5 Common Sales Commission Structures
Choosing the best sales commission structure is important to motivate your sales people and achieve your business profit. However, there are many factors that can impact sales commission. Some of these factors include: what you are selling, your employees, the industry, your company size, sales cycle length, and more.
The most common and simple sales compensation plan is made by providing commission as a percentage of a single sale’s revenue. If a product sells for $2,000 with a sales commission rate of 5%, a sales professional would collect $100 for each product they sell.
Common sales commission structures include profit, gross margin, tiered commission structures, straight commissions, draw against commissions.
Gross Margin Commission Structure:
Gross margin involves both sale price and the costs involved in making that sale. For example: If the company is selling a product for $1,000 and if your sale percentage is 10% and there is $400 in associated costs, then the commission would be a percentage based on the remaining $600 profit. i.e, $60 will be the sales commission to the person making the sales.
In this commission plan, you will receive a commission percentage of the gross profit on a sale. The higher the profit margin on sale, the more commission you will earn.
Profit Commission Structure:
These plans pay commission to the salespeople based on how well the company is performing. It is startups that mostly use this plan since they lack liquidity.
Profit commission plan is best suited for sales professionals who are able to support themselves through the lean period.
You can also attract salespeople by incorporate long-term incentives such as stock shares, and also, with other job benefits like flexible time.
Tiered Commission Structure:
The more you sell, the higher commission percentage you will receive. This is the rule of tiered commission plan.
With tiered commissions, employees can earn greater commission rate once they surpass a certain level of revenues.
For example, if a sales rep is earning 7% commission on a product which is sold up to $500,000 in the total revenue, the tiered commission plan increases to 9% once they exceed the $500,000 boundary line.
Mostly, there will be a number of revenue tiers, so each time your sales professional achieves a certain number of sales or revenue targets, his/her commission will increase.
With this type of commission setup, high performers have additional motivation to keep selling and increase the company’s revenue.
Straight Commission or Commission-Only:
Straight commission refers to paying employees based on the sales they make. This is entirely a variable pay and is extremely motivating. However, it can also be highly stressful for the sales reps because on the chance that they do not make any sale, then they do not take home any pay either.
Draw Against Commission:
The draw against commission plan enables workers to receive an advance payment for commissions they might earn in the future.
A few companies with straight commission structures and products with longer sales cycles offer this method of commission to their workers to cover for months with low cash flow.
Draw against commission is a loan to the salesperson which the company will deduct from future earnings. For instance: If the received draw commission is $300, and you sell five $3,000 widgets at 6% commission for a total commission of $900, you would be paid $600 since you already received the $300 at the beginning of the month.
In addition to the plans mentioned above, there are also many hybrid versions that use elements of each.
A solid sales commission structure drives sales reps to perform and sell which will increase the profit of the company.
But, on the other hand, the company should also provide structure for reporting and calculating commission and much more. Maintaining all the sales commissions will be tedious, time-consuming and creates errors.
Check out reasons why you should automate your sales commission here
With a good sales commission software like Easy-Commission, you can maintain and automate your sales commission process, which will reduce time, increase trust, and motivate the salespeople.