If your payment for the work you do involves sales commission, you probably know the basics of the structure: you earn a portion of your salary — or in some cases your entire salary — based on what you sell and the sales you close. This sales compensation plan is meant to incentivize sales reps to work harder and sell more aggressively — essentially, to do their job well.
7 sales compensation structures.
If you are considering taking a job that involves commission, make sure you understand the different commission plans and how they will impact your role and paycheck. Here are seven different types of sales commission plans and how they work for employees and employers.
1. Base salary plus commission.
In this type of commission plan, you will receive a base salary — meaning a guaranteed paycheck — along with a percentage of the sales you make. If you prefer a low-risk model that allows you to cover expenses, this is the model for you. In most cases, sales representatives' salaries are high while their commission is low. This still provides sales reps with incentive to perform well, but also offers a measure of security, so they'll still earn a living even if sales dry up at a given time.
Companies that sell products seasonally may employ this model to keep employees motivated—and compensated—year-round.
2. Commission only.
The commission-only structure means that employees are only paid when they make sales. This type of sales commission plan keeps sales representatives highly motivated and ensures that the company only pays when it has the money to pay.
Highly motivated employees who thrive on closing the deal will do well with this model. On the plus side, you'll likely receive a high commission rate (a larger percentage of the sale) if your employer uses this structure.
3. Territory volume.
In the case of territory sales, you'll earn a commission based on sales you make across an entire territory, rather than an individual person or company sales. This will involve building networks and teams to support the individual salesperson and the employer's sales goals.
This can be an attractive model for the salesperson who has strong relationships with clients in a particular area and the resources to grow networks and client bases. The downside is that you'll lose clients if they move elsewhere since they will no longer be in your territory.
4. Share of the profit margin.
In this case, your employer will give you a share of the profit if you can make a more lucrative deal with a client. This provides you with the incentive to increase the price and earn a better profit. On the flip side, if you have to discount or reduce the price, you'll lose money personally.
5. Placement fees.
The placement model offers salespeople a flat fee for the sale of a product. It depends on the volume of sales, rather than the nature of the sale itself, and requires a great deal of interaction with many customers. Industries such car dealerships often use this model.
For employers, the downside is high turnover, because competitor could offer your sales team a better rate at any time abd draw employees away.
6. Capped commission.
This model places a limit on the amount of commission sales reps can earn in a given period of time.
The downside is that employees may be less motivated to close big sales after they've reached the cap.
7. Tiered commission
If you're great at meeting and going beyond sales quotas, the tiered commission plan could be a good one for you. In this model, you'll receive a greater percentage of commission after you sell beyond a certain threshold. For instance, if you sell up to $25,000 worth of goods in a given period, you'll receive 3% of sales. If you exceed that, you will begin earning 3.5%, up to, say $50,000. Then your commission rises further.
For highly motivated people who thrive on closing deals, this can be a good structure for you.
What is a good commission rate for sales?
Commission rates vary substantially among industries and companies. Some are as high as 50%, while others are as low as 5%. To determine whether yours is "good," you should compare your rate to others in the same industry. For example, if the industry standard is 20-30% and you're earning closer to 30%, you should consider that a decent rate.
How do I create a sales compensation plan?
When establishing a commission structure at your business, you should take into account the above models, the needs of your staff and the realities of your organization and industry. You may want to ask employees about their preferences. For example, someone with a family who depends on earning a certain amount regularly probably isn't going to want a commission-only structure.
Below are templates corresponding to two of the above models.
Base salary plus commission
|Commission||X% of $Y||$|
|Tier 1 earnings||X% of $Y||$|
|Tier 2 earnings||X% of $Y||$|
|Tier 3 earnings||X% of $Y||$|
Your employer will probably set a designated sales commission structure but may reevaluate it at certain times and have discussions with sales team members to find solutions that work for everybody.
If you're concerned about the sales structure your employer or prospective employer uses and work better with certain amounts of structure and risk, it is worth having a conversation with your manager or prospective manager. You can discuss what motivates you to do your job well and how you can work together to develop a model and plan that works well for both of you. Your employer may be receptive to what you have to say and discuss alternative payment structures that can make you both comfortable with your role and salary.