All About Sales Commission Structures

Sales Commission

A sales commission is the payment made to someone based on how much money they make. This is usually compensated as a percentage of sales on top of a base wage. A greater amount of sales commission to base pay is meant to focus salespeople's attention on the need to generate revenue. A sales commission might be given either when a deal is made or when the consumer pays cash. The second payment method is better since it requires salespeople to consider their clients' trustworthiness.

A sales commission can be calculated using many different incentives. Before any commission % is applied, the sales manager may ask that a basic sales threshold be met. A bonus for selling certain items or services and another reward for selling into a specified sales territory or to certain clients may be added to this commission. When more than one individual is engaged in a sale, commissions may even be shared.

Make your salary and commission plan as transparent as possible. This will make the commission structure easier to execute and guarantee that the plan is free of flaws. A good salesperson should be able to connect the dots.

Importance of Sales Commission

Employers offer sales commissions to employees to encourage them to make more sales and to reward and recognize those who do the best. Sales commissions have proven to be an efficient approach to rewarding salespeople while encouraging greater product or service sales, which is why they are commonly used in multiple companies.

Individual performers benefit from the sales commission since it allows them to get more remuneration for their efforts and, more importantly, their accomplishments. This acknowledgment is pleasant and fulfilling for many people, both personally and professionally.

Employers must choose a sales compensation structure that rewards the behaviors that the company wants to encourage.

Sales Commission Structure

Sales Commission Structures specify how much money a company will pay its salespeople for each transaction. Fixed and variable pay are the two fundamental components of traditional sales compensation. Base payments are clear and meant to pay a predetermined amount. Sales commission structures are a part of variable compensation in sales; they affect how reps are compensated and which actions are rewarded.

Sales executives should consider how much of their budget they can devote to commissions, how much they'll pay for varying levels of sales productivity, staff's basic salaries, and any prospective bonus or motivations they're prepared to add when establishing a commission structure.

Importance of the Right Sales Commission Structures

To retain talent in today's highly competitive environment, you must be capable of distinguishing your brand. There is a lot of competition, with more options for similar products and/or better sales commission structures for their employees. In such a saturated market, having a competitive commission structure is critical to attracting the most motivated salespeople.

Impartiality and accuracy are two important factors to consider when designing an effective commission structure. Salespeople who believe they are adequately compensated tend to stay with a company rather than seek greater chances. Structures that work contain the correct combination of salary and commission, as well as quotas that can be met. How a company compensates its salespeople may impact profitability while also assisting in attracting and retaining the finest salespeople.

Keep the sales commission structures straightforward. Ascertain if the structure is equitable throughout the corporation. It must be straightforward to comprehend and implement. This should be a realistic goal for the reps to strive for. Paying reps monthly or quarterly allows them to set realistic goals and see the practical consequences of their efforts.

The usage of throttle is the next point to consider. Most salespeople will be motivated by a consistent return for lesser thresholds, but doubling or tripling the reward for a stretched target will provide a corporate benchmark and something that can be spoken about and celebrated if accomplished. This increase in potential communications motivates the stronger reps to go the additional distance to meet this difficult goal. Especially with such a large disparity in earning potential!

Additionally, any experienced agent will want to understand the sales commission structure in depth. The strong candidates will even bring it up during the interview. This could be because it demonstrates how the organization appreciates and honors its finest employees, but it's more likely because it's the most effective way to double or even triple their base pay. This extra incentive will motivate your sales representative to close sales and create and sustain client relations.

Sales Commission structures are the most equitable way to compensate hardworking salespeople. The sales reps will have reasonable goals to achieve if these targets are established. Furthermore, it is critical to openly recognize and celebrate staff who achieve their goals to preserve a good sales culture. This will boost morale and confidence and most likely lead to increased future revenue.

Because sales reps account for a major percentage of a company's revenue, healthy sales commission structures will reward a committed sales force and drive higher engagement levels. Having a fair commission structure in place can only benefit an organization as a whole. A well-planned sales commission structure is important to the success of any corporation with a sales staff.

Most Common Types of Sales Commission Structures

Can we agree that your organization's commission structure is critical? Now, the only dilemma is which one to choose.

We'll get to it later, but for now, we can tell you about the five most popular sales commission structures and why you would choose to employ them or not.

1. Base Salary Plus Commissions

A base rate + commission on every deal is among the most prevalent sales commission structures. Under this approach, both the corporation and the sales representative share responsibilities. In addition to remuneration for whatever they sell, the corporation invests in the rep with a monetary benefit regardless of their performance. In exchange, the sales representative devotes all of their talents and time to earning both parts of their pay.

The base compensation is usually insufficient to generate a reasonable income for the sales representative. Salespeople will still rely heavily on commissions, but they will have a safety net if they boost production or the market shifts, causing sales to slow.

This structure suits businesses where sales rep retention is crucial to the sales organization's performance. The company actively invests in each representative's success and rewards them for their efforts.

2. Straight Commissions

Straight commission packages compensate salespeople on a commission-only basis, with all money gained from variable compensation and no set base income. Sales reps who operate on a commission-only basis are highly driven to make transactions, but their employment also comes with increased stress due to the high level of risk involved, which can lead to sales exhaustion.

Although not often employed, there are some scenarios where pure commission plans make the most sense, such as organizations with shorter sales cycles, contract/temporary employment, or when significant commissions are possible. This structure is typically used by startups or other businesses that do not have consistent access to funding. It's similar to a pay-as-you-go plan in many respects, and it's ideal for companies that don't have the means to provide competitive base rates.

