Choosing the Right Sales Commission Structure for Growth
An effectively designed sales commission plan is required to encourage sales teams and promote business growth. An effective plan will also align business interests with the interests of the sales representatives so that efforts are directed toward moving organizational goals. In this article, we cover the structures of sales commissions, their pros, and their considerations for implementation. Commissions can be simplified and tracked with the assistance of tools like Flow Commission, enabling organizations to be open and efficient.
Common Sales Commission Structures
Base Salary Plus Commission
This combination method is a compromise between a salary and a sales commission. It provides sales reps with security and still offers an incentive to perform. As an example, a salesperson could receive a $50,000 annual salary and a 10% commission on sales. If they sell $200,000, they would receive $70,000 total. This method is extremely popular as it is a good balance between security and incentive.
Straight Commission
In a straight commission plan, the salesperson’s earnings directly depend on the sales revenue he or she brings in, and no base salary is offered. For instance, a rep earning a 10% commission on all sales would need to continue making sales in order to maintain his or her income level. Although this plan strongly motivates peak performance, it has the effect of causing uncertainty of earnings during slow sales.
Tiered Commission
This plan offers increasing commission percentages for achieving certain sales volume levels. For example, a sales representative earns a 5% commission for sales up to $5,000, 8% for sales between $5,000 and $10,000, and 12% for sales above $10,000. This approach encourages reps to surpass goals to receive more.
Draw Against Commission
Here, the sales representatives receive an advance, or draw, which is later offset against commission income. Draws can be recoverable or non-recoverable. The scheme assists new hires in surviving pipeline ramp-up, with earnings predictability in ramp periods.
Territorial Volume Commission
Commissions are paid on the total sales for a specific territory, motivating the sales representatives to work as a team. This is suitable where sales are transacted on the basis of team effort, and all who participated in the effort benefit.
Residual Commission
The reps earn recurring commissions on the repeat business or subscriptions that they generate. The model is common in recurring revenue businesses, where it incentivizes reps for long-term customers and customer retention.
Gross Margin Commission
Commissions are earned on the margin of sales, not on revenue. This encourages salespeople to sell products or services with higher margins, linking their efforts to company profitability goals.
Multiplier Commission
This model uses more than one factor, i.e., sales volume and product type, to determine commission rates. It can facilitate a customized approach, paying for behavior that reinforces strategic objectives.
Factors Influencing Commission Structures
Industry Conventions
Commission rates and structures vary by industry. Average commission rates, for example, vary from 20% to 30% of gross margins, depending on the sales structure. An understanding of industry norms helps in designing competitive and motivational compensation plans.
Company Objectives
Commission plans need to be linked to company objectives so that sales efforts are directed toward desired outcomes. If, for instance, market share is to be increased, a graduated commission plan can be established to encourage more sales volume.
Sales Cycle Length
The duration of the sales process affects the appropriate commission structure. Longer sales processes can be supported by a base salary plus commission plan to provide some stability of earnings, while shorter processes can be appropriate for straight commission plans.
Product or Service Profitability
Commissioning on high-margin products ensures that sales efforts have a beneficial effect on the bottom line. Gross margin commission plans are particularly helpful in motivating the sale of profitable products.
Implementing an Effective Commission Structure
Clear Communication
Commission calculation and payment transparency is the path to establishing trust as well as motivating the sales teams. Having the structure clearly defined makes it sure that representatives are aware of how their efforts are being translated into compensation. With Flow Commission, it is easier to provide sales reps with real-time visibility into performance and earnings.
Regular Evaluation
Periodic review of the commission plan’s performance allows for adjustments to be made in accordance with market needs and evolving business goals. Periodic review maintains the plan as motivational and fair.
Alignment with Roles
Creating commission plans based on different selling roles recognizes the differing contribution of the members. For example, account managers who are focused on client retention can be on a different plan than new business developers.
Legal and Ethical Considerations
There is a need for labor law and ethics considerations in designing commission plans. This includes adherence to minimum wage laws, overtime laws, and anti-discrimination laws.
How Flow Commission Can Help
Flow Commission is a powerful commission, sales, and deal management solution that removes the complexity of managing multiple commission structures. Whether your business runs a tiered, straight, or residual commission structure, Flow Commission simplifies tracking and paying accurately. Flow Commission provides real-time visibility into sales performance, allowing sales leaders and finance teams to make data-driven decisions. With Flow Commission, companies can:
- Automate Commission Calculations: Eliminate manual errors and ensure accurate payouts.
- Enhance Transparency: Provide sales reps with real-time insight into their earnings.
- Track Performance: Stay on top of key metrics and identify areas to optimize commission structures.
- Enhance Compliance: Stay in line with industry regulations and in-house policy.
Conclusion
Choosing a suitable sales commission structure is at the heart of incentivizing sales teams and motivating business objectives. By understanding the various models and considering industry standards, company goals, and sales cycles, companies can create compensation plans that encourage performance and motivate business growth. Regular review and communication then further optimize the performance of these structures, ensuring they continue to align with the company’s and the sales reps’ interests. Using Flow Commission can simplify this process and provide the insights needed to modify commission approaches with ease.
