Tag Archives: Comp cost

Appropriate cost of the sales force

Question and answer format

Question

Our sales force’s compensation is 38% of total company compensation. Is that appropriate?

Answer

There’s not really any useful benchmark I know for sales compensation % total compensation. It depends very much on your industry, company stage and basic competitive strategy (technology driven, operations driven, market driven).

The right place to focus is on the value of the sales force and how that relates to the cost. Even if what they are paid is market-competitive, it could be that you don’t have a sustainable selling model if the rest of the economics of the company (marginal profitability of the next sale, cost of supporting the sale, overhead structure, other channel costs, etc.) don’t align to create value for the owners.

There are useful ratios that hold within industries like total sales compensation should stay below xx% of revenue — but even these are useful guidelines at best.

One key idea to keep in mind is that, as a company matures, the sales people should continue to earn more money each year. But their productivity should go up even faster than their earnings so that sales compensation as a percent of revenue declines gradually over the very long run. This is because the company is adding to the sales person’s ability to be productive every year by building their product line, cost efficiency, market presence, selling tools, etc.