3. Tiered Commissions

A tiered commission system is common among sales reps, particularly top achievers and/or highly driven ones. Salespeople get greater commission rates when they close a particular sales volume or create a given amount of money. For instance, a sales representative receives 6% on all items sold up to $12,000 in total revenue. After exceeding the $12,000 barrier, the same sales professional would receive 9% of any income produced under the tiered approach.

If you want to grow your sales department, this compensation structure is ideal since it rewards top performance and pushes representatives to seek new income channels. Tiered commission structures are an excellent way to expand your sales force and company. They may be particularly successful pay schemes for boosting revenue in bigger, more experienced sales teams since they are structured to incentivize over-performance.

4. Territory Volume Commissions

Using the territorial volume commission structure, sales teams organized by area or territory may foster a sense of collaboration and teamwork. Sales reps get money based on a defined rate for their allocated territory under this arrangement. Compensation is based on region sales volume and income. Based on overall sales, commissions are shared equally among the salespeople. This concept appears to promote commission fairness and equity. However, high-performing reps might easily feel like they're carrying the team's baggage without appropriate credit. With that in mind, this approach needs strong leaders who can cultivate a real culture of cooperation and teamwork.

Businesses with several territories should use a territorial volume commission plan. It's great for team-based businesses looking to strengthen certain service areas.

5. Residual Commissions

The Residual Commission structure pays salespeople a commission as long as the clients they acquire generate money. As a result, salespeople should try to keep their clients for as long as feasible. Expanding client connections helps both the organization and the sales agent, whether it's through contract renewal or upselling new product releases. Let us consider an example. A customer agrees to pay your organization $1,000 monthly in exchange for your services. For as long as the account is active, the sales professional who clinched the deal will get a 4% commission, equating to $40 monthly.

This approach is most commonly used by agencies and consulting organizations with high-budget, long-term contracts, such as advertising agencies or consulting firms.

6. Draw Against Commission

The commission draw model combines parts of the commission-only and commission-plus models. The greater you sell, the more commissions you earn. Put bluntly, irrespective of how much they sell, each sales agent is promised a certain amount of money each month. Salespeople are paid a monthly income, or draw, despite sales, for a certain period of time. They keep the commission and the difference between it and the draw amount if they earn less in commission than they do in pay. A salesman, for example, is anticipated to make $5,000 per month in commission and $3,000 per month in a draw. If they reach their $5,000 target, they will receive $3,000 in addition to the prize money. They owe the organization $1,500 under the draw if they only earn $1,500. Only when commission totals exceed the draw amount does the salesperson benefit. The commission draw plan is based on early payment, or draw, that allows new recruits to adjust to their sales activities without losing money.

This approach is generally implemented for new employees who require time to get up to speed. Because it takes a few months for a sales professional to reach maximum production, having a draw allowance might give some peace of mind during this period. On the negative side, the commission draw model is difficult to implement, and sales agents find it difficult to manage and estimate their income. Moreover, they may be in serious debt to the organization if they have a string of unsuccessful sales cycles.

7. Revenue Commission

When it comes to commission rates, companies that are more concerned with wider corporate goals than total profit sometimes employ the sales commission structure called the revenue commission model. Sales reps who earn a predefined portion of the revenue they create have a chance to rise to the top of the sales ranks. Example: A car salesperson earns a 10% commission on a $50,000 vehicle sold. For that sale, they get a $5000 revenue commission. When it comes to expanding their share in the market or entering new territories, many sales companies employ this strategy. They are more concerned with broader company objectives than with profit. It's straightforward for reps and corporate leaders to comprehend and implement, and paying reps based on revenue assures those top sales performers get paid the most.

8. Gross Margin Commission

The gross margin commission is one of the sales commission structures that is a little modification on the revenue commission model, as it accounts for the costs of the things you sell. Instead of earning a percentage of the revenue, the salesman earns a percentage of the profit. Salespeople are less prone to discount products because their commission is based on the final price of the sale. They can earn more commission if they can upsell a product or service. Every sale transaction in this strategy benefits the company's bottom line. It can also motivate sales reps to sell products with the best profit margins, resulting in a major victory for the business and the representative. For instance, if you sell a $10,000 product with $4000 in expenditures, the salespeople will earn a portion of the remaining $6000. Gross margin commission equation: Gross Margin = Total Sale Price - Cost. Total Commission = Gross Margin x Commission Percentage.

Best Sales Commission Structures for Your Business

One of the most significant things a company can do for its sales operation is to specify its compensation structure. What feels best for one company might not fit for another. The finest sales commission structures will motivate your salespeople to give it their all. There are various methods to build up your sales commission structures, and there is no one-size-fits-all answer, as with many planning tactics. Here are some guidelines for determining the best compensation structure for your business.

Determine the outcomes you want to attain. For one department, this may be client retention, while for another, it could be brand loyalty. Concentrate on a successful sales procedure. Determine which sales strategies will help your organization meet its sales targets. To assess their performance, keep track of the results throughout time. Because sales turnover is common, don't be hesitant to experiment with different commission structures. What worked a few years ago as a motivator might not function in today's setting.

Considering these aspects will provide you with the information you need. With this knowledge, you can better assess which structure is ideal for your team and will produce the best results. The best way to pay salespeople depends on your sector, the position of the salesperson, geographic location, and other factors.

About Author

Sumeet Shah

Chief Growth Officer @Incentivate, has over 15 years of experience in management consulting, product engineering, and analytics, working with clients across multiple countries, functions, and domains.