Sales commission is, in its simplest form, the money a sales rep gets for making a sale.
Normally, sales commission is not part of a sales rep’s regular pay, but rather an added incentive. For example, a typical compensation plan for a sales rep consists of a fixed salary plus a variable commission. So, income potential varies based on the commission structure of the company.
Because sales commission is based on individual employee performance, it can be a great mutually beneficial factor in a sales compensation plan. If the employee performs well, not only will they make more money, but the company will as well.
That being said, why wouldn’t you have a commission plan in place, right?
The problem is many companies choose a commission plan that doesn’t align with their business goals or simply doesn’t fit with the structure of their sales team.
In this post, we'll talk about how to alleviate this struggle and dig into:
Hire the best.
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Find the right balance between sales commission and salary.
As a general rule of thumb, the more weight you put on sales commission, the less control you’ll have over the execution of the sale.
This is because the more commission-based a rep’s income is, the more likely they are to adopt an “independent agent” mindset, strategizing their own marketing and sales tactics to close deals and make their coin.
You need to decide if this is okay for your company.
For example, if as a company you want to push product “A” but product “B” offers more commission potential, a sales rep is realistically more likely to push product B than A. This will, after all, make a bigger impact on their paycheck.
But this presents a problem for your company, as sales won’t be aligning with your company objectives. Things like this can be prevented by providing an adequate base salary so sales reps don’t need to choose between making the company happy and paying their own bills.
In some instances, your company might even be better off without incorporating a sales commission plan at all. This is the route Pluralsight took, and their sales team actually increased from 5 people to 50 people in about a year.
One of the arguments for this decision was that sales commission gets in the way of putting customer needs first, and customer satisfaction is the ultimate deciding factor in a company’s long-term success. (We can’t argue there.)
While eliminating sales commission worked for one company, that doesn’t mean it’ll work for everyone.
Let’s look at another example. Fishbowl, also a tech company, pays all their employees a commission—that’s right, EVERYONE, not just their sales reps. Their results? An annual revenue increase of 60% for over 5 consecutive years.
Clearly, the key is to find the right balance. There’s no one-size-fits-all answer when it comes to sales commission plans.
What type of sales commission plan should you choose?
There are many different types of sales commission structures out there to choose from. A little research can go a long way in helping you decide on the best plan for your sales reps that also aligns with the goals of your company.
We’ve highlighted some of the most common sales commission structures below to get you started.
For the sake of comparing all of these plans, let’s use an example of $1,000 of product being sold and a 10% commission rate.
1. Revenue sales commission structure
A revenue-based compensation structure is the most common type of sales commission plan. Commission under this plan is based on the total amount of revenue you bring to the company.
Using our example above, if you bring in $1,000 of revenue, 10% of that is $100—this is your commission on the sale.
This type of commission structure is ideal for your sales reps when they’re dealing with more expensive products, and works well for the company if your goals are to gain market share or enter a new market.
Basically, depending on product pricing, this commission plan helps your reps make some decent commission and helps your company close more deals.
2. Gross profit sales commission structure
A sales commission plan based on gross profit—the difference between the company’s cost and selling price on a product—means the sales rep would take a percentage of the profit earned on a sale versus the total selling price.
For example, say the product your company is selling for $1,000 actually cost $600. The profit on this product would then be $400, and a 10% commission on this sale would be $40.
While this means less commission for the employee versus the revenue-based plan, it makes more sense for the company in terms of how sales impact the bottom line.
If your company goals are to streamline profit and maximize your bottom line, this may the better solution for you. If your company sells products, services or other items with a high profit margin, this plan would also work well for your sales reps.
Basically, this commission plan maximizes company profit and makes sure your operational costs are met.
3. Placement fee sales commission structure
Under a placement fee commission structure, a sales rep gets a flat fee for each sale made.
Going back to our first example, if a $1,000 sale is closed, a placement fee would be a fixed amount—say $25.
The pro of this structure is that commission is very straightforward, easy to understand, and easy to track.
However, companies that use this structure often have a high turnover rate with their sales reps. This would be especially likely if your company sells less-pricey items, in which case the placement fees and overall income potential would be very low.
