Usually salesmen have a base pay and then commission on each sale. I want to know how a company handles this? I mean for example a salesman's basic pay is $1000 and commission ratio is 10% for each sale, now what would be the monthly target for him? It must be something which will generate enough revenue for the company even after paying salesman's pay and commission, right? So how do you calculate that? Is there any simple way (some formula) to make a sales target for a salesman based on his pay and commission?
The thing is I want to hire a salesman but I have no idea what to offer him and for what? like what should be the base pay? what should be the commission ratio? What should be sales target? and what should be my profit's ratio after paying his pay and commission?
I never been to business school and anywhere near any business and I have no idea how these things work. Any advice/guidance would be greatly appreciated.
You can start with a compensation survey that tells you the average (or mean) compensation for a particular occupation in your area. The BLS site has some data here for a range of occupations:
Let's say the typical compensation in your area for this occupation and industry is $85,500. Next, let's say your production cost is .5 (50%). This sales position would need to generate $213,750 in revenue to net a 10% profit:
How would you break the compensation out into base and commissions?
revenue = compensation / ((1 - production cost) - net profit margin)
revenue = 85500 / ((1 - .5) - .1) = 213750
The answer is how much risk or volatility the employee in this occupation wants to accept. If the employee wants no more than 10% of his income (on average) to based on commission, then you have the equation:
In this example, the base is $76,950 and the commission is 4%. The "risk factor" (how much of an employee's income is based on commission) would be different for each industry, company, and candidate potentially. You can check the job boards to see what similar businesses are offering. Many industries have a sliding commission scale, where the commission rates go up based on performance.
(commission rate * 213750) = .1 * 85500
commission rate = 8550 / 213750 = .04
In this example, you could break commission out into bands based on revenue:
Some industries / companies require a minimum quota before commissions kick in. In this case revenue would need to reach $192,375 to cover the base salary alone, so that would be your minimum. But many companies provide commission on all sales precisely as an incentive to meet and exceed the minimum, which is probably a better way to do it.
$0 - $213,750 = 4%
$213,750 - $250,000 = 10% (up to 40%)
$250,000 - $500,000 = 20% (up to 40%)
$500,000 - $1,000,000 = 30% (up to 40%)
After the first level is met, you can pay up to 40% in incentives on the portion of sales exceeding $213,750 (50% went to production costs and 10% was retained as profit, leaving 40%).