Sales Commission

Nolwazi Mlala / Posted On: 2 March 2022 / Updated On: 18 May 2022 / Analytics / 114

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Sales Commission


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The amount of money paid to a person depending on the sales achieved is known as a sales commission. This is usually compensated as a percentage of sales, on top of a base wage. A high proportion of sales commission to base pay focuses sales people's attention on earning revenue. A sales commission is paid when a transaction is made or when cash is received from a consumer. The latter payment system is the better option because it compels salespeople to consider a customer's creditworthiness.

 

It's critical to understand how the sales commission systems function. This is important whether you're in the sales business or considering a career shift to a sales-based role. Because most salespeople are compensated on a commission basis, what they sell and how much they sell impact their annual household income. Here we will define compensation structures for sales. In today's market, and among competitors with a generous base salary, the starting sales commission percentage is 5%, with the average falling between 20% and 30%. These percentages depend on the industry, salespeople's skills, expertise, experience, and the company's budget. Some organizations have commission rates as high as 50%, common in sales compensation models that rely significantly on commission and rep success.


In the sales industry, a commission structure outlines how corporations compensate their salespeople. There are various distinct sales commission schemes, each with a different pay scale. Weekly, biweekly, or monthly commissions are available. Most employees are paid at the end of the period, but companies may need to wait for payments from clients before paying their employees.

 

The Importance of the Sales Commission Structure

 Sales commission structures establish the behaviours that the firm values the most. If you get things just perfect, they'll work for everyone. Should you miss the mark, though, the corporation may find paying out too much commission, reducing its profitability. If you pay too little, salespeople will leave for competitors.

 

Because a normal sales commission system remains in place for a year, it is challenging to adjust to it to remedy problems in the middle of the year however, if extra month-end, quarter-end, and year-end incentives are required, an inventive sales commission system should be flexible enough to accommodate them.

 

10 types of sales commission structures to motivate your sales team

Depending on their services or products, companies use several sales compensation models. The following are the top eleven most common structures:

 

1. Draw against commission

This commission structure is based on advanced payment, or draw, that allows the new employees to adjust to their sales duties without losing money. The more you sell, the more commissions you earn. For example,  a salesperson's commission is projected to be $4,000 per month, with a draw of $2,000 per month. They will win $2,000 more if they reach their $4,000 target, which is the amount over the draw. If they only earn $1,000 which is below the draw amount, they owe the corporation $1,000.

 

The calculation for draw commission:

Commission Total - Draw = Commission Owed.

 

2. Base rate only commission

In today's sales organizations, a base rate alone approach is rarely used. Salespeople are paid a flat hourly rate or salary rather than commissions on each sale. There's no motivation to sell more, so unless you offer bonuses or other incentives, there's no way to increase productivity or motivate your employees.

 

Some sales organizations adopt this structure if they're primarily focused on inbound leads rather than chasing deals. Sales reps are spending more time consulting or supporting than “selling.” Rather than overcoming objections, following up with leads, or delivering pitches, their effectiveness is based on their ability to answer questions. To calculate the base rate only commission the formula we can use the formula below

 

Amount sold × Commission Percentage = Commission Total.

 

3. Tiered commission

A tiered commission structure is popular among sales agents, particularly top performers and highly motivated. In a nutshell, salespeople get greater commission rates when they close a particular number of deals or create a given amount of income. For an example of the tiered commission, a sales representative earns 5% commission on all products sold up to $10,000 in total revenue. After exceeding $10,000 in revenue, the same sales professional would earn 8% on any income generated under the tiered approach. If you're trying to grow your sales team, this compensation structure is ideal because it rewards top performance and pushes reps to explore new income channels as upsells and cross-sells.

 

4. Territory volume commission

The Territory Volume Commission Structure is a one-of-a-kind arrangement. The commissions earned from sales generated inside a territory are divided equally among all sales reps that operate within that area. For example, three salespeople working within a region have a $75,000 sales quota. The first salesperson makes a $30,000 profit. The second salesperson makes a $26,000 profit. The third representative sells $22,000 worth of merchandise. The salespeople earned $78,000 in total, exceeding their quota. As a result, they shared the 20% commission equally and earn $5,200 each.

 

To make this sales commission plan work, your sales team must create a team-first environment in which every team member is eager to contribute to the broader goal—no lone wolf techniques are permitted.

 

Sales Totals x Commission Percentage divided by Number of Salespeople = Commission Total Per Person.

 

5. Revenue Commission

One of the reasons this commission system has proven so popular among outside sales teams is because it is easy. Every time a product or service is sold, salespeople are paid a predetermined commission. With items and services that have a predetermined price point, this type of sales compensation system works best. They're also good for organizations looking to expand their market share or enter a new industry because they're less concerned with making a profit and more interested in attaining a wider business goal.

 

It's worth noting that revenue commission plans frequently fail to match a field sales organization's wider, broader sales team aims. As a result, they should be taken with caution. An example of this commission; if your organization sells a $500 service with a 10% commission rate, a sales representative will make $50 each time they sell that service.The calculation for revenue commission:

 

Sale Price x Commission Percentage = Total Commission.

 

6. Commission Only Structure

The Commission Only structure, also known as a Straight Commission plan, pays salespeople a fixed commission anytime they make a transaction. Reps aren't paid a base wage and don't have the option of increasing their commission rate. Commission Companies that use temporary and contract salespeople have short sales cycles and give huge commissions and tend to benefit the most from such structures. On the other hand, most salespeople despise this structure because it requires them to work hard and get the products sold. They don't get paid unless they close deals. An example of this sales commission structure,  sales representatives gets a 5% commission for every product they sell. If they sell a $1000 product, their commission is $50. Calculation for a straight commission:

 

Sales x Commission Rate = Income.