This commission plan may be right for you if you’ve just opened a start-up or if you’re selling inexpensive items and a flat placement fee is more attractive than a percentage of the sale. Otherwise, there are arguably better options out there that will leave your sales reps a lot happier.
4. Tiered sales commission structure
This sales commission structure works by rewarding sales reps for surpassing predetermined sales targets by offering them increased commission potential.
For example, if you made $1,000 of sales and were working with a commission rate of 10%, you’d initially earn $100 of commission on this sale. Once you reached, say, $25,000 of sales, your commission rate could increase to 12%, allowing you to earn $120 on $1,000 sales moving forward. The commission rate can continue to increase from there (e.g. 14% at $50,000, 16% at $75,000, etc.).
This structure works well if your company goals are to increase employee motivation levels and engage their minds to innovate the way they sell in order to reach new commission potential.
This challenge may be exciting for your sales reps, but if your company is selling inexpensive products or services, it may not seem worth the effort because even with a percentage increase, the actual payoff wouldn’t make a significant difference.
To summarize: this method motivates sales reps to really go for their maximum selling potential, which is great for both the reps and your company. But... it could backfire if the product or service you’re selling is too inexpensive. (In this case, a revenue-based or placement fee structure might make more sense.)
5. Commission-only structure
This sales commission structure means exactly what it sounds like. Sales reps rely solely on their closed deals to make a buck—there’s no safety-net salary.
On paper, this is the perfect solution. Hypothetically speaking, nothing would motivate sales reps or benefit the company more than a commission-only structure. But real life is a bit different.
First off, this creates a high-pressure, high-stress work environment for sales reps and makes them more susceptible to burnout (you know… exhaustion, fatigue, detachment from the job, anxiety, cynicism… basically things you definitely don’t want on your sales floor when dealing with potential customers).
You’d also be increasing the chances of sales being closed in an inappropriate or even unethical way when the sales rep is forced to choose between closing the sale and not taking home enough money to feed the family or pay the bills.
Think about it, you’re essentially asking people to work for free—unless they make the sale.
The upside for sales reps? The income potential is virtually limitless.
Don’t let sales commission hurt your customer experience.
Ideally, sales commission should be an added bonus for your sales reps to help a customer fulfill a need—not a motivator to relentlessly push products.
In the Relationship Era, customers can see right through pushy sales pitches. It’s important as a company to focus not on simply selling a product, but also on matching your customers with products that genuinely meet their needs.
This is critical to your long-term business success.
Yes, sales is about so much more than making a buck. But that doesn’t change the fact that your sales reps, like everyone else, would like to be paid well for their time and efforts.
This brings us back to just how important it is to find the right sales commission plan that works for both your sales reps and for the company—you want to keep them happy so that they’re motivated to provide a good customer experience, even while they’re selling.
How you implement your sales commission plan is as important as the plan itself.
Say you’ve picked which sales commission plan you’re going to go with. Are you going to just stroll into the office tomorrow and say, “This is how we’re doing things from now on?”
It’s important to implement your new sales commission structure properly. Otherwise, you risk causing confusion among your team as well as taking a negative toll on team morale.
For existing sales teams, try implementing a new commission structure in a small control group first.
This will allow you to better contain any negative reactions. If there are none, then you have a proven test group of reps who’ve demonstrated the new structure works to the rest of the sales floor.
For brand new sales reps, try taking a blended approach with sales compensation structure.
For example, starting a new sales rep on a full salary while they go through training, then reducing their fixed salary as their confidence in your brand and product knowledge grows is a great way to reduce pressure until the sales rep is a fully fledged member of your team.
This will drastically reduce stress, instill in them a team mindset, and set them up for success. This approach benefits the company too because it’ll give you time to make sure the new rep understands the company’s values and delivers them in a way that aligns with not only sales goals but also overall goals.
The bottom line... (Pun intended.)
When used correctly, an effective sales commission plan can boost sales and be awesome for both your sales reps and your company.
Remember, a sales commission structure isn’t a one-size-fits-all solution. It’s important your team is getting paid well, but you don’t want to lose sight of the customer experience either.
Don’t be scared to play around with your structure until you find something that aligns with company goals like your customer service objectives, covering operational costs and hitting revenue targets, and sales reps satisfaction.