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I'm trying to work out a fair way to calculate sales commissions. I want to do a percentage of gross profit, and am trying to figure out what gross profit is. Subtract labor and materials? Subtract 10 percent of the sales price, then subtract labor and materials? How are you guys doing it?
 

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We discuss this quite often so I wrote up an article on one of my websites that goes into greater detail.

Spoiler: You basically can do net sale, gross profit, salary or a hybrid.

Net sale is the most common, gross profit is the most fair (in my opinion), salary plus is very common in commercial.

http://hangupthebelt.com/2011/how-to-pay-a-salesman/



Gross profit is this: Sale price - all job costs including labor, material, permit, disposal, equipment rental, etc... ALL direct jobs costs, ALL, should be factored to get an accurate gross profit.

Why would you subtract 10% of the sale price? What is this number? Is this 10% to cover your overhead? Where does this 10% come from? If you are subtracting to cover your overhead then you are talking Net profit, not gross profit. Net profit is sale price - all job costs - overhead. net profit is true profit.


When I price a job I make a compelte materials list and for each material I know how long it should take on average to isntall. Therefore I can reasonably predict gross profit on each job before we begin. This is the only way to be accurate, then when the job is done all transactions are logged into quickbooks and generating a profit loss report is really nothing more than a click of a button.
 

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Thanks Grumpy! The 10% would be overhead, but now I see this is net profit. Why is the commission based on Gross instead of Net??

I want to pay this guy fairly. He's my right hand man, treats the company like his own, and I want to pay him fairly and don't want to screw myself either.

Next step, bring in more leads for him to run!

I'm going to spend some time looking over that site and maybe pick up a couple of books you have listed on the site as well.

Thanks
 

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Based on gross instead of net because it is not the salesman's job to control your overhead. it really is a funny number though when you think about it. "I can give you 40% of the gross or 50% of the net." Acccording to your 10% overhead number this formula, would be exactly the same.

Did you read my link in regards to reverse engineering his commission? How much do you want to pay him at the end of the year, what number is fair? $80,000?

Ok we will use $100k only for easy math.

Let's say he needs to earn 100k, then you have to ask how much can he sell? Again for ez math we will say 1 million revenue ($1,000,000). But now what is your markup, of that 1 million how much is directly related to your job costs. Again according to you 10% is overhead. Is it fair to say 70%, or in other words $700,000? Let's say 70%, so $1mil - $700k = $300k gross profit. 300k - 10% overhead or $100k = $200k net profit.

You would either have to pay him 50% of the net or 40% of the gross for him to earn $100k.

No matter how you look at it you have the formula now. Input how much you want him to earn, input your markup, REAL gross and net profit (ask your accountant if you are not sure, I highly suggest asking your accountant before making any deals like this) and you will have your answer.


But that'll just determine your commission. If he is going to sell a million a year, What is your average sale? Wow many leads will he need? How much will the leads cost you? Is your current markup structure enough or will you have to increase your markup to cover his commission and the increased overhead resulting from buying more leads+? If you do increase your markup, how will this affect his closing ratio?

Lots of variables when you are implementing a new system. How ever you decide I think you should be upfront with your sales rep and tell him that you are going to try this for a two or three month period and at the end of that period you will both sit down and examine the numbers and make sure it's working for the both of you. Again involve your accountant, have him look at the numbers before you make any decision.
 
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