One of the most popular questions we receive as “what is a fair commission to pay an independent sales rep?”
In this post I will present a guideline that you can use to come up with a fair rate, regardless of the industry or market. You will have to make some assumptions; the steps below will show you one way you can back into a fair rate.
The fair commission rate formula
1. Estimate how much annual income is needed for the type of sales rep you are looking for.
2. Estimate the average number of lines such a rep would have. That is, are they working for you exclusively (1 line), or do they have another line (2 lines total), or two other lines (3 lines total), and so on.
3. Assume that each line is equally profitable for the rep, so that they would tend to give equal amounts of time to each line. If this is not the case, then adjust the parameters in your computation.
4. Take the number of lines from step 2 and divide that into the total annual earnings of the rep. This equal division assumes equal efforts per line as described in step 3. Otherwise adjust accordingly.
5. Now you have the total earnings required from your line. Normally this would include earnings from residuals on past sales.
6. Estimate the total annual sales of the rep of your line.
7. Divide the total annual sales by the total earnings required from your line. That gives you the commission rate.
As an example, let’s run through a sample calculation:
– step 1: assume the rep requires a $60k annual income before taxes from repping activities;
– step 2: assume the rep has two other lines;
– step 3: assume the rep gives equal time to all three lines;
– step 4: divide $60k by three lines giving $20k per line; thus the rep has to earn $20k from your line;
– step 5: assume the rep can sell $200k of your line in a year, including residual sales from previous efforts;
– step 6: divide $200k sales by $20k commission and you get the commission rate of 10%.
Since your assumptions can greatly vary from those in this sample calculation, the result can of course be very different. For example, the amount of time given to the lines in step 3 may not be equal, so the step 4 calculation would have to be weighted differently.
If you have made fair assumptions, then these steps should give you a fair commission rate.