Whether you are in sales and marketing or running your own business, you need to understand what a sales commission is, how it works, and the different structures it can have. Most of the salespeople you see around are paid in a sales commission structure. The way companies use sales commission to compensate the employees greatly impacts these individuals’ household income.
This post will define what sales commission structures are and give examples of each.
What is Sales Commission?
Sales commission is the payment made to the staff that brings in sales and business for a company. Salespeople are hardworking people. They try to interact with your store visitors and convince them to purchase. Their commission should be paid on time because it forms a significant part of their income and livelihood.
What is a Sales Commission Structure?
A sales commission structure of a company details how the organization compensates its salespeople and sales associates. There are several different types of sales commission structures. They all have different ways of paying the salespeople and give different pay levels.
A sales commission can be paid daily, weekly, biweekly or monthly. Most companies pay out the sales commission at the end of the designated period. When employers need to wait for payments to come from clients first, they pay the sales commission to the sales staff a bit later.
The Need to Have an Effective Sales Commission Structure
There are specific key considerations that businesses need to keep in mind when creating an effective sales commission structure. These include elements like fairness and accuracy. When salespeople feel that they are being paid and compensated for their work fairly, they are likely to maintain their jobs instead of looking for work replacements. They foresee better job opportunities within the same company and work hard to get promoted instead of applying for jobs elsewhere.
An effective sales commission structure comprises a mix of basic salary and commission. It also dictates an achievable goal and reachable quotas. The way a company pays sales commission to its sales staff determines its profitability while at the same time helping in attracting the most talented sales force.
Nine Different Sales Commission Structures
Here are nine different types of sales commission structures. There might be companies out there that pay sales commission in an even newer way than these, but these are the most common types in most industries these days.
1. Base Rate Only Commission
This is when the sales representative is paid a flat or hourly salary. This structure benefits companies where the salespeople must spend a lot of time supporting and educating customers before and after the purchase is made. There is no incentive to upsell or sell more products than the required quota in such sales. Thus there is no point in offering a sales commission above the flat rate.
The base salary plus commission is the most type of sales commission structure. It compensates the sales force by paying a straight base salary or hourly rate plus a commission rate. Typically, companies that offer this kind of package have a meager base salary. The standard ratio of wages to commission is 60:40, where 40% of the income comes from the sales commission. This plan is best for companies that need to constantly motivate their sales representatives to make more sales.
3. Draw Against Commission
This kind of sales commission offers an advance payment that helps newly hired sales representatives adjust to their sales roles without being under the threat of losing all their income if they fail to make high sales levels in the beginning. If they make less commission than their salary, they get to keep the sales commission and the difference between it and the drawn or predicted amount. The funds they get are considered advanced payments for them until they can either reach the amounts through their commissions or salary. Eventually, the employee needs to pay back these advanced payments to the employer. But if the salesperson can earn commissions higher than the drawn amount, then the person makes a profit.
4. Gross Margin Commission
This sales commission structure factors in the expenses involved with the goods being sold. The salesperson is given a percentage of the profit per sale in simple terms. The sales commission, in this case, depends on the final cost incurred for making the sale. This is why salespeople who earn through this plan are less likely to offer discounts to customers. They would instead upsell products and services, getting them more commission.
5. Residual Commission
The residual plan is designed for salespeople who have ongoing clients or accounts. When an account continues to generate sales revenue, sales commission payments to the salesperson continue. This structure motivates sales representatives to retain their clients and customers for as long as possible. As they do that, the company benefits from getting repeat business from their existing clients. Agencies and consulting firms that need long-term clients for sustainable sources of income often use sales commission in this structure.
6. Revenue Commission
This model is used by companies that focus on their larger goals than the total profit earned per sale. Giving revenue commission means the sales representatives are compensated with a predetermined percentage of the revenue that comes from the sales that they make. This kind of sales commission package is suitable for the top sales performers.
7. Straight Commission
This is where the sales representatives only earn upon completing a sale. If they do not make a sale, they get no income. Companies that do not offer any base salary use this sales commission structure. But these companies often provide higher sales commissions than others to attract the most talented salespeople. This kind of compensation model allows the sales force to act like independent contractors who can set their own working hours. This benefits the hiring company regarding taxes, perks, and other benefits that they do not have to provide to their salespeople.
8. Tiered Commission
This is a model in which the salespeople get a commission percentage on all the sales they make until their sales commission reaches a designated amount. Once the revenue goal is achieved, the commission increases. This motivated the sales staff to exceed their sales quota and goals so that the company gets to close more deals.
9. Territory Volume Commission
In this structure, sales commission is based on a rate set by the salesperson’s defined region. The compensation amount is typically determined by the territory volume. Sales numbers are added up, and sales commissions are split equally among all salespeople operating within the region. This kind of structure is suitable for companies that have a team-oriented environment.
How is the Sales Commission Calculated?
Sales commission is usually calculated using a sales commission calculator. First, the company needs to choose the most suitable sales commission structure to offer to its sales force. Then they need to select a tool to be used as the sales commission calculator.
The calculation is more straightforward if the company is making sales online. Many websites have a built-in mechanism to calculate and compute the sales commission for the affiliates and sales representatives associated with the brand. Others estimate the sales commission through their affiliate programs.
Image taken from Strikingly
An affiliate program is designed to encourage people to promote the products and services of a business, and in return, earn a commission on each sale or customer that they can bring in. Many small and growing as well as large organizations develop affiliate programs to enhance their sales. The most common sales commission structure applied to affiliate programs is the straight commission model. By becoming an affiliate of a company, you are free to work independently. But you only earn when you make a sale. You do not get any base salary from the company.
Strikingly, a website building platform also offers an affiliate program to allow people to promote our web development tools and features. If you join our affiliate program to promote our platform, you can earn a sales commission of up to 30% of the first payment of each person you bring in.
At Strikingly, we believe that the best way to sustain a business and retain our users is to keep our existing customers happy. We, therefore, come up with upgrades and updates to our tools every now and then. Our goal is to encourage our existing users to fully enjoy our services and get new users who are excited to get on their website building path.
If you build an ecommerce website on Strikingly, you can track your orders and customer details so conveniently through our order management system that you’ll have ample time to focus more on your marketing and sales strategies. You can create an online store on Strikingly, hire sales representatives to promote your website and products and offer them a suitable form of sales commission.