As a business owner, you want to be sure that your sales team is motivated and doing their best work. One way to do this is by offering incentives in the form of commissions, but how can you decide what type of commission structure works best for your company? In this article, we’ll explore different sales commission strategies and tips on how to determine an effective commission plan for your reps.
What is a Sales Commission?
Sales commission is a payment made to an employee for each sale they make. This provides an incentive for employees to sell more, as they will earn more money for doing so. There are different types of sales commission, which can be based on the number of sales made, the profit generated from those sales, or a combination of both. The most common type of sales commission is a percentage of the total sale value. For example, if an employee sells a product for $100, and their commission rate is 10%, they would earn $10 in commission.
Types of Sales Commission Strategies
Companies use a few different types of sales commission strategies to motivate their sales reps and agents. The most common ones are probably salary plus commission, straight commission, and draw against commission.
1. Salary Plus Commission
The salary plus commission strategy is pretty simple- the company pays the sales rep a base salary and gets a percentage of any deals they close. This gives them a little bit of security, knowing that they will still get paid even if they don’t make any sales, but it also incentivizes them to close as many deals as possible to maximize their earnings. Many companies also use payroll software to help automate this compensation structure more effectively. Creating a pay stub can help streamline the documentation of these earnings and provide clarity for both the employee and the employer. Additionally, businesses can use software to create W-2 forms to ensure accurate year-end tax reporting.
2. Straight Commission
Straight commission is exactly what it sounds like- the sales rep only gets paid when they make a sale. There’s no guaranteed income, so this can be a riskier proposition for sales reps, but it can also be very motivating since they know that every sale they make directly impacts their own bottom line.
3. Draw Against Commission
Draw against commission is similar to salary plus commission, except the sales rep gets an advance on their commissions instead of getting a base salary. So, if they know they will close a few big deals, they can essentially “draw” against those future commissions to give themselves a little bit of extra money to live on in the meantime. Again, this motivates them to close deals quickly to get paid back (plus interest) as soon as possible.
Pros and Cons of Using Sales Commission
Sales commission is a popular means of compensation for sales representatives and agents. However, there are pros and cons to using this type of pay structure. Here are some things to consider when determining if sales commission is right for your business:
Pros:
- Can Motivate Sales Representatives: A key advantage of using sales commission as a form of motivation is that it can directly tie reps’ earnings to their performance. This can create a strong incentive for agents to sell more and perform at a higher level.
- Flexible Compensation: It can be flexible, allowing you to tailor it to your reps’ individual needs and objectives.
- Can Encourage Long-Term Thinking: Because the commission is often based on the total value of a sale, it can encourage reps to think long-term about the potential of their relationships with clients. According to research, motivated workers are 12% more productive, while unhappy employees are 10% less productive.
Cons:
- May Discourage Risk-Taking: If reps know they will only be compensated for closed deals, they may be less likely to take risks that could lead to more significant sales.
- May Create Tension Amongst Reps: If not appropriately managed, competition among reps can intensify, leading to infighting and decreased morale.
- Requires Close Tracking and Management: Commission payments must be closely tracked and managed to avoid overpaying or underpaying your reps. This can be time-consuming and require additional resources.
How do you Set Up a Sales Commission Plan?
When it comes to setting up a sales commission plan, there are a couple of things you’ll need to take into account:
- First, you’ll need to decide what commission structure you want to use. Several options are available, so be sure to do your research and choose the one that best fits your needs.
- Once you’ve decided on a commission structure, you’ll need to set up some guidelines for how commissions will be paid. This includes determining how much commission each sales rep will receive and when and how often they’ll be paid. Again, research and develop a plan that works best for your business.
- Finally, once you have everything in place, be sure to communicate the details of your plan to your sales reps. They need to know exactly what’s expected of them to stay motivated and hit their targets.
By following these simple steps, you can develop a sales commission plan to help motivate your reps and help them reach their full potential.
On the other hand, E-Commerce businesses can easily manage and track commissions. If you have a WooCommerce website, all you need is a sales agent plugin that allows you to manage and evaluate the performance of your sales rep. We recommend Sales Agent for WooCommerce.
This amazing plugin is a sales agent management solution that automatically calculates commission and keeps track of all customers and their data. With this tool, you can set various commission rules and set up a motivating commission schedule that multiplies your sales in no time. Test the Sales Agent for WooCommerce plugin with its demo to understand better what this amazing tool can do.
Tips for Improving Sales Commissions
- Incentivize your sales reps with higher commissions for meeting or exceeding sales targets.
- Offer bonus commissions for hitting specific benchmarks, such as signing new customers or generating a certain amount of revenue. Use employee scheduling tools to simplify work shift management, ensure optimal staffing levels, and foster clear communication about schedules when trying to achieve certain business goals.
- Structure your commission payout so reps are rewarded for short-term and long-term success.
- Review your commission structure regularly and make adjustments to ensure that it motivates your reps to sell effectively.
- Be clear and transparent with your sales reps about the commission structure and how they can earn more money.
- Encourage healthy competition among your sales reps by offering prizes or commissions for top performers.
Alternatives to the Traditional Sales Commission Model
Sales commission models constantly evolve as companies attempt to find the perfect way to motivate their sales reps. The traditional sales commission model is often seen as outdated and ineffective, so many companies are looking for alternatives.
One popular alternative is the draw against the commission model. In this model, reps are given a small salary and then paid a commission based on their sales. This can help ensure agents are still motivated despite a slow month or two.
Another alternative is the base plus commission model. In this model, reps are given a base salary plus a commission on their sales. This can help ensure that agents are motivated to sell as much as possible without putting too much financial pressure on them.
Your specific needs and goals will depend on the suitable model for your company. Before changing your commission structure, talk to your sales team and see what would work best for them.
The Verdict
The right commission strategy is essential to motivate and retain your sales reps. By creating an incentive system that rewards performance, you can create an environment of competition that encourages your agents to strive for success while rewarding them when they achieve it. With a carefully planned commission structure, you can incentivize sales staff to reach their targets while ensuring the sustainability of your business.
