How to Choose the Right Sales Commission Structure for Success
A well-designed sales commission structure is important in motivating your sales team toward the accomplishment of business goals through the generation of revenue. Sales commission structures outline how and when salespeople get paid for their work, detailing commission rates, how payment will be made, and what defines qualifying activities. The appropriate structure will help in recruiting, retaining, and motivating top performers while a poorly designed plan may lead to confusion, dissatisfaction, and increased turnover.
This guide will consider the most common sales commission structures, their benefits, and best practices for implementing a structure that works for your business.
1. Straight Commission
A straight commission sales structure means reps make 100% of their income through sales. In other words, there is no base salary; reps make direct money on what they sell. This typically occurs within companies that fall into contingent sales industries, which are primarily real estate or retail, or for those independent contractors who operate independently in the role of a sales representative.
- Best for: New businesses, industries with independent sales representatives, or high-commission roles like affiliate marketing or real estate.
- Benefit: High earnings potential for star performers-attracts self-motivated salespeople.
- Disadvantage: Risk-averse reps are moving out without financial stability, creating a higher turnover.
This structure appeals to sales professionals who like the action of closing a deal and are confident in their close ratio and want more control over total income. This could be a turn-off for any candidates looking for solidity in their income, as there is no salary to fall back on.
2. Base Plus Commission
Today, perhaps the most common commission structure that businesses adopt is a base salary plus commission. It ensures a stable income in the form of a base salary and further rewards sales performance through commissions earned. This method gives the best of both worlds, merging stability with performance-driven incentives.
- Best for: Large, established businesses looking to reduce turnover and give stability to the sales teams.
- Benefit: Salespeople enjoy a steady income while being incentivized to exceed their targets for higher commissions.
- Drawback: Can lead to complacency if reps feel good about their base and are not highly motivated by their commission potential.
A base-plus-commission model is infinitely better for companies that must balance revenue growth with the need to recruit and retain sales talent. The typical ratio is 60:40, where 60 percent are earnings based on base salaries, while 40 percent is commission.
3. Tiered Commission
With tiered commission structures, sales representatives receive higher rates once their sales reach a milestone. This model incentivizes reps to work toward aspirational sales milestones with incremental payouts based on achieved performance tiers.
- Best for: Growth-driven businesses seeking to push top performers to exceed their quotas.
- Benefit: Encourages over-performance by offering higher rewards for exceeding sales targets.
- Disadvantage: It can be cumbersome to keep track of multiple commission tiers.
For instance, a rep could receive a 5% commission on the first $10,000 in sales and then leap to a 10% commission once they have surpassed that barrier. This kind of structure truly gives the sales reps a strong incentive to push beyond quota and close more deals.
Additional Commission Structures to Consider
While these are the most common-along with base salary plus commission and tiered commission models-there are many other structures that can be successful, depending on your business model and the makeup of your sales team:
- Residual Commission: Over time, this sales representative earns from revenue because the value of an account grows. This is ideal for subscription-based businesses.
- Territory Volume Commission: Representatives get a commission based on the total volume of sales in a specific territory. This allows representatives to create a team feature and success.
- Hybrid Commission: There are multiple commission structures combined in order to balance stability with motivation, including base salary plus tiered commission.
- Team Commissions: There are policies that reward the contribution of not just one’s own sales but also the combined achievements of the entire team.
Best Practices in Sales Commission Structure
An effective commission structure design must consider your business goals, market conditions, and sales team needs. Best practices to consider include the following:
- Transparency: Clear the commission plan and let it be fully comprehended by all the team members. Reps need to make sure exactly from what they get commission for, and for when they will receive it.
- Equitability: Design a mechanism that is equitable and will incentivize participants. Ensure the plan rewards the right behavior and aligns with the objectives of the company.
- Flexibility: Be prepared to change commission structures as your business changes. What works well today may need adjustment with the growth of your company or a change in market conditions.
- Regular Reviews: You need to revisit your commission structure from time to time to ensure it’s focused, at all times, on your business and sales objectives.
Conclusion
The secret behind a well-designed sales commission structure is to ensure the motivation of your sales team will drive business success. Whichever model you use-straight commission, base salary plus commission, or tiered commission-it is highly important that you align the structure with the goals of your company and motivate the team to perform positively. By paying attention to best practices and reviewing your commission plan regularly, you can devise a compensation system that incentivizes top performers and helps drive long-term growth.