Tiered Commission
Definition: Tiered commission structure is a kind of sales compensation plan that pays different commission rates based on the achievement level of the sales representative. The rationale of the model is to induce better performance in salespersons by increasing the commission rate at which salespeople earn for all sales beyond certain sales thresholds.
Detailed Explanation
A tiered commission scheme pays a salesperson at an increasing rate of commission for higher levels of sales. This motivates salespeople to increase their sales results above target levels, since higher rewards accrue to higher levels of sales. This means every tier actually represents a band of sales, and a band has a corresponding commission rate. As salespeople move up the tiers, they earn higher rates on sales that fall within those higher tiers.
Some of the most important characteristics of a tiered commission structure include:
- Multi-tier: This is a multi-tier structure, and each tier in the sales force is compensated with a commission at the relevant percentage.
- Graduated Incentives: When the salespeople exceed the sales limits set for each level, they receive higher commission rates, hence giving them compelling reasons to sell more.
- Motivation to Exceed Goals: High rates at a higher tier motivate the salespeople to overachieve their sales objectives.
- Scalable: The structure is tiered and will take the sales target and market conditions as they come. Basically, it can be scaled up.
Importance in Sales Process
- Drives High Performance: Tiered commissions push salespeople to reach higher sales levels by offering greater rewards.
- Supports Business Growth: The structure encourages salespeople to achieve and surpass their set targets, which is a means of pushing the business to grow.
- Encourages Strategic Selling: Salespeople will have a reason to strategize and give increased attention to those sales that are most value-bearing towards moving into higher tiers.
- Balances Effort and Reward: The structure ensures that salesmen’s efforts are balanced with the right kind of financial rewards, raising their job satisfaction.
Real-World Example
Consider a software company which operates under a tiered commission scheme for its sales force. The tiered commission might be defined as:
- Sales under $50,000 get a 5% commission.
- 7% commission on sales between $50,001 to $100,000.
- 10% commission on sales over $100,000.
A salesperson who sells $120,000 in software makes:
- 5% on the first $50,000 = $2,500
- 7% on the next $50,000 = $3,500
- 10% on the remaining $20,000 = $2,000
For a total of $8,000.
Such an approach motivates a salesperson to push further after achieving each threshold to maximize the earning potential.