The word sir’ is common in conversations, especially in formal environments. Similarly, casual conversations can also have the word sir’ mentioned in them.
When a person calls you sir, it is a polite way of addressing you and a way of showing you respect.
Respond to sir by reflecting on the appreciation shown to you. A polite “Thank you” or “Likewise” will suffice if it comes from a supervisor. For people close to you, you can also respond more personally.
When You’re in a Formal Environment
Whenever you’re in a formal environment, you have to respond in a positive way. The person calling you sir is doing so because they respect you. According to a 2020 research article by ResearchGate, formal environments call for communication in a way that shows decorum among the people involved. 
As a Superior
If you’re the boss in your workplace, your response should show appreciation to the person calling you sir. Something else that’s important to take note of is that the response you give depends on the context of the conversation.
For example, if the conversation is about nothing but a good morning greeting, the response will be simple. For instance, you can come to your office and your secretary greets you “Good morning sir.” This is a simple greeting that requires a simple reply.
You can reply with:
“Good morning to you. Thank you.”
This is a great way of responding to the statement. Since the relationship between you and the person is formal and you are the boss, the talk cannot be extended. It has to be kept short and precise.
There can also be a situation where you’re talking to a colleague. This is someone you’re at the same level with. In such a situation, it is also possible that you’ll be referred to as sir. In such a situation, your response will be a bit different.
Since this is someone you’re at the same level with, you can extend the conversation further. For example, a colleague in the office can say something like: “Hello sir, I see your project is doing quite well. You must be so doing a great job.”
As you can see, the statement accompanied by the word sir’ is longer than the previous one. This is because the person talking to you is not your junior, but a colleague at the same level of authority as you.
In this situation, the speaker expects you to not only appreciate the gesture of calling you sir but also to talk a bit about the project. The response can be something like this:
“Hello. Thank you for the observation. I am doing my best to get optimal results from the project.”
A closer look at this response shows that you are appreciative of the speaker calling you sir. You also go ahead and respond in regards to the progress of the project.
When You’re in an Informal Environment
You can also be in an informal environment and someone calls you sir. In this scenario, your response will be different from the formal one.
Here, you’ll take a casual angle while still appreciating the honor given to you by the speaker.
If someone calls you sir in a casual or friendly conversation, your response should be warm and positive. Despite the fact that you’re having a friendly conversation, you still have to acknowledge the effort to call you sir.
For example, you could be talking to your friend about something you’re doing together and then he responds by saying “Yes sir”. The phrase from the speaker simply means that he agrees with whatever you’re saying.
If you were giving him a piece of advice concerning an issue in his life, he can call you sir because of the wisdom you’re sharing with him. In such a situation, you can respond by saying:
“I know you’ll pull through. In case you develop any problems along the way please let me know.”
Another situation of someone calling you sir in an informal set up is when they are congratulating you for your efforts. As a way of respecting you for your efforts, someone may choose to call you sir in the process. It can be something along the lines of: “That was a good gesture from you, sir. Thank you so much.”
The speaker chooses to call you sir because of what you have done. You may be a friend to that person or even a stranger, but that does not stop him from calling you, sir. In such a scenario, you can say:
“You’re most welcome. I took that action because I believe in you.”
If you look at the above closely, you’ll notice that you have the liberty of creating a conversation out of it. Your response can turn into a friendly and casual conversation depending on what you’re talking about.
The context in which the speaker is calling you sir influences the way you respond and handle the conversation that ensues.
Certainly, the word sir’ is a common one today. It has been used as a way of showing respect to people who are at the apex of authority or those you appreciate and honor. It is expected that when someone calls you by that word you respond in a particular way.
The bottom line is that the statements or phrases you say in respect to that word should be respectful as well. Since the person utters the word as a way of being respectful to you, your response should be courteous as well.
The tone of your voice and your body language should be on the same wavelength. This will help to create a cordial relationship and interaction between the people involved in the conversation.