Whether you’re in the sales industry or considering building a sales-based business, it’s important to understand how sales commission structures work.
Since most salespeople are paid through some type of commission, what and how much they sell has an impact on their annual income. In this article, we define commission structures for sales and provide examples of each.
What is Sales Commission Structure?
Commission structures in the sales industry detail how companies compensate their sales associates. There are several types of sales commission structures that result in different pay rates. Commissions can be paid weekly, bi-weekly or monthly.
Most are paid at the end of the period but can be delayed if the employer needs to receive payment from the client before paying you.
The Importance of an Effective Commission Structure
Key considerations that companies should keep in mind when creating an effective commission structure include fairness and accuracy. Sales associates who feel they are paid fairly are more likely to stay with the company rather than leave for better opportunities.
An effective structure includes the right mix of salary and commission and affordable quotas. How a company pays its sales force can impact profitability while helping to attract and retain the best salespeople.
Nine Types of Sales Commission Structures
There are a variety of sales commission structures that businesses use depending on their services or products. The nine most common structures include:
1. Basic rate commission
The basic rate plan only pays sales reps an hourly or fixed salary. This commission structure benefits businesses where sales reps spend a lot of time educating and supporting customers before and after the sale. There is no incentive to upsell or sell more products or services.
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Example: A company’s four salespeople each make $1,250,000 a week no matter how many sales they make.
No calculations are necessary because no commissions are paid.
2. Basic salary plus commission
Base salary plus commission is one of the most common commission structures. It pays salespeople a base or straight salary plus a commission rate. Typically, the base salary is often too low to support a person’s overall income, but it does provide some income security when sales are low.
The standard salary to commission ratio is 60:40 with 60% being the base rate and 40% being commission driven. The plan best serves as an incentive or motivation to improve sales performance.
Example: A salesperson earns a salary of 500,000 a month with a 10% commission, or 500,000, for sales worth 5,000,000. If he sells 20,000,000 products in a month, he earns 2,500,000: a salary of 500,000 and a commission of 2,000,000.
Calculation for base rate commission only:
Commission Percentage x Sales Amount = Total Commission.
3. Draw against commission
Draw against commission is based on an upfront payment, or draw, that helps new employees adjust to their sales role without losing income. It combines elements of a commission-only and base salary plus commission structure. The more you sell, the more sweden business email data commission you earn.
Sales sales get a salary or bonus every month for a certain period of time regardless of sales. If they get less commission than salary, they keep the commission and the difference.
The funds are considered an advance payment until the commission reaches or exceeds the salary draw. This advance payment must eventually be paid back to the employer. The seller only profits if the total commission is higher than the draw amount.
Example:
A salesperson is expected to earn 4,000,000 a month in commission and receive 2,000,000 a month in salary. If they meet the 4,000,000 target, they earn 2,000,000 more, the amount above the draw . If they only earn 1,000,000, they owe the company 1,000, the amount of the draw.
Calculation of draw against commission: Total Commission – Draw = Commission Due.
4. Gross margin commission
The gross margin commission model takes into account the costs associated with the products sold.
Salespeople earn a percentage of the profit. Since their commission is based on the final cost of the sale, salespeople are less likely to discount products. The more they can sell a product or service, the more commission they can earn.
How to Choose the Right Sales Commission Structure?
Outlining your commission structure is one of the most important things a company can do for its sales operations. What works best for one business may phone number bl not be the answer for another. Here are some tips for finding the right commission structure for your company:
- Determine what outcome you want to achieve. This may be customer acquisition for one department but customer loyalty for another.
- Focus on an effective sales process. Determine what sales methods work best for your company to achieve its sales goals.
- Document the results over time to measure success.
- Sales turnover is usually high, so don’t be afraid to try new commission structures. What worked as a motivator five years ago may not be an incentive for today’s sales team.
Conclusion
That is a complete discussion of several types of sales commission structures that you might be able to apply in your business. To make it easier to calculate the sales commission of your sales force, you can use Accurate Online accounting software that has a sales commission feature.
By using Accurate Online, you can also easily do bookkeeping, asset and inventory management, automatic reconciliation processes, create more than 200 types of financial reports, and much more.
