and keeps them moving.
Here’s an ideal scenario:
Jaya on the sales team brings in a client this year that purchases a $100,000 website and mobile app project. Jaya frequently checks in with the client, always on the lookout for upselling opportunities, and meets with their account manager to help with some upsells. After the success of the first project, which triples the client’s revenue, she pitches them a new marketing project worth $50,000. Jaya earned her regular salary, plus 7% of the 100,000 project ($7,000), another 7% on the $50,000 project ($3,500). She also earned 7% of any of the other sales that either the account manager or she and the account manager together made. Let’s say there was an additional $15,000 in sales over 6 months (another $1,050). All told, she earns an extra $11,550 on top of her regular salary of $40,000. Imagine what she would bring home if she brought on a new client like that each month!
If you want to play around with the numbers, I’ve created this shared spreadsheet which uses the base plus 7-and-7 model. Plug in the base salary, average initial contract and ongoing contracts to figure out how much money your salesperson might make.
There are other formulas for sales compensation, which Elizabeth Wasserman gives a great overview of:
After identifying your sales goals and spelling out the vision of success for your sales staff, you need to figure out how your business will compensate the sales force. Some companies pay their sales people with straight salaries; others put their sales people on 100 percent commission. Those are the extremes. A straight base salary guarantees that valued sales staff members are compensated even during an economic downturn, when a lack of sales is attributable to factors outside the salesperson’s — or the company’s — control. On the other hand, variable pay, such as commission, incentivizes salespeople to work harder to land new accounts and drum up new business — they will see the results of their hard work in their paychecks. — Elizabeth Wasserman, Inc.
In a strictly service-based, web studio environment, I don’t advise going much over 15% for sales commissions. Simply because margins are often lower due to the higher risk in this arena.
A good salesperson should bring in $1-2 million per year in sales. A great salesperson can bring in as much as $4 million per year. Someone who is working for a design studio full-time should be able to bring in a minimum quota of $500,000.
In our studio, we measure quota quarterly. For a new hire, the first three to four months are a grace period when they’re not required to make the quarterly quota. I think of the grace period as an investment or training period. If, after the grace period, the salesperson is not on track to meet their quota, it may be time for them to start looking for a new job. Obviously this would be a huge loss for the company, and the only way to avoid it is to hire excellent talent. Picking the right candidate for your sales team is another blog post in and of itself.
Once the client hands you a check…
…then you can pay your sales team.
When you’re paying salespeople, I recommend only and always paying after the client has paid the company first. We bill our clients on time and materials, and we get paid every two weeks. The salesperson who originally sold the client receives their 7% cut after the client pays us for our work. In other words, pay your salesperson their percent of the money as you are being paid, not up front.
Yeah, there’s an exclusion to the rule
Sometimes we pay more than the standard 7% commission. When a client pays a quarter of the project budget upfront (let’s say, they give us $25,000 for a $100,000 total project), then we would give the salesperson 10% commission upfront instead of the standard 7%. We budget ongoing commission payments so that the average commission remains at 7%.
Setting Stretch Goals
Our team has a standard quota, a goal, and a stretch goal.
I already mentioned our quota is set at $500,000. The starting goal for each salesperson is $900,000. And our stretch goals are usually around $1.2 million for the first year. After the first year, each salesperson will have their goals set individually and incentivized appropriately.
The key is to incentivize meeting those goals and stretch goals. Every time one of our team meets the first goal, they receive an extra 1% on top of everything they’ve sold. For every stretch goal achieved, we give a 3% bonus. These bonuses apply to every dollar brought in, from the first $500,000 to the second $700,000. When someone makes our stretch goal, they bring home an extra $36,000, which essentially doubles their salary.
Hopefully this post gives you a good start on setting up appropriate sales compensation packages, but it’s certainly not all that can be said on the subject. As a designer or developer looking to grow a business, what questions do you think are still unanswered when it comes to paying salespeople?
Special thanks to Jeff Wilson from 352 for spending an entire day with me a couple years ago and showing me how a truly big, badass, agency runs. The method described in this blog is based on tips from him during that meeting.
I hope this was helpful to you all!