Ask the Experts | How to Calculate Sales Commission

Question: What numbers should we use to calculate sales commission?

Drew Cameron; President, HVAC Sellutions & Energy Design Systems, Inc.:

I get asked about sales compensation quite a bit, and the question the way it’s asked is a little thin in structure for me to be able to really understand what the questioner is asking, so I’ll interpret it to the best of my ability.

Number one, “what number should we use when calculating sales commission?” Well that all depends on what the compensation program is. Meaning, if you’re paying a draw or a salary or something of that nature – and I’m assuming we’re talking residential replacement as well – that’s going to factor into the answer. I’m not a fan of paying a salary, I’m OK with a draw that you settle up against commissions at the end of the month, and I like the draws to go away as people earn to keep them hungry.

So if we were paying 100% straight commission to a salesperson, what numbers should we use? In my humble opinion, calculate using the revenue, with no discount to that for financing costs, rebate costs or technician or employee spiff costs. I don’t think that a salesperson’s job gets any less hard if financing is involved, rebates are involved or technician spiffs are involved. Those are costs of doing business in my opinion, those should be covered as part of overhead as a cost of doing business, and should be spread out among the whole business, not just on that particular job or that particular month, and that way you’re covering all the costs of doing business in your overhead. So now you can use revenue as the topline calculator, number one.

Number two is that when a salesperson sells something you want them to be able to understand what it is they make. It keeps them hungry, it keeps them motivated, that’s what drives a true professional salesperson. It’s not just the “thrill of the kills” as they say, but understanding what they make for doing that. Cause everybody else understands, “If I work an hour, I make X amount of wage.” A salesperson says, you know, “What do I get paid if I sell something?” If you have some convoluted formula that’s based off of net profit or gross profit or something like that, that’s going to make it more of a challenge.

Now, the only thing I will deduct from the calculation is, during certain times of the year, shoulder seasons, when I get really aggressive with my marketing campaigns – such as, Gary has, I think, a sweet 16 program – and that’s vvery aggressive; there are some deep discounts, and many incentives includes for purhcases during a certain time period to drive sales. And that’s where I say, if I don’t do the marketing – and I’m paying a 10% commission, say, on revenue – and I don’t do the marketing, odds are I’m not going to have a heck of a lot of leads. So it costs me a lot in terms of marketing costs as well as incentive costs, to do that type of program, and therefore the way I look at that is, well, if I don’t have any leads, 10% of nothing is nothing. So I’d rather do a marketing piece where, yes, we cut into profit, but there’s also what I call a commission share – I don’t like to call it a deduction, so it’s a commission share going into the shoulder season campaigns.

So all that being said, let me just kind of give you some tiers that I use – have used – at my own company and that I use with my clients. I recommend paying a 5-10% commission for equipment sales, and that’s basically tiered at the upper levels. Obviously you get paid more for selling a higher-efficiency system than you do for a lower-efficiency, entry-level type system. That’s for HVAC.

I like to pay 10-15% on indoor air quality products and services, such as duct cleaning, humidifiers, air cleaners and whatnot. You know, 15% if they’re sold by themselves – pay a little more because obviously a lower average ticket there. 10% if sold with the job. Same if you also do home performance, as well as duct modification – if sold with the equipment, 10%, if sold by themselves, 15%.

Have a lot of clients that do whole home generators – so we pay 10% for generators, we pay 10% for smart home solutions that are included with the system, 15% if sold by themselves. 10% for accessories like humidifiers, air cleaners, UV lights, things of that nature, that are sold with an install; 15% if sold alone. And then I like to pay a 3-5% kicker for self-generated leads – again, on top of the regular commission.

Obviously there are bonuses for performance over and above that, but those are the numbers I would use based on the way I interpreted the question for calculating commission.

This is the weekly Ask the Experts free excerpt. To listen to all of this week’s calls, or to see the schedule and register for future calls, click here.