Sales commissions are a tested and true method in many businesses. But how you structure it varies wildly. Find inspiration here.
Even if you haven not spent the past few months guilt-binging on “Selling Sunset”, you have probably heard about the concept of sales commissions and just how highly sales reps value them. In fact, the top real estate agent on the aforementioned docu-reality series is rumoured to have raked in an eye-watering $1.2 million commission on a house valued at $40 million, showing that in the high-stakes world of sales, reward can often more than compensate for risk.
While not everyone is engaged in the business of selling multi-million-dollar properties, sales commissions are still a highly effective tool for motivating sales teams. With a strong sales commission structure, you can not only drive your team to perform better, but can also get a better return on investment, thereby achieving two very important organisational objectives in one go.
This article will touch upon what a sales commission is, the pros and cons of having various compensation structures, and how they can be implemented effectively in an organization.
A sales commission is a key element of any sales compensation scheme. It is a monetary reward granted to a salesperson (or a team of salespeople) upon meeting a certain predefined sales objective – for example, upon completing a certain number of sales, or making a sale of a certain value.
Commissions have long been considered one of the most effective ways of motivating salespeople, since they link monetary rewards directly to employee performance. For this reason, several salespeople find commissions both, personally and professionally rewarding.
Although a useful tool, the chosen structure of your sales commission has to be carefully planned in order to incentivize employees without creating a culture of competitiveness or demotivating lower-rung performers. Some popular sales commission models are discussed below, along with the pros and cons of each.
Different companies adopt different sales commission models, depending on their organisational culture, company goals and objectives, and employee demographics. There is no one-size-fits-all solution, and companies often use a combination of different models or a completely unique commission structure that aligns with their sales objectives.
Some of the most widely known sales commission models are:
In what is probably the most commonly known sales commission model, employees are given a base salary plus a commission on every sale. A larger proportion of the employee’s salary is commission-based, but some responsibility falls upon the employer to provide a minimum guaranteed salary regardless of performance.
Example : Francisco works for XYZ Ltd. His base salary is $5,000 per month, plus a commission of 5% on each sale he makes. He makes $50,000 worth of sales in October. His salary will be = $5,000 + (5% x $50,000) = $7,500.
Pros and cons:
Extremely popular with start-ups on lean budgets, this structure means that 100% of the sales rep’s salary comes from commissions, with no minimum guaranteed salary. In most cases, companies tend to have no upper limit on how much a sales rep can earn in commissions.
Example : Francisco works for XYZ Ltd. He earns a commission of 5% on each sale he makes. He makes $50,000 worth of sales in October. His salary will be = (5% x $50,000) = $2,500.
Pros and cons:
A balance of guaranteed and performance-based pay, this model offers salespeople a guaranteed base salary, plus a fixed rate commission paid proportionally on a predetermined sales target.
Example : Francisco works for XYZ Ltd. His base salary is $5,000 per month, his monthly sales quota is $20,000, and his commission rate is 5% (or a total of $1,000, when applied to his monthly quota).
Pros and cons:
Though similar to the relative commission model, a tiered commission structure offers salespeople the added incentive of a higher commission rate for exceeding sales targets. Therefore, a sales rep’s commission rate increases upon meeting certain targets and decreases in case they miss the target.
Example : Francisco works for XYZ Ltd. He has a base salary of $5,000 per month. Additionally, he can earn a commission of 5% for up to $20,000 worth of sales, and 10% for any sales that exceed this amount.
Pros and cons:
Choosing the right commission model is half the battle won. The final task is to educate your sales team about the new system, implement the commission structure, align it with your existing sales pipeline, and continuously monitor its effectiveness to ensure that it is meeting its objectives. Some key tips on managing this effectively are:
Drafting a sales commission agreement could not be easier, thanks to the smart features that Contractbook offers. Negotiate with your employees through collaborative document creation, automate sales commission agreements with members of your sales team, collect digital signatures, and much more – all in an easy-to-use, clean interface.