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Establishing a proper pay structure for your employees is one of the most important things a business does. And since the vast majority of companies dealing with sales use commissions to drive motivation, ensuring that you have a sales commission structure will not only increase motivation and productivity but will also reduce employee turnover. 

Are you sure that you’re employing the best sales commission structure for your company? If you’re only going to read a single article about sales commission structures, read this one because in it, we’re going to help you decide which commission structure is best for you. Your employees will thank you for reading it.

What Is A Sales Commission Structure?

Before we jump into the different types of sales commissions, let’s take a look at what exactly a sales commission structure is. 

In the sales industry, a sales commission structure is how a company determines the salaries of its employees. Compensation in sales is typically made up of two parts, fixed and variable. Fixed salaries are pretty straightforward. An employee is paid a set amount every week/bi-weekly/month/year.  A variable pay structure determines how an employee will be paid, whether through a mixture of base pay and commission, solely commission, or any number of other ways. 

Since most companies in sales use commission as a means of motivating their teams, it’s incredibly important that you know the different types of sales commission structures, and how each one works so that you can employ the one that best fits your company. In this article, we aim to give you everything you need to know to determine which sales commission structure will work for your company.

overcoming objection

The Benefits Of Having A Defined Sales Commission Structure

There are many benefits to developing a sales commission structure for your team. Let’s take a look at three of them.

Higher motivation

When an employee’s salary is based on how much he or she sells, it gives them greater motivation to actually sell. Most sales commission structures don’t put a cap on earning potential, so employees can increase their salaries exponentially. A bigger paycheck is a huge motivating factor for many people, not just sales reps. So if you’re looking to motivate your team more, look into sales commissions structures. It gives them the ability to determine their own salaries based on how hard they choose to work. Without motivation, there’s nothing to incentivize your team to push themselves to close their deals.

Higher productivity

This can go hand-in-hand with higher motivation. When an employee’s salary is based on how hard they work and how much they sell, they’re going to do everything in their power to sell more. And the more motivated they are to sell more, the greater their productivity becomes. When your team is motivated to sell more, says Spotio, “they’ll discover the most efficient ways to work in order to maximize their time,” which in turn boosts their productivity.

Less turnover

Having the right sales commission structure in place can greatly decrease employee turnover. In fact, according to Mailshake, businesses that pay their employees competitively within the 75th percentile or higher tend to see 50% less turnover. Competitive pay and a proper sales commission structure will allow you to ensure only the best salespeople want to work for your company, and it will keep them on your team for longer. Numerous studies have shown that typically, employees leave a workplace for one of two reasons: personal or compensation. There’s nothing you can do if an employee decides they’re moving across the country or leaving the workforce as a whole, but ensuring they’re receiving competitive compensation will keep them from leaving your company for a competitor.

Sales commission structures

Sales Commission Structure Examples

So now that you know what sales commission structures are and how your company can benefit from implementing one, it’s time to take a look at the different kinds of sales commission structures there are. This will help you understand the differences between them and decide which one will work best for your company

100% Commission

Big risk, big reward! 100% commission plans (also called straight commission or commission-only plans) are when the only compensation an employee receives is directly correlated to their sales. 

This sales commission structure offers employees the highest earning potential since most companies don’t cap commissions. And since you don’t have to pay a base salary to your employees, you can offer higher commissions per sale. And while this puts the earning potential straight into the hands of your employees, it’s also one that not many employees are fond of. Companies that implement 100% commission pay structures tend to have a high rate of employee burnout, which leads to higher turnover. ‘

This plan isn’t one that’s used as often as others, but there are times when it makes sense. Companies with short sales cycles, those employing contractors or temp employees, and when an opportunity arises for very large commissions are all areas where a 100% commission would work well.

Base Salary + % Commission

This sales commission structure is one of the most common out there. It involves paying your employees a base salary plus a percentage of each sale they make. The base salary isn’t typically enough to support oneself without the commission, so it motivates employees to strive to close sales while giving them a bit of cushion to fall back on during low sales seasons.

Employers decide whether to pay their employees a base pay of hourly rate or yearly salary, so they have control over how much they’re paying employees, as well as how many hours the employees are making, and what percentage of the sale price they’ll receive as commission. This allows you to predict your expenses and lets you know how much each employee needs to sell in order to be profitable.

The base salary plus commission sales structure is usually a favorite of sales reps as well, as it rewards them for their performance, but also gives them confidence in you and your company. Knowing that you’re investing in their success before they even make a sale can help empower employees to work hard and remain loyal to a company that is loyal to them. This motivates reps to work hard to earn both compensation offerings.  

According to Indeed, the typical salary-to-commission ratio is 60:40, with 60% being the employee’s base pay and 40% equaling the commission they make. 

The biggest problem with a base salary plus commission structure is when you fail to adequately compensate your employees. If their hourly or salaried rate is too low, or if you’re offering too low a percentage for commission, employees will be unmotivated to work harder and increase their productivity. This can lead to high turnover rates if your competitors are compensating their employees more fairly.

Base Salary + Tiered Commission

The tiered commission pay structure is a great way to keep motivating your employees even after they’ve reached a sales target. These plans are specifically designed to incentivize your team to perpetually surpass their quotas by offering larger percentages of commission for each level hit. 

