Rapid QuoteRequest InfoSchedule Demo
BusinessGuide

Complete Guide To Sales Commission

By July 8, 2020 No Comments

Author and sales leader Anthony Iannarino once compared the sales compensation plan to Batman. So when you’re developing the sales commission plan, it’s like you’re outfitting Bruce Wayne in his Batsuit. Just like the batsuit gives Bruce Wayne the tools to make him a superhero, a commission plan designed right can convert an average employee into a super revenue generator. Whether it’s an Adam West Batsuit or a Christian Bale Batsuit is entirely up to you.

stacks of coins under growing plant sprouts as a metaphor for sales commissions growing sales motivation

A good sales commission plan grows profits, increases revenue, and motivates your sales team.

We’ve talked a lot about commission calculations and reports. But a lot of sales organizations have to start at the beginning and figure out what their sales commission plan looks like before they can get into the weeds with calculations. Whether building a commission plan from the ground up or reevaluating the current commission plan in the face of business shifts, it’s good to know what you’re doing.

In light of that, we’ve put together a brief but complete guide to paying commissions. Starting with what your goals may be to how to actually execute on your plan, use our guide to get a grip on where to go next.

Keep It Simple!

First, we want to highlight the most important part of any successful commission plan: Simplicity! If a sales commission plan is simple, it’s more understandable. It means that a salesperson easily understands what you want them to do and you can clearly outline goals for both employees and the business overall. Click here for more questions to ask yourself while building your sales commission plan.

What goals might you be aiming for with a sales commission plan? Let’s start there.

Goals:

  • Drive Profit: it’s not enough to just sell more. Emphasis needs to be placed on selling the more profitable products or services. Any commission plan should consider the net return to the company and not just monetary volume. Ensure that the commission plan clearly lays out the products that will earn the company and its salespeople more profit.
  • Generate revenue: the ultimate goal of any business is to make money and the commission plan should help facilitate this. If your salespeople sell more products, not only are they earning more commission, the company is earning more revenue. Again, to make this happen, the plan needs to be understandable but also reasonable based on what your company can afford with each sale. 
  • Motivate your sales team: in theory, earning commission on sales motivates your sales reps to sell more and earn more. For that to work in practice, the plan needs to be understandable to ensure that your sales team understands what they need to do to get paid. Sales contests and additional incentive programs may also contribute to this goal.
  • Attract the best talent: setting up a fair and clear commission plan that will allow top salespeople to earn money will appeal to the best salespeople you can hire. Make sure that the plan fairly distributes commissions to each salesperson to ensure that you can keep a diverse group of sales professionals both motivated and happy.
Sales commission plan presented to sales team as they meet in a board room.

Now let’s get into the details.

Types of Sales Compensation Plans:

  • Base + commission: salespeople most often earn both a base salary in addition to commissions. When considering commissions, it’s best to aim for a plan that allows a salesperson to earn 50% of their total salary from the base and 50% from commissions.
  • Commission only: commission only means that a salesperson only gets paid if they sell. If you choose to offer a commission-only plan, consider the average salary for a salesperson in your industry and craft a plan that would allow a salesperson the opportunity to earn at least that with a reasonable sales cadence. It should also offer a higher reward to successful salespeople seeing that they are taking on more risk if they’re only earning commission since they don’t get a guaranteed payday. If you’re looking to attract talent with commission only, be generous to the best sellers.
  • Base + bonus: while this plan doesn’t necessarily incorporate traditional commissions, it does require a calculation to determine how a salesperson earns their bonus. This may be a quarterly or yearly bonus or based on a different time frame as well. But a quota or goal must be set and achieved for the employee to earn bonus payments in addition to a base salary.

Types of Commission:

  • Absolute commission: this plan rewards salespeople every time they hit a particular sales target, such as earning a new customer or selling a particular number of products. This is a very simple understanding: get a specified reward for accomplishing a task or selling a certain number of products or reaching a monetary target. For example, an employee may get $150 for every new customer they get to subscribe to a service. As a manager, it’s important to remember that this type of commission can limit income for your team if they don’t have the resources they need to sell.
  • Relative commission: rather than relying on a very specific target like absolute commission, relative commission is based on a quota. That quota may be based on revenue or volume of sales. Reaching the quota means they earn a predetermined commission amount and/or increased commission rate.
  • Territory volume commission: given that sales reps working together in a defined region or geographical location share this incentive, territory volume commission promotes teamwork. A sales team in a particular area may target customers in a particular area individually but the total volume or sales in that area to which they’ve been assigned will determine how much the regional team earns.

