Setting up a compensation plan which includes both salary and commission can be quite a challenging task. Although, initially, it may appear to be marginal however, the sales commission should be the basis of the plan if a company wants to make both its customers and sales rep happy.
Sales compensation packages are prepared in various forms and are being calculated in different ways, depending on the company and the industry. Building a sales compensation agreement usually requires careful and informed negotiations with employers. There are several practices through which a good commission structure can be developed. Below mentioned are some sales commission structures that are used by organizations.
Common Sales Compensation Structures
Several structures for sales commission have been established that are not only used by organizations but, are accepted industry-wide as well. These structures include:
- Straight salary: This is rendered as the safest structure of sales commission used by companies however, this is very less motivating. Here there are no incentives provided to the sales person which makes them complacent within their jobs.
- Salary and Bonus: Under this structure sales person receive a fixed part of the amount with each pay they get along with additional bonus amount at specific periods if they reach or surpass their set quota. Although, it is stable, bonus is usually capped in this structure. Sales people who are over achiever may earn lesser here than that of a structure that is commission-based.
- Base plus commission: This structure is used mostly when developing a sales reward plan. The structure is based upon the amount of finalized sales. This structure is reliable because of the fixed element. Here, the rate of commission may be marginally low as compared to commissions in the straight plan.
- Variable commission: There are some similarities with the straight plan however, it is variable. The rates vary up and down subjective to the sales quota. Here sales reps may become motivated towards being over-achievers; many times the emphasis is on the quantity rather than quality and may take customer satisfaction to be the second most important factor.
- Straight commission: There is no base salary within this structure and can be demotivating for new salesperson, underperformers and those sales people who are in a bad period. For over-achievers, on the other side, earnings could be quite extravagant.
- Residual commission: Sales reps tend to receive commissions until the accounts of these sales rep generate revenue for the respective organization. This source is a dependable source of money however; sales person can lose considerably when their accounts are generating lower revenues.
- Draw against Sales commission: This structure is based upon commission only and gives sales rep advanced money when every pay period starts. The pre-determined draw is then taken from their commission at end of the every pay period. After paying back the drawn amount, the remaining of the amount is kept with them.
What is the bottom line?
Avoid capping earnings: if a person realizes that he cannot make any money from a deal on which he had worked quite hard can be quite a demotivating factor. This way will definitely result in losing high performing sales rep. being a leader, it is important to develop a compensation plan which will bring in a win-win situation for both the salesperson and the company.
Keep everything simple: There is no requirement to hold a higher degree to determine how much you can earn every month. Calculating sales commission should not be like rocket science.
Aligning metrics with the organizational goals: There is a need to tailor plan so as to motivate behaviors that are in alignment with the business goals. For example, when the aim is to maximize cash flows then incentives are given on upfront payments.
Provision of real-time visibility: If sales reps have no idea where they are in the middle of the month, they can get frustrated from the situation. It is important that they are able to calculate their earning. Providing real-time visibility will boost their motivation to sell.