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The Ultimate Guide to Choosing the Right Sales Commission Structure for Your Team

As a sales professional, understanding the various types of commission plans and identifying desirable salary and commission rates from potential employers is crucial. If your sales organization struggles with balancing company requirements and employee compensation needs, it may be time to reassess your commission structure. To help you navigate this process, we've compiled a list of resources to aid in choosing the most effective sales commission plan for your team or yourself. Let's dive in!

What is a Sales Commission?

A sales commission is a percentage of profit or other compensation that sales reps receive for meeting specific goals, such as making a sale, meeting a quota, or achieving team success. It is a crucial aspect of a salesperson's overall compensation and can vary depending on industry and job role.

Important Factors to Consider in a Sales Commission Structure

When creating a commission structure, there are a few essential things to keep in mind. According to sales strategist Marc Wayshak, author of "The High-Velocity Sales Organization," it's crucial to avoid salary caps, get it right the first time, and keep it simple. These tips will ensure your sales team is motivated and has a clear understanding of their compensation and commission plan.

How to Implement a Successful Sales Commission Structure

If you're unsure of how to structure your sales commission plan, there are a few different methods you can consider. Using a sales compensation calculator is an effective way to calculate various commission scenarios, such as salary plus commission, tiered commission, and territory volume. Always keep your team's goals and targets in mind when determining the best structure for them.

  • Avoid salary caps: Capping salaries can limit your sales team's earning potential and ultimately impact their motivation and morale. Sales managers should encourage their team's success and allow them to earn as much as possible for their hard work.
  • Get it right the first time: Frequent changes to your commission plan can demotivate your team and hinder their performance. It's essential to get it right the first time to maintain their motivation and morale.
  • Keep it simple: A clear and straightforward commission structure is easier to understand and implement. It also eliminates any potential loopholes that could lead to misunderstandings or conflicts within the team.

In addition to these crucial factors, it's essential to focus on the right products when creating a product-based sales commission plan. Encouraging sales reps to prioritize their preferred products is beneficial, but it's critical to ensure that their goals align with the company's priorities.

Understanding Sales Commission Rates

Determining a fair commission rate for sales can be a challenging task. It often varies by industry, job role, and various factors such as product value and employee involvement in the sales process. Referencing the average commission rates for your industry can serve as a useful starting point when determining a fair rate.

Examples of Sales Commission Structures

Here are some common examples of sales commission structures and how they work:

  • Straight Commission: Sales reps earn a percentage of every sale they make, motivating them to increase their sales. However, this structure can also result in inconsistent income.
  • Salaried + Commission: Sales reps receive a base salary in addition to a commission for each sale. This structure provides stability while still incentivizing reps to make more sales.
  • Tiered Commission: Sales reps earn a higher percentage of commission as they reach higher sales targets. This structure encourages reps to set and achieve ambitious goals and rewards them accordingly.
  • Profit-Based Commission: Sales reps earn a commission based on the overall profit of the company, rather than individual sales. This structure motivates reps to focus on selling high-margin products or services.

Average Sales Commission Rates by Industry

The average commission rates in sales can significantly vary by industry. For example, real estate agents may earn a higher commission than retail sales associates. It's crucial to research typical commission rates for your specific industry to determine a fair rate for your team.

Choosing the Right Sales Commission Structure for Success

Motivating and driving the success of your sales team starts with a fair and effective commission structure. In this article, we will discuss the best practices for creating a commission plan and how to determine the most suitable structure for your team's goals and industry.

1. Base Salary Plus Commission

The most common commission structure is the base salary plus commission plan. This structure offers a fixed salary and additional commission based on performance, typically with a 60-40 split between fixed and variable pay.

It is ideal for companies that value retaining talented sales reps and provides a sense of security and rewards to keep them motivated.

Pro Tip: Consider this structure if long-term employee retention is crucial for your business success.

2. Straight Commission Plan

A straight commission plan operates on a pay-as-you-go model, where sales reps only receive commission for the sales they make. This structure is commonly used by startups or businesses with limited capital.

While it may be appealing to high-performing sales reps, it may not provide stability for those who struggle to consistently meet sales targets.

Pro Tip: This structure works well for complex organizations, allowing for adjustments in quotas and commissions based on individual performance and territories.

3. Relative Commission Plan

The relative commission plan offers a more secure alternative to the straight commission plan. It considers the difficulties that sales reps may encounter in certain territories or with specific products, ensuring fair rewards for their efforts.

This plan is beneficial for businesses with varying sales pipelines, directing sales reps' focus on areas that need improvement.

Pro Tip: If you have a diverse sales team and want a fair and motivating structure, consider the relative commission plan.

4. Absolute Commission Plan

The absolute commission plan directly ties commission to performance, making it easy for sales reps to understand and providing a strong incentive to reach their full potential. It works well for businesses looking to motivate their sales team to achieve specific targets or goals.

Pro Tip: Consider using this structure for teams with specific targets or goals that align with your overall business objectives.

Sales Commission Rates Example: Straight-Line Commission Plan

Under a straight-line commission plan, sales reps earn a percentage of their sales quota. The unique aspect of this structure is that once the quota is met, reps continue to earn commission for all sales made.

For example, if a rep has a quarterly commission of $10,000 and exceeds their quota by 10%, they would earn $11,000 in commission.

5. Residual Commission

The residual commission structure is based on the long-term value of individual accounts. Sales reps receive ongoing commission for as long as the account generates revenue, creating a strong incentive to maintain valuable client relationships.

However, this structure comes with higher stakes as losing a valuable account can significantly impact a salesperson's commission.

Pro Tip: This plan works well for businesses with long-term client relationships, such as ad agencies or consulting firms.

Sales Commission Rates Example: Residual Commission

For instance, a sales rep earning 7% commission on a recurring payment of $5,000 per month would receive $350 per month in residuals from that client.

A well-designed sales commission agreement is crucial for outlining the terms of a salesperson's employment. As an employer, it is essential to carefully consider the different commission structures and choose the one that best aligns with your business goals and sales team's needs.

Understanding Sales Commission Agreements: A Guide for Employers and Employees

When a new employee joins your company, one crucial document that must be prepared and agreed upon by both parties is the sales commission agreement. This document outlines the terms and expectations for commission structure and serves as a roadmap for motivating and driving your sales team towards success. Keep in mind the best practices and examples discussed in this article to determine the most suitable commission structure for your team. With a well-designed commission plan, your sales team will be motivated to achieve their targets and drive the success of your business.

Understanding the structure of commissions and the employee-employer relationship is crucial for both parties involved in a sales commission agreement. This document outlines the key components that should be clearly communicated and understood before signing.

Commission Structure

The commission structure, including bonuses and performance incentives, should be clearly outlined in the agreement. Important details such as when commissions are earned and paid, as well as consequences for cancellations or defaults, should be addressed to avoid confusion or disputes.

Agreement

Once all details have been discussed and understood, the salesperson and employer must sign and date the agreement. This serves as a legally binding document, ensuring that both parties are aware of their rights and obligations.

To ensure compliance with relevant laws and regulations, it is recommended to seek guidance from a legal team or lawyer when crafting a sales commission agreement. This will ensure that all necessary aspects are covered and that the agreement is in line with legal requirements.

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