Sales commissions are your way to keep your sales team motivated!
Time and again, organizations have utilized sales commissions and incentive compensation management to enhance the productivity of their sales force. Implementing effective incentive compensation management systems holds the potential to drive the growth and success of the organization, while simultaneously ensuring employee satisfaction. please add this keyword
If sales commissions have such a crucial part in your business operations, then isn't that something that requires your attention as well?
In this article, you will gain insights into the sales compensation plan, including an understanding of what sales commission entails, its various types, factors that influence sales compensation, and guidelines on calculating sales commission.
So scroll down to know about sales commissions and its calculations to maximize your earnings.
What is a Sales Commission?
Sales commission is the variable pay that the salesforce receives as a reward for the target they achieve. It serves as a tool to derive positive behavior and keep the sales team focused and motivated in their work, while a sales commission tool simplifies the process of determining and distributing these rewards accurately.
Types of Sales Commissions
Depending on the organization and their policies, salesforce commissions are calculated in various ways. These include:
- Straight Commission
When the salesperson has no fixed or base income and is paid only in commission for each sale they make, it is called a straight commission.
- Graduated Commission
When sales commission increases with sales volume it is called graduated commission. For example: under a graduated commission a salesperson can be paid 10% commission for their first $1000 sales, 20% for $2000 sales, and so forth.
- Revenue Commission
Revenue commission is calculated as a percentage of the sales the salesperson made for the company. For example, when a salesperson makes a car sale of $20000, they can receive a 5% commission, that is $1000 as an incentive.
- Gross Profit Commission
The gross profit commissions are calculated as a percentage of the gross profit made on the sale. Here the commission can vary from each sale depending on the profit made of each sale.
Factors that Influence Sales Commission
- Commission Basis
Commission is dependent on company policy, revenue target, territory, and many other factors. Hence it solely depends on the organization in deciding how to calculate and manage their incentive program, including important aspects like objection handling techniques. Commission rate, commission overrides, commission splits, and commission period are some of the key factors to consider.
- Commission Rate
Commission rate is the percentage of sales that the salesperson will receive upon finalizing a deal. Depending on the organizational policy, the salesforce receives either a fixed percentage or variable pay for the sales they closed.
- Commission Overrides
Override commissions are the rewards sales managers receive for successfully managing, motivating, and overachieving the sales quota, often contributing significantly to their On Target Earnings (OTE). It serves as a good motivation tool to make the sales team strive beyond their sales targets.
- Commission Splits
Most often closing a sale is a team effort with more than one working towards the same goal. In such situations, the commission is split between the salespeople who worked towards fulfilling the sales.
- Commission Period
A salesperson gets paid their commission in a period of time. It can be monthly, quarterly, or yearly depending on the company policy.
How to Calculate Sales Commission
As mentioned above, incentive management is centered on each organization. But most companies follow a standard procedure in calculating their commission to ensure integrity and transparency.
Here is how to calculate commission.
- Determine the Commission Period
Depending on the company policy and incentive program, the commission period of an organization can be monthly, quarterly, or yearly. Hence, it's important to determine the commission period to further set the sales quotas and targets for the coming year.
- Calculate the Commission Base
Organizations must also be clear as to what is the base revenue that the salesperson must close to be eligible for commission. Most companies provide commissions under clauses. For example, a company can set their commission plan with a base revenue of $10000. Closing a deal worth $10000 will earn the salesperson their reward of commission.
- Calculate the Payable Commission
Companies often set a commission base as well as a commission rate to calculate their payable commission. The commission base is the minimum revenue the salesperson must bring to be eligible for commission. While a commission rate is the percentage of the sales revenue that they will receive as a commission.
Sales x commission rate= Payable commission
$10000x 10%= $1000.
In the above example, a salesperson earns a commission of $1000.
- Apply Any Commission Variables
Most organizations follow a mixed commission model, where on achieving certain milestones they are rewarded in addition to their payable commission. For example, if the sales quota is $1000 and the salesperson achieved $2000, the company does apply a higher commission rate for the overachieving.
For example, the salesperson will receive a 10% commission of $1000 plus an extra amount of commission for the additional $1000 revenue.
- Apply Tiered Commission Rates
While calculating commission, organizations can also divide the commission rate into various tiers. For example, when the salesforce makes a revenue between $1000 and $2000 they receive 10% commission, between $2000 and $3000 the commission rate is 12%, and so forth.
- Calculate Any Overrides
Organizations are flexible towards calculating commissions especially when they overachieve their sales quota. A 10% commission rate for a particular sale can override 15% when they make a significant achievement like 50 or 75 percent.
- Deduct Returns
Commissions are prone to claw back as well. When the lead qualification for which the salesperson received their commission can be taken back in the event of not closing the deal. Such calculations also need to be closely watched by companies during sales commission calculations.
- Split Commissions
Organizations also must be clear while deciding how to split commission when two or more participated in closing a deal. Clarity and transparency are crucial in finding how to calculate commission in such situations as it can easily fall into disputes.
Hence bringing standardization in calculating commissions is crucial for the integrity of the organization and the smooth functioning of its operations.
Organizations are constantly thinking about cracking the question of how to calculate sales commission, how to find commission rates, and resolving the tediousness of sales commission calculators.
These are questions that require quick solutions as it affects the smooth functioning of the organization as well as keeping their sales force motivated and competent. The simplest and cost-effective way organizations can achieve this goal is through automation.
Kennect is a digital solution that focuses on incentive compensation management and sales performance management. By automating your incentive compensation plans, Kennect supports you in creating transparency and achieving operational efficiency.
For more information, Book A Demo today!