Other Variables:

  • Gross margin: depending on how the commission plan is structured, salespeople may have the opportunity to earn more commission on sales of products with a higher gross margin. 
  • Hierarchy: commission may increase with seniority, skill level, or position within the company requiring a hierarchical structure for commissions. Managers additionally may earn commissions on their subordinates’ activity, incentives for guiding their teams to success.
  • Territory: where a salesperson lives and the cost of living and average salary in that area may have an impact on how much commission they earn. 

When Commission Is Paid:

  • Commission upon sale: commission may be rewarded to a salesperson immediately after they make the sale and be included in their next paycheck.
  • Commission upon each payment: other times, commission is held until the customer submits payment and the salesperson earns a portion of the commission with each payment. This type of commission distribution may also be known as residual, usage, or trailing commissions depending on the industry.
  • Commission upon payment in full: some commission plans require that a payment from their customer is made in full before a commission can be awarded.
  • Combination of the three: some plans determine that a portion of commission may be paid upon the sale while the rest is held until a payment is made.

Vocabulary Lesson:

  • Sales quota: when organizations set quotas for salespeople, they are asking their employees to meet a target within a set time frame. These may be quarterly quotas or yearly quotas but they identify a goal that a salesperson needs to reach in order to earn their commission. 
  • Sales accelerators: for salespeople who’ve reached their quota, a sales accelerator may continue to motivate them by offering a higher rate or increased commission for sales made above their quota. 
  • Sales decelerators: on the other hand, if a salesperson does not meet their quota, a sales decelerator can reduce compensation. For instance, a commission rate percentage may be reduced if the salesperson doesn’t reach at least 75% of their quota.
  • Chargebacks or Clawbacks: if a customer is lost before a certain target, a salesperson may lose their commission entirely. If the salesperson has already been paid the commission, they may have to refund it to the company as a result.
  • Spiffs: an incentive that is offered once over a limited period of time is often known as a spiff. It can also refer to an immediate commission for a sale.
  • Sales contests: generally used to help sell a specific product, sales contests encourage competition among salespeople to sell a certain volume or earn a certain revenue for the company. These are often implemented for a short period of time.
  • Split commissions: when a commission is distributed between more than one salesperson or other employees, it’s known as a split commission and requires a specific calculation that may change from month to month.

Sales Commission Plan Checklist:

  • Compare your company to competitors, research regional compensation: this will help you determine what an average salesperson at your company should earn. Additionally, keep in mind that you want to offer competitive and fair wages to attract talent.
  • Calculate on-target earnings for each level of sales in your organization: take into account that senior-level salespeople will make more than entry-level representatives and build a hierarchy in commissions based on that.
  • Determine the structure you want to use: while any structure will inevitably have some level of complexity, make sure that it’s something you can still easily explain to potential sales team members. And also select a structure that allows the company to earn money and continue paying competitive salaries.
  • Establish fair and reasonable quotas: salespeople need to be given fair and reasonable quotas so before completing any commission plan, the sales organization needs to calculate those targets. This can be done in one of two ways: by examining market opportunities and the capabilities of your sales team, you deliver a quota that works based on the real-world abilities of how much your sales team can sell; by considering revenue targets in addition to other elements, you’ll set a quota that helps build the company.
  • Outline the commission plan in employment contracts: any incoming salesperson should have the sales commission plan and how it works in writing from day one. Include every detail in their contract so that they may reference it at any time.
  • Communicate commission plan details regularly and give ample warning of any changes: don’t let the employment contract be the last time you discuss the sales commission plan with your team. Bring it up in one-on-one meetings, discuss details in sales meetings, send regular reminders in email. And if a change is needed, plan well ahead for it and give employees ample time to prepare for a change in their income. 
  • Call Core to help you process commissions every cycle: spreadsheets won’t cut it. Once your commission plan is in place, you’ll need to make sure it is managed reliably every single cycle. Core’s application can handle your commission rules, however complex they may be, and accurately calculate them to every single sales cycle. We also provide a web portal where your sales team can view their own data and track their progress. Additionally, company-wide data and reports can be generated easily and given to executives to see how well the sales commission plan is driving revenue, motivating sales, and attracting new talent.

Don’t forget to check out our guide on how to avoid legal issues in paying commissions as well.

If you’re interested in automating your new sales commission plan with Core Commissions, drop us a line. We’ll be happy to show you how it works.

Enjoy this article? Share with your colleagues!