Compensation is the most common topic related to hiring an independent sales rep. Unfortunately, there is no standard flat rate to determine commissions for independent sales reps. However, commissions as a percentage of gross margin, (sales price minus direct expenses) can be used to calculate an independent sales rep average commission range.
The low end usually bottoms out at 5%, but the industry average seems to be between 20% - 30% of gross margins, or 7 – 15% of gross sales, with lower commissions being offered for “easy sales,” i.e. manufactured products with a simple sales cycle and little or no service or training required and higher commissions being offered for sales that are more complex. These are typically businesses that have implemented a commission-only structure.
The 100% commission role has evolved just like the rest of the sales landscape. Just as job seekers are hesitant to accept a 100% commission role, employers see risk in hiring a salesperson and paying them a large base salary when they do not perform, leading to employee turnover and costing the company money. Commission plans that work in some B2B or B2C sales industries will not work in others.
If there are no fixed sales prices involved, a company might go with a percentage of gross margin. It is worth pointing out that independent sales reps are in fact independent. As a non-employee, they don’t have much stake in what the price of a product is. In fact, a higher price may interfere with their goal of selling as many items as quickly as possible.
If they have the flexibility to negotiate the final sales price, it makes sense to base commission on the gross margin. This both encourages your reps to sell at a higher price and discourages them from selling low to close a sale. Provide your independent reps with an incentive for their financial well-being and your products sell the best price.
With any independent contractor, enter into a sales representative commission agreement which clearly defines the commission structure to be paid. Well written agreements eliminate disputes and hard feelings with sales reps.
Sales representatives can be paid by various methods. The representative can be an hourly or salaried employee or contractor. The employee may receive an hourly rate plus commission, a salary plus bonus, or just a commission. The contractor may be paid per sale or collection of sales or upon meeting an identified quota. The method of compensation determines which tax forms are submitted to the representative and to the Internal Revenue Service, or IRS.