What exactly is a Sales Commission Structure?
Motivation is the core of sales performance. Without that inner drive, your salespeople may not be prompted to close deals. It is a win-win situation for you and your sellers when you do it right. Designing sales commission structures to motivate sales staff and increase revenue is a reliable plan. A typical sales commission rate is around 5%, which usually applies to sales teams with generous base pay.
A sales commission structure specifies how companies compensate their sales representatives based on performance. Many commission structures include base salaries to provide reps with financial stability. Others prioritize high commission rates to motivate sales representatives to work harder and achieve more. The structure of your company affects your reps' earning potential, so design it to allow them to achieve and reward them for meeting their sales commission goals. According to Harvard Business School, the average US company spends more than $800 billion on sales force management yearly, with $200 billion devoted solely to sales compensation.
The Most Common Sales Commission Structures in a Business are:
1. Straight Commission Structure
A commission-only or straight commission structure means reps are paid solely for their performance. Their salary is zero if they do not sell anything during the month. The only income sales representatives earn in a straight commission plan comes directly from their sales. The biggest advantage for sales reps is that it offers the highest earning potential. Most companies do not set a commission cap on commission plans, so sales reps can earn as much as they want. Because the company is not required to pay a base salary, it can offer a higher commission on each sale. This structure gives sales reps complete control over their earnings because they can work more hours to make more money. It's also a way for them to assess their performance in the role. A straight sales commission provides the quickest route to market for companies, making it desirable for startups.
2. Tiered Commission Structure
A tiered sales commission is a perfect plan to motivate your sales reps. Reps earn higher commissions under this plan after closing several deals, generating a certain amount of revenue, or reaching another milestone. Use the tiered commission structure to penalize poor performance and reward top sellers of your company. For example, suppose a sales representative only meets 80% of their monthly quota. In that case, they may only earn 70% of their commissions, while they can earn 130% of their commission upon meeting 120% of their quota.
3. Gross Margin Commission Structure
Gross Margin sales commission is ideal for businesses because it ensures that every sale contributes to the bottom line. It also discourages sales reps from offering large discounts to close deals as it would result in them losing money. Because it is the simplest way for reps to increase their income, these sales commission structures frequently encourage reps to sell products with the highest profit margins.
4. Draw Against Commission Structure
Draw against commission allows new hires to earn a consistent amount while they learn the ropes. Sales reps are guaranteed a certain amount of money every month, even if their sales numbers don't validate it. Representatives, however, must repay their initial compensation through future sales commission income. This compensation plan is often used to attract and retain high-performing sales representatives. It gives them a guaranteed minimum income and an incentive to make sales and earn additional commission income.
5. Territory Volume Commission Structure
The territory volume structure allocates commissions based on the success (or failure) of entire geographical regions or territories. Sales representatives are given a defined territory and are incentivized to increase sales within it through a base salary and tiered commission rate, which increases as sales volume increases. This plan encourages them to work on expanding their business and meeting sales goals actively. As a result, territory volume commission structures best suit to field sales teams and sales departments that rely on collaboration.
6. Multiplier Commission Structure
The multiplier sales commission allows businesses to create custom compensation structures and truly motivate their sales representatives to achieve more. Companies pay a standard commission percentage under this structure. They multiply this percentage by predetermined numbers based on each rep's success level. The disadvantage of this compensation plan is that it is difficult to implement. Your company has a lot of math to keep track of, and reps may need clarification on how much money they'll make in a given sales period. However, this sales commission model enables managers to assess rep performance against various KPIs other than sales. Using a multiplier commission structure can help you establish a sales department that emphasizes ethical business practices rather than focusing on closing deals at any cost.
7. Revenue Commission Structure
The revenue commission structure involves paying a predetermined commission to sales reps every time they sell a product or service. Due to its simplicity, this sales commission structure is widely favored among outside sales teams. Sales commission structures based on revenue often have to align with a sales team's broader goals or specific characteristics. Revenue commission plans work best with fixed-priced products and services. Such sales commission plans help companies gain market share or enter new markets because they prioritize achieving a larger business goal over profit.
8. Residual Commission Structure
The residual commission structure is ideal for SaaS companies, agencies, consulting firms, and any other company with recurring business or subscription models. Under this commission structure, reps are compensated for as long as their accounts generate revenue, rewarding them for customer retention and generating repeat business. A SaaS-based industry sales commission rate starts at 5 to 7% and can upsurge to 30%, depending on the product and deal size.
What are the best sales commission structures for your enterprise?
The sales commission structure you select for your company is critical. The right plan will motivate your reps, increase their productivity and performance, and even assist you in lowering the turnover rate in your department. Remember that the ball is in your court when it comes to compensation structures. You can even combine them to create a unique plan suited to your team. Whatever you decide, remember that the more you pay your reps, the harder they'll work for your organization, allowing it to succeed.
Final Thoughts!
Fairness and accuracy are important considerations for businesses when developing an effective commission structure. Sales associates are more likely to stay with a company if they believe they are fairly compensated rather than seeking better opportunities elsewhere. Effective sales commission structures combine salary and commission and include achievable quotas. How a company compensates its salespeople can impact profitability while attracting and retaining the best sales force.
