It’s true! A majority of sales leaders grapple with the dilemma of determining the commission structure for their reps. For good reason, one might add. After all, there is no single best solution that applies to all organizations and more often than not, this quest for finding the right balance boils down to the good ol’ “trial and error”.
It is very important to understand what exactly a sales ‘commission’ means. To put it simply, a sales commission is a monetary incentive that is given to a salesperson when they hit their targets. The aim is quite clear- growing your revenue by incentivizing your salespeople to earn more.
Your sales commissions structure is more important than you think. It is instrumental in-
- Motivating your sales team to do their best and keep employee morale high
- Attracting and retaining the best in the industry
Keeping this in mind, let’s look at the 9 best sales commision structures that organizations today swear by-
- Base rate only commission
Example: The company’s salespeople each earn $1,000 a week no matter how many sales they make.
In this case, the commission is fixed and no further calculations are necessary.
- Base salary plus commission
Example: A salesperson earns $500 a month in salary with 10% commission, or $500 for $5,000 worth in sales. If he sells $20,000 of product in one month, he earns $2,500: $500 in salary and $2,000 in commission.
Calculation for base rate only commission: Commission Percentage * Amount Sold = Commission Total.
In this case, the base salary is usually too low to support someone’s household entirely but does provide a stable guaranteed income when sales are low.
- Draw against a commission
Example: A salesperson is expected to earn $4,000 a month in commission and receives $2,000 a month in draw (salary). If they met their $4,000 goal, they earn $2,000 more, the amount over the draw. If they earn only $1,000, they owe the company $1,000, the amount under the draw.
Calculation for draw commission: Commission Total - Draw = Commission Owed.
- Gross margin commission
Example: A salesperson is selling a $120,000 car that costs $70,000 to make. The gross margin is $50,000. The salesperson earns 5% on the margin or $2,500 in compensation.
Calculation for gross margin commission: Total Sale Price - Cost = Gross Margin. Gross Margin * Commission Percentage = Total Commission.
In this case, salespersons are not likely to give out more discounts as the amount at which a product is sold influences their earning.
- Residual commission
Example: A salesperson lands a large account. As long as that company pays its premiums of $4,000 a month, the salesperson receives a 5% commission or $200 every month.
Calculation for residual commission: Payment * Commission Percentage = Total Commission.
The benefit is that salespeople are motivated to retain customers this way.
- Revenue commission
Example: A car salesperson sells a $20,000 vehicle and earns 4% of the sales. They receive $800 in revenue commission for that sale.
Calculation for revenue commission: Sale Price * Commission Percentage = Total Commission.
- Straight commission
Example: A salesperson that sells vacation home rentals earns $100 for every booking. The more time he puts in, the greater the chance of making a sale.
Calculation for a straight commission: Sales x Commission Rate = Income.
- Tiered commission
Example: A salesperson's base commission is 5% up to a total of $100,000 in sales. That commission increases to 7% for total sales between $100,001 and $200,000. If they go beyond that and perform over $200,001, they earn 10% in commission.
With this structure, a salesperson is motivated to exceed sales goals.
- Territory volume commission
Example: Two salespeople are expected to sell $50,000 in product each month in a particular region. One sells $30,000 while the co-worker sells $20,000. Since the total goal has been met, they split the 10% commission, earning $2,500 each.
There are some ways that can help you decide which commission structure is ideal for your organization. For example, focusing on making your sales process effective, designing your commission structure around company goals and benchmarking with industry standards can help.
However, it is not easy to religiously stick to one structure and more often than not, companies choose to opt for a hybrid option.
Whatever your sales commission structure is, Kennect’s ICM solution provides real-time updates on your sales compensation program with a No-code plan builder that helps you customise your IC plans and deliver at 100% accuracy!
Book a demo with us today!