Determining Commissions for Independent Sales Reps

One of the most common questions involved with the hiring of independent sales reps relates to compensation. “How do we pay our manufacturer’s reps?” Fortunately, while there is no standard flat rate or easy answer, there is a very important guideline to keep in mind:
Nothing motivates sales better than an attractive commission schedule.

A commission-only position is the best way to pay sales reps, with the best method being a straight percentage of the sales price. While there are a few different ways to handle this, most sales reps tend to prefer a straight percentage based on the sales price.

If there are no fixed prices involved, a company might decide to go with a percentage of gross margin. It is worth pointing out, obvious as it is, that independent sales reps are in fact independent. They don’t work for your company, and don’t have much stake in what price a product sells for. If they have the flexibility to negotiate the final sales price, it makes sense to base commission on the gross margin, both to encourage your reps to try and sell higher, and also to prevent them from selling to low simply to close a sale. This is a way of providing your independent sales reps with a further level of investment in the well-being of your company and your products while maintaining them as independent.

With any sales rep you should enter into a marketing agreement which, among other things, should clearly define the commissions to be paid to the sales rep to eliminate disputes and hard feelings.

Depending on the industry, commission ranges can vary wildly. Other things that can influence commission include:

  • How much customer service do your sales reps need to provide to customers? If you expect your sales rep to provide functions beyond simply training, assisting with installation, testing, and so on, you should raise your commission rates.
  • Do your sales reps only provide leads, or do they close sales? Plenty of companies only require sales reps to bring in leads, and prefer to close the sale themselves, and act as account managers. This preference should probably reduce the commission rate to reflect the independent rep’s level of involvement in the actual sale.
  • Does your product generate repeat business? When a principal’s line is disposable or consumable, meaning that repeat business exists, commission can often be lower unless it takes time to service the account, generally because the customer does not need to be sold on the product every time. You also have the option of offsetting the lower commission  by paying a higher percentage or a bonus for the first sale to a new customer.
  • What types of expenses tend to occur for new businesses? In many cases, the front end costs of acquiring new customers can be fairly high, and commissions should reflect this to ensure that sales reps receive an appropriate return on their investment.

In general, most manufactured products prompt a commission rate of anywhere from 7 to 15 percent. For percentage of gross margin, (sales price minus direct expenses) a standard range is anywhere from 20 to 40 percent. In the interest of increasing the incentive, often a principal will include a sliding scale based on the volume of business that is generated by any given sales rep. You will want to be careful to factor in support services. If additional business necessitates additional support services or inventory, that can play a role in the sales rep’s return on investment.

Most service based products that do not require manufacturing expense tend to have commissions that can run upwards of 50 percent. You’ll want to be very careful in these instances, as this can have a significant impact on your business! For service based products, reps can sometimes be under the impression that as there are no manufacturing costs, there is very low overhead. You need to make sure that you factor time expenditures into your commission schedule such that your business has a good return on its investment.

Commission splits are another important consideration. Sometimes territories are divided by geographical location, or by industry type. You need to define any provisions on commissions that come into effect if the independent rep sells to a customer outside of their territory. You should also define what sort of commission split your independent reps should expect if someone else sells within their territory. You can’t always anticipate these issues in advance, and it is very important that all independent sales reps always have adequate incentives to continue performing up to the expectations of their employers.

204 Responses to “Determining Commissions for Independent Sales Reps”

  1. Marissa says:

    Hello, I am looking to hire an outside manufacture sales rep for an electronic company. His responsibilities would be to get our products into large big box retailers such as Costco and Walmart ect. After he opens the account we will hire an inside person to service the account. My question is : how much commission do we offer him? Also, once he opens the account he wants to sign a contract to receive commissions from the account for X number of years since he will open the doors for big box retailers he wants to reap the benefits. Is 1 year fair or more? Also how much commission is fair for him to get us into big stores?

  2. jas says:

    In general it is reasonable to reduce commission if the account servicing is not the reps responsibility. So our usual guideline of 10 – 15% would have to be reduced. This would be a negotiation point. Cannot give you more specifics than that.

    Regarding residuals after opening the account: this is definitely the incentive that motivates the rep to build your business, and is money well spent. One year would probably be a minimum but could go more. You have to decide if you want to motivate the rep to keep opening more lines for you that justifies the cost to you as compared to the revenue streams brought in.

  3. James says:

    I am looking for independent sales reps around the country who would sell big data solutions as SaaS model. They would be required to service these accounts. What is the typical payout for these type of positions in the big data industry?

  4. jas says:

    We don’t have in house expertise in this field. However, I do have a connection in the industry and will see if I can get some good info for you. In the meantime, perhaps another one of our readers might chime in with specifics.

    In general, the rep needs to make a living from all of his lines. Often we use the benchnark of 10 – 15% commission, because that translates into “a living” for the rep. However, in your field, if the dollars are large enough, such a rate might be too high. You might be able to take this line of thinking and back into a rate.

    Finally, as always, talking to the rep will give you an idea of expectations, as well as put boundaries around what you should expect. Why not start such conversations with the reps?

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