Answering this question is harder than it looks. The answer depends on the nature of the selling role, the level of maturity of the business, and the cost structure of the company.
At its most basic, a commission rate is derived by taking the total compensation you intend to deliver and dividing it by the amount of sales you expect. The result is the commission rate. Many companies then add motivation-enhancing mechanics such as acceleration at high levels of achievement so that commission rates may increase over the course of a quarter or year. But the starting place is those two key ingredients: the amount of variable pay you would like to deliver through the commission, and the amount you expect a person to sell in order to earn that much.
To determine the amount of money you want to deliver through the commission you must decide what the total compensation should be for on-target performance, and divide that appropriately between any base pay you will guarantee and the variable piece. In more mature companies it is more likely that there would be a substantial base pay level. Also, for very skilled selling roles, it may be necessary to offer a meaningful base pay in order to attract the talent you want into the role. And, in general, the more direct control the individual contributor salesperson has over the sales results on which they are measured, the more appropriate it is for them to have a high level of variable pay and a low level of fixed pay. Conversely, if the sales are made by a team, or if the brand is strong, or if a strong marketing function guarantees a steady flow of warm leads to which the salesperson must simply respond well, then a higher base, lower variable, and lower upside for over-performance arrangement would be appropriate. So that’s a very high level overview of some of the issues around determining the total variable pay to be delivered through the commission, your numerator in determining the commission rate.
For the denominator, the total sales you’re expecting from them, this is a function of how you are selling, the level of skill required, the characteristics of the market into which they sell, any support systems you have in place, the effectiveness of your competition, and your basic selling strategy. Knowing what your competitors expect of their sales people might be helpful, but do they have a teamed inside/outside pair, or only a Field sales person with no inside resource? Do you have a strong marketing department and a great lead flow while your competition expects their sales people to generate their own leads? Much goes into determining a productivity expectation for a salesperson, but this must be estimated, and will serve as the denominator for your commission calculation.
While it seems like a simple question, a lot of thought must go into getting to the right answer.
Donya Rose, CSCP, is Managing Principal of The Cygnal Group. She is a recognized expert in sales compensation plan design, regularly speaking at conferences and writing published articles. She serves clients from F500 to growth-stage businesses, and advises WorldatWork on sales compensation hot topics and best practices.