What if we told you that the greatest challenge sales organizations are facing in 2020 is not profitability or client acquisition but losing their best salespeople. Sounds unreal, right? This is every bit real and is giving sleepless nights to countless sales leaders. A 2018 report by the Bridge Group shows that the average tenure of a Sales Rep is just 1.5 years.
If we compare it with the same report from 2010, the average tenure was more than 3 years. With salespeople having a voluntary turnover rate of 16%, the highest of any industry, and steeply declining tenures, sales organizations are scrambling to retain their top sales talent.
Let us understand what it is, the best sales commission structures, its examples, and when you should use them.
What is a Sales Commission Structure?
A sales commission structure typically outlines how a company will pay its salespeople and the amount it will pay for each sale. This is determined by various factors such as the company’s budget allocations for commissions, base salaries, different levels of sales performance, the products a company sells, the industry it belongs to, and other incentives built into the compensation plans. Commission structures play a key role in motivating employees to achieve objectives that directly impact an organization’s success.
Why are Sales Commission Structures Important?
A good sales commission structure can do wonders for your organization. It is a great tool for encouraging positive behaviors, setting expectations for your team, and motivatingthem to achieve organizational goals.
It also plays a crucial role in attracting and retaining the right talent for your sales team.
While there are many upsides to a great sales commission structure, it can be tricky to pick the right one since many variables are involved.
Understanding the various types of sales commission structures is a good place to start since these can be tailored to meet your organization’s needs, resources, and goals.
Types of Sales Commission Plan/Structures
To help you find the best fit for your company, we’ve broken down some of the most common and best sales commission plans.
1. Base Salary Plus Commission Plan
Under this structure, companies pay a base salary plus commissions on the sales made by the employees. These companies pay the sales reps for their time in addition to what they sell. The most common salary to commission break up under this structure is 60:40, where 60% is the fixed/ base salary, and 40% is variable based on the sales performance. Some industries, such as Pharmaceuticals and Technical sales jobs that focus on customer education and problem-solving, can pay as much as 75:25.
This structure works best for companies that are looking to retain salespeople since employees appreciate the sense of security provided by a fixed salary.
2. Straight Commission or Commission Only Plan
Under this plan, the sales reps’ salary is made entirely of variable pay and comes directly from the sales they make.
This plan works well for startups since there is no base salary to be paid, and the risk is transferred to the sales rep. It is also suited to companies that have relatively short sales cycles and provide an opportunity to earn a big bonus. It is suitable for high performing sales reps but usually sees high turnover rates as well.
3. Revenue Commission Plan
This is the most common commission structure used by sales organizations where the commission is calculated as a percentage of the revenue from a sale. For example, if a company sells a product or service for $1000 with a sales commission rate of 20%, the sales rep will earn $200 every time a sale is made.
This plan works well for smaller companies with products or services, which have a set price point. They are also suitable for companies looking to enter a new market or gain market share.
4. Gross Margin Commission Plan
This is similar to the revenue model, but the company takes the cost associated with making that sale into account when calculating the profit. If we take the same example as above where the product sells for $1000, and the commission rate is 20%, but the company counts $200 as expenses, then the commission will be counted on $800 and amount to $160.
5. Tiered Commission Plans
These plans allow salespeople to earn higher commission rates after they’ve generated a certain amount of revenue. For example, if a sales rep earns a 5% commission on all sales generated up to $50,000 in total revenue, they will earn 8% after surpassing the $50,000 mark.
Although a bit complicated and time-consuming to set up, these plans allow companies to customize their commission structures based on several performance indicators. For example, if a sales rep makes a 5% commission and attains 100% of the quota, then their commission will be multiplied by 1.5% going forward. This means they’ll now make a 7.5% commission on each sale.
These plans work well for motivating top performers and allow sales leaders to use multiple indicators to measure performance.
