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Three Methods for Paying Sales Commissions

By October 13, 2020 No Comments

What’s the best way to pay sales commissions? The answer to that question is different for every organization.

Hand places coin on top of stacks of coins being used to represent paying sales commissions.

With commissions, organizations often aim to motivate sales.

Ways to pay commissions vary as much as the organizations that pay them. But there are a few standard methods that many businesses adhere to. Depending on what your company’s goal is in paying commissions, one of these methods might work for you.

What’s the Goal?

Before even determining a sales commission plan, organizations need to consider their overall goals. With commissions, organizations often aim to motivate sales. The idea is that sales representatives and other members of the sales team will be incentivized by the potential to earn more. That leads them to sell more, earning more for themselves and for the organization as a whole.

However, organizations may differ on how much they want to drive individuals to sell as opposed to having the sales team work together as a team to increase revenue. Additionally, some sales teams include employees who may not be directly tied to sales but instead focused on discovering and verifying leads, maintaining customer relationships, or other sales support roles. In those cases, sales commissions need to be structured to incentivize everyone to work together.

Once a sales organization determines which side of the scale it’s on (drive more sales by individual reps or drive revenue as a united team), then it has a good foundation to determine how to pay those commissions.

So how do they pay incentives? Let’s break down the most popular methods.

Sales Commission Methods

  • Absolute Commission: It’s called “absolute commission” because this method triggers payment for every specific revenue-generating action that a salesperson takes. This means that every time a rep gets a new customer or sells a product, they immediately get a percentage of that sale or subscription. It may not be paid immediately (that would depend on the organization’s commission payment schedule) but they have a claim to that sale and can earn based on that. This style works best if your sales reps work independently and are aggressive sellers already.
  • Relative Commission: With a more relative approach, sales organizations set quotas or targets for sales reps. Rather than earning for every single action, sales reps collect their commissions based on how much of their quota they attain. For instance, a salesperson is assigned a quota of $75,000 with a potential commission of $50,000. If they reach 90% of that quota (by selling $67,500), they’ll earn 90% of their commissions or $45,000. An organization may also put accelerators or decelerators in place that slightly adjust how commissions are rewarded (raising or lowering the rate) if the rep underperforms or exceeds quota. This method still works with those independent sellers but by setting pre-determined quotas and earnings, there’s more room for teamwork among representatives as well.
  • Territory Volume Commission: Rather than rewarding individual reps for their performance, territory volume commission rewards the entire team for combined efforts. At the end of the pay period, the organization divides commissions earned for an entire territory among the members of that territory’s team. It’s not only a way of driving more sales, it also fosters teamwork among employees who need to work together to drive revenue. It can also help incentivize support roles that may not be directly responsible for those sales.

Whichever method your organization selects, we can help you automate it. Drop us a line or set up a free demo and we’ll show you how we can help you pay commissions and keep your sales reps and your sales team fully motivated.

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