Outlining your commission structure is one of the most important things a company can do for its sales operation. What works best for one business may not be the answer for another. Here are some tips for finding the right commission structure for your company:. Understanding how to calculate a sales commission rate depends on the structure of the company's agreement. Some companies base commission on a certain percentage of sales, while others base commission on the final cost of the sale after expenses.
There's a lot of variety in structure, so it's important to know the exact details of the commission structure before attempting to calculate commission. The gross profit of the sale is the target number salespeople follow. The commission is typically based on the total amount of a sale, though there are other factors, like net profit and gross margin that may impact a salesperson's earnings.
Find jobs. Company reviews. Find salaries. Upload your resume. Sign in. Career Development. What is a commission structure for sales? Importance of an effective commission structure.
Nine types of sales commission structures. Base rate only commission. Base salary plus commission. Draw against commission. Gross margin commission. Residual commission. Example: An insurance salesperson lands a large account. Revenue commission.
Straight commission. That being said, HubSpot found the average rates per industry to help guide you:. Great, now the question is, which one should you choose? How it works: Also known as a Straight Commission plan, the Commission Only structure refers to paying reps a set commission whenever they make a sale.
How it works: Sales reps receive a predetermined commission every time they sell a product or service. When to use it: This type of sales commission structure works best with products and services that have a set price point. It should be noted that revenue commission plans typically fail to align with the larger, broader goals of a field sales organization or the unique DNA makeup of a sales team.
Therefore, they must be used with caution. Sales generated within a territory are tallied up and the commissions generated are split equally amongst all of the sales reps who work within that territory. When to use it: For this sales commission plan to work, your sales department must develop a team-first environment and every team member has to be willing to contribute to the overall goal—no lone wolf tactics allowed.
How it works: Gross margin commission structures are similar to standard revenue commission ones. Sales reps then earn a commission based off of this number. How it works: Think of draws as advanced payments. In this commission structure, sales reps are guaranteed to make a specific amount of money each month, regardless of the number of sales they generate for their company.
When to use it: The Draw Against Commission Structure is generally best for new hires, ramp periods, long periods of change and uncertainty, and training. In a nutshell, salespeople earn higher commission rates after closing a certain number of deals, or, surpassing a total amount of revenue generated. How it works: The Residual Commission structure continues to pay sales reps a commission for as long as the accounts they acquire continue to drive revenue.
Because of this, it behooves reps to retain their customers for as long as possible. When to use it: This sales commission structure works best for organizations with ongoing accounts, such as insurance providers, marketing agencies, etc. How it works: Multiplier Commission Structures can be difficult to set up, but allow companies to create customized compensation plans that truly motivate their sales department to make more sales.
How it works: Sales reps are paid an annual salary with or without benefits and do not receive commissions on the sales they generate. When to use it: The Base Pay Rate Only commission structure is rarely used by modern sales departments.
There are many reasons for this, one of them is the lack of incentives it provides to sellers. Failing to properly incentivize your team will likely result in a low level of team productivity. Still, it can work for some organizations, especially those which operate almost exclusively on inbound leads. These businesses have sales staff that operate more as customer support professionals than actual salespeople. Finding both leads to sales success. Common structures for sales commissions include being paid a high salary with low commission or being paid based on individual sales, territory sales volume, a share of the profits, bringing in new business, maintaining old business, wholesale or net retail sales, hitting an exact sales target or hitting variable targets.
The most common pay plans include:. Inside sales , in which the sales rep is given a list of customers to contact, often offers a high base salary and low commissions. Those who don't mind making cold calls and need a guaranteed paycheck will be happy with this plan, says Greg Bennett, a senior account executive for The Mergis Group a division of Spherion in Durham, North Carolina.
Look for a low base and the highest possible commission. Remember that a sales territory is only as rich as the customers it contains. Companies that sell services often pay their sales reps a percentage of the profits. The catch? If you have to discount the price due to competitive pressure, the discount comes directly out of your paycheck. A tiered commission structure is a payment system that offers higher commissions to sales people as they sell more product. The way employers choose to compensate those who sell their products can affect how sales people behave and how customers view companies.
Salesmen who work on commission may try harder to make sales than purely salaried workers, but they may also be more pushy with their sales tactics. This can cause customers to feel pressured or hurried into buying products, which can lead to dissatisfaction, especially if products do not live up to the expectations created by salesmen.
Gregory Hamel has been a writer since September and has also authored three novels. He has a Bachelor of Arts in economics from St. Olaf College.
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