 

7. Gross margin commission

The structures of gross margin commissions are similar to those of revenue commissions. The difference is that a sales representative's commission is based on the gross revenue generated by each sale rather than the sale price. This commission structure calculates actual profit by evaluating a product's sale price and the expenditures connected with concluding a contract. Salespeople are paid a commission based on this figure. Those who favour a gross margin commission system feel that every sale should boost the company's bottom line. For example, the sales rep would earn a portion of the remaining $500 profit if your company's service costs $1,000 but incurs $500 in expenditures to execute the deal. The calculation for gross margin commission:

 

Total Sale Price - Expenses= Gross Margin.

Gross Margin x Commission Percentage = Total Commission.

 

8. Basic salary plus commission

Sales reps earn a commission on sales they directly generate in addition to base pay or hourly wage under this structure. Offering an hourly rate in addition to commission puts both the corporation and the sales team on the page Both parties have made a commitment. You'll pay less per hour / base salary in this structure than you would if you just paid an hourly/base rate. The same may be said about the commission your company will pay, but in the end, the sales rep has a lot more to gain.

 

Companies who want to attract the best sales personnel and have the products, reputation, and infrastructure to back up their promise should choose the base plus commission structure. An example of this structure is that a company pays its sales representatives a base salary of $40,000 per year plus a 3% commission on each transaction they make.

 

Payment x Commission Percentage = Total Commission.

 

9. Residual Commission

The Residual Commission structure pays salespeople a commission as long as the accounts they acquire keep generating money. As a result, it is in the best interests of salespeople to keep their customers for as long as possible. This sales commission system is excellent for businesses with recurring accounts, such as insurance companies and marketing firms.

 

For example, a customer agrees to pay your organization $2,000 every month in exchange for your services. As long as the account is active, the sales professional who closed the deal will receive a 5% commission, which equates to $100 each month.

 

Calculation for residual commission:

Payment x Commission Percentage = Total Commission.

 

10. Multiplier Commission

Multiplier commission structures are complex to set up, but they allow businesses to design bespoke incentive schemes that encourage their sales teams to increase sales. Multiplier plans begin with a basic revenue commission percentage multiplied by a predetermined value based on a sales representative's quota achievement. This structure is appropriate for managers who want to track a rep's performance against various KPIs, product offerings, and upsell opportunities.

 

A sales representative, for example, earns a standard 5% commission on every sale they make. This 5% number is then multiplied by 0. 8 if the rep achieves less than 75% of quota, 0. 9 if the rep achieves 76-85% of quota, and f the rep achieves 86 percent of quota or over.

 

Choosing the best sales commission structure

One of the most significant things a company can do for its sales operation is defined its commission structure. What works best for one company might not be the ideal solution for another. Here are some pointers on determining the best commission plan for your business:

1. Determine what results you hope to achieve. This might be customer acquisition for one department but customer loyalty for another.

2. Focus on an effective sales process. Determine what sales methods work best for your company to reach its sales goals. Document the results over a specific time to measure their success.

3. Turnover typically is high in sales, so don't be afraid to try new commission structures. Five years ago, what worked as a motivator may not be an incentive for today's sales teams.

 

How can you put a sales commission in place in your company?

The first half of the battle is won when you choose the proper commission structure. The next step is to train your sales team on the new system, implement the commission structure, connect it with your existing sales pipeline, and track its effectiveness to ensure it is reaching its goals. The following are some helpful hints for efficiently managing this situation:

 

1. Align your compensation scheme with employee need

The sales team are one of the most changing variables in any sales-related operation. Remember that you're working with people, not robots, so any incentive system you establish should take into account not only your sales goals but also the needs of your staff. If it helps them perform better, allow them to negotiate their commission rates.

 

2. Stick to one plan

Despite how tempting it may be, you should avoid changing compensation plans too frequently because it might confuse and demotivate sales teams. As a result, it's critical to conduct a thorough study before committing to a sales commission system.

 

3‍. Keep it simple and transparent

To maintain high morale, it's critical to be open and communicative with your sales force, ensuring that they understand the numerous stipulations in their sales compensation agreements. Include any pertinent information, such as the remuneration structure, commission rates, and other stipulations.

 

4. If possible, do not limit earning potential

Though several of the methods mentioned above suggest limiting how much a sales agent can earn, research has shown that this is ineffective because it does not inspire employees to go above and beyond their quotas. So, unless it's unreasonably expensive, choose a model that allows your staff to maximize their earning potential within reason.

 

Conclusion

A firm is nothing without sales. When you're building the ideal team, you'll need to instil in them the desire to succeed. This is where a commission structure for sales comes into play.

 

What's the most significant thing to your group? Are you aiming for top performers or a specific market share? Are you a small business trying to expand or a major corporation looking to cut costs? Choose a sales commission structure that will best encourage your team to take your business to the next level.

 

You'll be able to determine whether a basic wage plus commission, tiered commission, draw against commission, gross margin commission, residual payments, or another plan is suitable for your company once you've figured that out.

 

Nolwazi Mlala is a Business Analytics Consultant at Industrial Psychology Consultants (Pvt) Ltd a management and human resources consulting firm.

Phone +263 4 481946-48/481950/2900276/2900966

Cell number +263 779538172

Email: nolwazi@ipcconsultants.com or visit our website at www.ipcconsultants.com

Nolwazi Mlala
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