It is a shocking truth that a great number of sales reps leave their job for a 10% salary increase. Sales managers should pay attention to their sales reps and make them satisfy with their salary. Along all efforts doing for attracting customers, paying a well salary to sales reps is also important. It directly affects your profitability and help you to attract top sales reps.
Stablishing a commission structure for sales reps motivate them and make them satisfied with their salary.
What is a commission structure?
The total commission dedicated to each sales rep, depend on each sales performance and individual goals. The most used sales commission structure is defined using variable component of a total sales compensation package.
The commission structure depends on the performance of sales reps and the amount of money or customer they bring to the company.
For example a sales manager specify a 10 percent sales commission for sales reps. Then for a total sales of $1,000 by a sales reps, he/she will earn $100.
There are different types of sales compensation plans such as commission only, revenue commission, gross margin commission plans, tiered commission, and residual commission.
Sales commission structures examples
In this section, different compensation plans are described.
1. Commission only
Straight commission plan or commission only plan means that the sales reps salary will consist of entirely variable pay. For new sales reps it is a risky-plan to choose and it take a while to make a reasonable amount of money for the new ones.
Sales reps, who work with a commission only plan, are extremely willing to find new customers and close the sale. It could be both risky and motivating to work with a commission only plan. The pressure also may increase until it increase the chance of sales burnout.
In businesses with shorter sales cycles or when there is an opportunity for sizable commissions, the commission only plan is a suitable choice. Another view is that it motivates sales reps to close the deals.
Selling and the ability to persuade customers can be difficult for some people and people may hesitate if outside jobs suit them well. It is a risky choice for both sales reps and company.
Simply put, if sales reps are making customers for the company, they will be paid. Otherwise, if they are not making customers, they won’t be paid.
2. Revenue commission structure
Revenue commission plans are basic structures, which have gained a great amount of attention. These structures are best for new businesses that are trying to achieve a larger business goal. Companies with set price points usually use revenue commission structures for sales reps.
It is referred to a predefined percentage of any sales a sales rep closes. By using this method, they will be paid based on the revenue they bring and top sales are the highest paid.
3. Gross margin commission structure
In gross margin commission structures, the costs associated with converting the sale will be considered in the sales price. It means that the company consider both of them and then the profit of each deal is calculated based on them.
Imagine a sales rep sells a product for $2,000 and it has $1,400 worth of expenses. The sales reps commission will be a defined percentage of the remaining $600.
By this structure, sales reps are not interested in discounts and it supports the company’s button line.
4. Tiered commission structure
Tiered commission structure is a commission model known for its progress and increasing profits based on the number of deals or the amount of revenue.
Based on this model, sales reps earn more commission rates after reaching a specified number of deals or a total amount of revenue.
This model motivates sales reps to sell more and become top performers of the company.
5. Base pay rate only
Base rate only model is not used today due to the lack of motivation it makes for sales reps. This commission stands for a base pay regardless of the performance level of each sales reps.
In other words, sales reps don’t focus on attracting customers so hardly. So there is no motivation or encouragement for sales reps.
It is not a place which top performance sales reps grow and try to sell more products, but a place where sales reps work equally.
This type of commission is used mostly when the sales team works primarily on inbound leads.
6. Base + commission
Base salary + commission structure is the most motivating structure for sales reps. Companies can attract the best salespeople by offering base+ commission model.
As the base, hourly rates or a straight salary is given to sales reps. The company gives a base salary and a commission for whatever they sell.
It requires attention and focus of sales reps to fit this job. Sales reps need to use their skills and invest time to earn both parts of their compensation.
The most skilled sales reps are interested in working for companies that invest in their success. Paying a base salary to sales reps will reduce the pressure of the sales reps, but still motivates them to sell more.
Offering a base salary in addition to commission, make sales reps more confident. This helps sales reps to sell more and companies to make more profits.
Sales reps can do more better to find customer needs and customers benefit, too. There is not any extra pressure if the sales don’t close a deal. This helps sales reps to focus on customer needs and make more satisfaction deal.
7. Commission draw
Commission draw plan guarantees that sales reps receive an amount of money and it doesn’t matter how much they sell.
It is said that commission draw is a hybrid plan of commission-only and base pay.
Based on this plan, if the commission earn of the sales rep is less than the draw amount, they will be given the whole commission plus the difference between draw and the commissions.
This plan is mostly suited for new sales reps that need time to fit the job. The borrowed draw must be paid back according to the predefined structures.
For example, if the predefined draw of a sale rep is about $2,000 and he/she earns $1,400 commissions. The sales reps receives all the commissions, plus the difference between the draw amount and the commission that is $600.
How to choose a sales compensation model
Choosing a sales compensation model that motivates sales reps and make them perform their best is the best plan to grow sales.
Sales managers usually ask which one of commission structures can be better and attracts more profits through sales reps? The answer depends on your business type, age of your company and so on. There is no unique answer for all businesses and even a hybrid of commission structures may work better.
Here, we have mentioned some of the most important factors while deciding about the sales compensation model.
To start considering a sales compensation plan, you should know the answer of these questions:
- What are the company’s sales goals?
- What are the company’s sales budget?
- How long is the average sales cycle?
- what amount is suitable for you to pay?
- How much do you want to sell each month?
- What are the exact duties of each sales rep?
- Does sales reps provide support or training?
These questions help you to determine sales compensation plan based on your business, requirements and needs.
It also helps you to determine SMART sales goals. So you can measure the performance of sales reps.
After considering the mentioned factors, you should follow these steps.
- Choosing a sales compensation plan
- Deciding when to provide compensation
- Choosing quotas and expectations for compensation