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Commission Plans

A shoe salesperson approached a customer in an upscale department store and asked, “Has anyone helped you yet?”

Then again at checkout the cashier asked, “Did somebody help you today?”

The repetition may be mildly annoying but it’s critical to ensure that commission is paid correctly.

Commission incentivizes employees to put in more effort and monitor their performance. Plus, many businesses use commission to align employees’ interests with their own.

Simplified, commission is a variable form of compensation based on a salesperson’s objectives and performance. Whereas a traditional salary structure is fixed and straightforward, commission payments allow for different arrangements based on a predetermined sales-based compensation structure.

There are many types of compensation structures and plans. Businesses pay sales employees salaries, straight commission, or a combination of both. Some companies even choose not to hire salespeople at all and instead pay independent contractors straight-commission with no other compensation.

A business’s unique organization requires them to choose a commission model that motivates their sales team for greater financial reward and supports their unique abilities and skills.

It’s critical that a company chooses the best sales pay structure for them. The right one will lead to better results from each salesperson and for the bottom line.

Sherman Oaks Accounting & Bookkeeping powered by One Source Services, Inc. CFOs can analyze your company’s specific situation and customize a commission structure to increase sales team productivity and bottom line profits.

Here are some strategies that have worked for other businesses:

Straight Commission Plans are when a salesperson is only paid commission with no additional salary or compensation whatsoever. Pay is entirely variable and based on sales; there is no fixed salary component. It’s not a commission plan per say, but it’s worth discussing because it’s by far the most motivating approach due to its high risk for the salesperson; zero sales equals zero remuneration. As such, it’s likely that salespeople may secure sales in manners that are at odds with company goals or standards because of the very strong incentive. Straight-commission makes the most sense in situations with short sales cycles or opportunities for large commissions (i.e., car sales, real estate, etc.).

Revenue Plans are the simplest, most-used approach. Commission is calculated as a percentage of a sale’s revenue. For example, if the shoe salesperson from earlier sold you a $200 pair of boots and made a 5% commission of $10 on the sale, then they were on a revenue commission structure. This model works especially well in situations with fixed prices and a company less concerned with profit and more concerned with gaining market share, entering a new market, or blocking competitors from making a sale.

Tiered Commission Plans allow employees to earn greater commission rates after they take credit for selling a specified amount of revenue. For example, the shoe salesperson from earlier earned 5% commission on your boots because they hadn’t yet met $5000 in total revenue. Once they hit that $5000 mark, though, their tiered commission plan will increase their commission rate to 7% and then increase it again when other revenue goals are met. This structure encourages high performers to keep selling and increase their earning potential.

Gross Margin Commission Plans involve both the price of the sale and any costs related to it, focusing on the actual profit of each transaction. If the shoe salesperson sold a pair of $200 boots and there were $50 in costs related to the sale, then their 5% commission rate would be calculated on the remaining $150 profit instead of the entire $200 sale revenue.

Multiplier Plans are more complicated but infinitely customizable. They are especially effective when a company wants to implement numerous performance measures in a salesperson’s incentive plan. For example, multiplying a simple single-revenue percentage rate by a percentage factor of quota achievement can effectively keep reps motivated to improve performance.

These plans are only the tip of the iceberg when it comes to the variety of commission structures available for consideration.

An effective commission structure must also include simple ways to review, manage, and adjust the plan as needed. Sherman Oaks Accounting & Bookkeeping powered by One Source Services, Inc. uses an automated system that makes commission reporting more efficient, improves sales rep’s trust and motivation as they receive accurate, timely payments, enables faster dispute resolution, and implements more checks and balances to catch errors faster.

One commission plan does not fit all and the most successful businesses implement a mixture of plans to make their own way. The important thing is that the plan meets business objectives and inspires excellence from their salespeople. Sherman Oaks Accounting & Bookkeeping powered by One Source Services, Inc. can help!