Average Sales Commission Rates by Industry
Determining the right sales commission rate for your sales team will require you to take a variety of factors into accounts, such as the base salary, nature of products and services, and the degree of research and technical knowledge required. While there is no magic formula to getting this right, looking at the median average pay for your industry can give you a fair idea of what works well. Here is the Median Pay for some industries as per the USA BLS Occupational Employment Statistics (OES) Survey 2019:
Now that you understand the importance of a Sales Commission structure, the various types of structures, and the average sales commissions across various industries, it is time now to create a Sales Structure for your team.
This process requires careful planning and evaluation of various factors such as your company’s goals and objectives, the past performance of your sales team, and the methods you will deploy to calculate your commissions.
We’ve listed the steps you need to follow to create your Sales Commission Structure:
1. Determine the Goal of your Sales Commission Structure
The primary aim of a Sales Commission Structure is to help you achieve your business objectives. Before you design your commission structures, it is essential to identify your priorities and evaluate how this structure can help achieve these goals.
Whether you’re looking to increase your revenue, the average deal size of the percentage of repeat customers, putting these goals at the heart of your plan will help you decide how best to compensate your sales team in a way that directly furthers these objectives.
2. Determine your Compensation Targets
The compensation target is essentially the total amount you expect to pay a salesperson as a combination of salary and commissions. This will vary based on the person’s responsibilities, seniority as well as industry trends. The compensation usually relates directly to the revenue a salesperson is expected to generate for the organization.
Establishing these targets at the outset will help you create a sales commission structure that aligns well with your goals as well as the resources you have at hand.
3. Evaluate Past Performance of your Sales Team
Take a look at your organization’s existing commission structures and evaluate how effective they have been in the past at motivating your sales team to perform better and meet your goals. Identify elements that have worked well to retain them and remove the elements that haven’t. This will ensure that the new commission structure builds on your past performances and helps take your team’s performance to the next level.
4. Pick your Sales Commission Structure
Based on your goals, compensation targets, and previous performance, choose one of the six commission structures that we have listed above and tailor it to meet your business's needs. While you’re at it, also decide when your salespeople will receive their bonuses. Whether it is every time the customer pays or when the customer signs a contract, your employees need to know when they’ll be paid.
5. Share your Sales Commission Structure
Now that you’ve created your sales commission structure, it is time to share it with your team. Make sure it is clear and easy to understand. The last thing that you want from your commission structure is for it to confuse your sales team.
Communicate the structure to your team, explain the thinking that went into designing this structure, and set expectations for them to know what it is that you want them to achieve.
A good practice is to write your commission structure down in detail and make it available to all employees so that it is easy for them to evaluate their performance and know where they stand.
6. Evaluate and Maintain your Commission Structure
This structure is a living document. As your business grows, your team evolves, or your strategy changes. You would need to evaluate and tweak your commission structures to ensure they remain relevant. Your employees stay motivated, and your objectives continue to be met.
Top Tips for Creating a Solid Sales Commission Structure
1. Keep it Simple: Your salespeople should be able to look at your structure and understand that if they do A, they should make $B.
2. Get it Right: It is a tedious process to make a sales commission structure, and you don’t want to do it over and over again. Not only will it confuse your team, but it will also impact your organization’s performance. When you sit down to create your structure, take as much time, you need to get it right the first time.
3. Don’t Set Unreasonable Targets: While you want your team to deliver their best performance, setting unachievable targets is more likely to demotivate them.
4. Don’t Cap Salaries: Your commission structure should motivate your employees to sell more, and you should support them if they want to make as much money as possible through their hard work. Capping salaries not only decreases their earning potential, but it may also make your best performers complacent.
Creating the right commission structure is crucial to the success of your sales team. As they say, well begun is half done. Start with the right sales commission structure, and you’ll be able to attract the right talent for your team and keep them motivated. Evaluate and fine-tune your structure based on the company’s growth and your team’s performance to retain the right talent and sustain your growth.
At Xoxoday, we deeply understand the intrinsic and extrinsic motivation and engagement drivers of people, be it an employee, supplier, contract staff, gig or consumer. We bring simplicity and continuity to a complex, everyday problem.