For example, a sales rep might receive a 5% commission until they reach $100,000 in sales. Their percentage then increases to 8% until $300,000 in sales. It increases again to 10% after that level, and so on. This type of sales commission structure empowers your sales team to get creative when it comes to their sales techniques so that they can increase their commission. It will have them cross-selling and upselling as much as possible. 

According to Xactly, tiered commission structures are best used by companies with a larger, more established sales team. And it works well for growing and scaling your business, as well as encouraging and motivating your sales team to outperform themselves with each level. 

One of the main cons of the tiered commission structure is that your payrolls will fluctuate often as your sales reps advance their levels. Companies can sometimes be caught off-guard if they’re not expecting quick advancement and end up having to dole out high percentage commissions before they’re ready.

Revenue Commission

Whether you decide to go with a 100% commission structure or a base salary plus commission, you’re also going to need to decide how you’ll set commission rates. This is where revenue commission comes in. It’s another one of the most popular sales commission structures implemented by companies. It’s primarily used by companies who sell products or services at set price points, or who employ field service agents

A revenue commission pay structure gives employees a flat rate of commission per closed deal. So for example, if a rep’s commission rate is 10% per $10,000 product sold, they’ll receive a pay of $1,000 for each product or service they sell. This sales commission structure works better in smaller organizations and those whose products or services have fixed pricing because it allows your team to focus on a single product or service to sell. Therefore, the problems with revenue commission structures arise when you have a larger company, a greater number of employees, or products and services that aren’t fixed in price. It can be difficult to implement a flat rate of commission when price points fluctuate.

Gross Margin Commissions

The gross margin commission model is similar to the revenue commission model in that sales reps earn a flat percentage of commission for each sale they make. However, it differs because it takes into account any expenses that may be incurred for your product or service prior to their sale. So reps make their commission on the gross revenue of a product rather than the total revenue. 

So continuing with the example above, if your product is sold for $10,000, but the costs associated with the product are $1,500, your company will see a profit of $8,500 for each product sold. Your rep, therefore, would earn their commission on that $8,500, rather than the total $10,000. So for every product they sell, if their commission rate is 10%, they would receive $850. 

This sales commission structure ensures that you’re not spending more than you’re profiting, and gives your sales team an idea of the value of each sale they make, leading them to push themselves to make more sales. 

It also tends to prohibit team members who rely on discounts to close deals from offering those discounts. This can be both a pro and a con. Sometimes, you need to offer discounts in order to motivate a buyer to sign that contract. But at the same time, there are reps who rely too heavily on discounts, which hinders their growth as salespeople.

Draw Against Commission

The draw against the commission model is basically a mix of the commission-only and base salary plus commission structures. It involves giving your employees a small base salary that is used as a “loan” for lack of a better term until they earn a commission. This base pay is given regardless of how many sales they close, but it needs to be paid back to the company from the commission they make. 

So if an employee draws $1,000 a month against their commission, and they make $4,000, then they would keep $3,000 of their commission because the company retained that original $1,000 draw.

This type of commission model is best used for new employees who have yet to ramp up their sales to provide them with some security. Since it takes roughly 9.1 months for sales reps to ramp up to their full productivity, says Xactly, this allows them to get to that point in a stress-free environment.   

A downside of the draw against commission model is it is fairly difficult to properly execute, and it can make it hard for salespeople, especially new hires, to predict their earnings, which can lead to more stress and high turnover.

How To Choose The Right Commission Rate

Choosing the right commission rate is an extremely important part of your company’s operation. Low rates can lead to high turnover and unmotivated employees, while too-high rates can lead to problems with your profitability and bottom line. 

So how do you know which commission rate is right for your company? Indeed gives simple questions to ask yourself when determining what rate to go with.

    • What results do you hope to achieve?
    • What sales methods work best to achieve your goals? Track and document different methods you’ve tried to determine best practices.
    • Is this sales commission structure still working? The sales industry is ever-changing, so what worked five years ago may not work now. It’s okay to switch things up.
Which type of sales structure is the right fit

What’s The Right Sales Commission Structure For Your Company?

If you’re looking for a quick and easy way to answer this question, well, we’ve got you covered. Zendesk has helpfully prepared a simple multiple-choice quiz that can help you narrow down the right sales commission structure for your organization.

1) What stage is your organization in?

A) Start up

B) Recently established, but stable

C) Recently established, but growing

D) Well established

E) Well established and continuing to grow.

2) What industry is your company in?

A) An industry with a short sales cycle

B) An industry with a core product

C) An industry with a large number of products

D) Consumer goods

E) The service industry

3) What is your company’s number one short-term goal?

A) Establish ourselves as a company and make as much money as we can

B) Continue to sell core products and keep staff and clients loyal

C) Motivate my team to sell more products

D) Grow my business quicker

E) Increase my company’s profit per sale

Answer Key:

  1. Mostly As – 100% Commission
  2. Mostly Bs – Base Salary + Commission
  3. Mostly Cs – Draw Against Commission or Revenue Commission
  4. Mostly Ds – Tiered Commission
  5. Mostly Es – Gross Margin Commission

Final Thoughts

We know how scary it can be to set up a sales commission structure if you’ve never implemented one before, but there are many benefits to establishing one. It may even be a good idea to speak to your team members and sales reps to see how they feel about it, and which sales commission structure they feel most comfortable with. Regardless of what you decide works best for your company, we hope we’ve given you the best starting point possible. For more informative articles to help you improve your sales teams and business as a whole, check out the Wingmate blog.

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