How Much Should You Pay Your Sales Staff?

May 20, 2011

Editor’s note: For more information, check out the full report, Compensation Research at the Expansion Stage, at OpenViewPartners.com.

The Color of Money

You’re an expansion stage company and you just got a ton of money from an amazing venture capital fund. You already have a great product and you’re prepared to take it to the next level and focus on scaling the business.

So, maybe it’s time to bolster your sales team.

That’s the logical first step, right? If you want to grow revenue and build your client list, salespeople can help you do that. But how much should you pay them? That’s a question that young companies must address as they begin to scale their teams.

There are a lot of factors that go into it, as Kris Dunn points out in a post on his blog, The HR Capitalist. For example, you might consider education, experience, and the job role. Generally, commission is the bread and butter of almost every successful salesperson’s earnings. So, it’s safe to start there.

But that’s just the beginning. You have to create a competitive package that includes commission, base salary, and total benefits. And regardless of the number you come up with, it’s important to be sure that you get it right.

Keep in mind that it doesn’t pay to underpay.

If you make a ridiculously low offer and a candidate accepts, don’t pat yourself on the back. Sure, you probably saved the company some money. But it’s only a matter of time before that salesperson realizes they’re getting the shaft and looks for a better opportunity elsewhere.

Craig Fowler, who has 35 years of experience in corporate human resources, tells Partner Finance that all intelligent employees will at some point realize their true market value. The market will correct for that and you may find your employees leaving to work for you competition.

Then, there’s the other extreme.

If you make an offer that’s too high, you might be blowing through funds that the company could have used for product development, new office space, or marketing initiatives.

Think I’m being dramatic?

Then think about this: In Boston, the average inside sales representative with two years of experience in a small (50 employees) software company makes $35,000 in base salary and $10,000 in commission.

Let’s say you give in to a candidate’s higher demands during a negotiation and agree to pay them a $50,000 in base salary. Do that with one more hire and you’ve exceeded your budget by $30,000 already. That’s almost enough to hire another rep. You’ve lost the company one full-time employee in future headcount and here you are trying to scale the business.

“But they’re worth it,” you protest. How do you really know? All you did was interview them. Why not let this supposed superstar prove their worth on the job first? If they kill it, then you can show your appreciation with a nice bump in pay. That way, you don’t jump the gun and needlessly harm the budget.

If you’ve already made that mistake, PayScale’s Compensation Today blog provides a few tips for dealing with expensive employees. Additionally, the article reinforces the importance of considering things like industry, size, geography, and revenue when structuring compensation.

Companies must determine where they stand relative to their competition, understand market conditions, and hire based on their own compensation philosophy. For example, if you’ve got a competitive “lead the market” philosophy, then your definition of overpaying may vary slightly from the market consensus.

Do your homework

With resources like PayScale, Glassdoor, and Salary.com out there to help you get an idea of low, high, and competitive pay ranges, there’s no excuse to get compensation wrong.

The key is to be competitive. Your offer should be – at the very least – the minimum of the market average (50th percentile). And in the interest of keeping your company afloat during its scaling period, try not to go past the 75th percentile mark. If you come across an absolute rock star, it’s fine to pay them more – but don’t go crazy.

There are some candidates that will deserve the market average and there are others that will need to be paid more toward the top end. Deciding where each candidate falls will require some research and your best judgment. That’s part of the fun of being a manager or startup executive, after all.

In the end, if your employees feel valued, they’ll probably stay with the company. If they don’t – well, you know the consequences by now.

Victor Mahillon is a recruiting analyst at OpenView Labs, where he is responsible for recruitment for the firm and its portfolio companies. You can follow him on Twitter @vmahillon.

Director of Recruiting

Victor Mahillon is the Director of Recruiting at <a href="http://kamcord.com">Kamcord</a>. Previously he was a Talent manager at OpenView.