Sales Commission Structure: What you need to know

31/10/2022 11:24 AM

A sales commission structure outlines how businesses compensate their sales representatives. There are various types of sales commission structures that produce various compensation scales. Payments for commissions might be made weekly, bimonthly, or monthly.

'

 

'

The significance of a successful sales commission structure Fairness and accuracy are important factors for businesses to consider when designing a sales commission structure. Sales representatives are more likely to stay with a company rather than look for greater chances if they believe they are being paid appropriately.

'

 

'

Achievable quotas and the proper ratio of commission to compensation are both essential components of effective organizations. Profitability can be impacted by how a firm compensates its sales staff, which also aids in luring and keeping the best sales force.


 


Types of Sales Commission Structures


Depending on their services or products, businesses employ several sales commission structures. The most typical structures are as follows:


1. Base rate only commission


Sales personnel are paid an hourly or flat rate wage under the base rate-only plan. Businesses that invest much effort in educating and assisting consumers before and after sales profit from this incentive structure.


 


2. Base salary plus commission


One of the most popular sales commission structures is base salary plus commission. It pays salespeople an hourly wage, a basic income, and a commission rate. The base wage is typically too little. With 60% being the basic rate and 40% being commission-based, the typical wage-to-commission ratio is 60:40. The plan works best as inspiration for better sales performance.


 


3. Draw against a commission


To help new workers adjust to their sales roles without losing revenue, the draw against a commission structure is based on an advance payment or draw. The commission-only and base pay plus commission systems are both included in it. You earn more commission the more you sell.


 


Regardless of sales, sales agents receive a payment, or draw, each month for a set period. They keep the commission and the difference between it and the draw amount if their commission income is less than their salary. The money is regarded as an advance payment up to the point that commissions equal or exceeds the salary drawn. These advance payments have to be finally repaid. Only when commission totals exceed the draw do salespeople make money.


 


4. Gross margin commission


The cost of the things being sold is considered in the gross margin commission model. The salesperson receives a cut of the revenue. Salespeople are less likely to offer discounts on goods because their commission is based on the final cost of the sale. The more products or services they can upsell, the higher the commission they can receive.


 


5. Residual Sales Commission Structure


Salespeople with loyal customers or accounts profit from the residual sales commission structure. Commission payments continue as long as the accounts are making money. Salespeople are encouraged by the framework to keep or gain repeat business from their clients. Agencies and consulting organizations that work with long-term clients frequently use this arrangement.


 


6. Revenue Commission


When determining commission rates, businesses that focus more on long-term objectives than total profit sometimes adopt the revenue commission model. Top sales performances can be attained by salespeople who receive a set share of the income they bring in.


 


7. Straight Commission


In a straight commission structure, salespeople only get paid when they close a deal. No sale means no revenue. The company can pay higher commission rates since it doesn't give a base wage, which frequently draws the finest salesmen. Salespeople can work independently and according to their schedules thanks to the straight commission structure. Only when the salesman fails to generate income for the business is money lost.


 


8. Tiered commission


Salespeople who use the tiered commission model are paid a set commission percentage on every sale they make up to a predetermined amount. As soon as they meet their revenue target, their commission rises. This inspires them to surpass sales targets and close more deals.


 


9. Territory volume commission


According to this sales commission structure, salespeople are paid based on the standard rate for the designated territory. When sales figures are totalled, and commissions are divided evenly among salespeople in a region, remuneration often depends on territorial volume. Only salespeople that work in a collaborative setting can benefit from this reward structure.


 


10. Multiplier Commission


Although complicated to set up, multiplier sales commission structures allow organizations to create custom incentive programs that motivate their sales teams to boost sales. A basic revenue commission % is multiplied by a fixed amount based on achieving a sales representative's quota in multiplier programs. Managers that wish to monitor a rep's performance in relation to multiple KPIs, product offerings, and upsell chances can use this structure.

How to choose the best sales commission structure


It's time to select one for your sales department now that you know the top ten sales commission structures. To choose the ideal structure, follow these five steps.


1. Consider your company's objectives.


Every sales department strives to increase sales. What do you hope to accomplish? Which sales commission structure will inspire your sales representatives to put in extra effort and achieve these goals? Being precise is essential. You must delve farther further if "closing more deals" is your goal.


 


2. Benchmark commission rates for your sector


Choosing the sales commission structure for your business is only half the battle. Additionally, you must select competitive commission rates, which you can accomplish by comparing them to others in your sector.


 


How are the sales representatives paid at your primary rivals' companies? Are you able to match, if not surpass, these arrangements? You'll find it simpler to draw in excellent talent if you can. Additionally, you'll lower your turnover rate and save your business money.


 


3. Think about the responsibilities of each rep.


There are numerous employees in your sales department, all of whom have various work responsibilities. For instance, sales representatives aren't expected to do the same activities as sales managers.


 


The job descriptions for your staff will be even more diverse if your department hires inside and outside salespeople, sales enablement specialists, and canvassers. This is why it's crucial to consider job descriptions when analyzing compensation schemes.


 


Your sales representatives will be the only ones to receive commissions, for instance, if you only reward actual sales. The others in your department won't be inspired to produce their finest job as a result. Additionally, they'll most likely leave your business to take a higher position.


 


4. Pay attention to turnover rates


You must assess your company's compensation strategy once it has been established. Is your staff content? Are they inspired? They should be if you've chosen the best sales commission structure and provided appealing commissions.


 


Talk to your team directly. Find out if they believe they are being paid fairly. The only issue with this strategy is that you might not always get straight answers from your staff.


 


The turnover rate in your department might reveal a lot about how satisfied your employees are. They would remain around longer if you were. It's likely that you're likely not paying your staff enough if it's greater than usual.


 


5. Analyze each sales representative's performance.


Most likely, both high- and low-performers work for your department. Spend a moment evaluating each rep's performance. If so, here's some advice: implement a tiered commission structure.


 


You can reward your top performers with a tiered compensation system while encouraging your underachievers to develop their capabilities and do better. Win-win situation!


 


Final Thoughts


Your sales agents will remain motivated if you choose the correct sales commission structure. If it's the wrong one, they'll be forced to leave, and business for your organization will suffer.


 


Fortunately, you have a thorough understanding of the sales commission structure at your disposal after reading this article. You also understand how to pick the best one for your group.

Nolwazi Mlala
Guest
This article was written by Nolwazi a Guest at Industrial Psychology Consultants (Pvt) Ltd

Related Articles


Notifications

Sign up now to get updated on latest posts and relevant career opportunities