It is critical for companies to keep their employees motivated. One of the ways they can do this is by offering sales commissions for every sale closed. A sales commission is the compensation a salesperson receives as a reward for making a sale. It serves as an incentive to encourage the stellar employee to make even more sales since they know their efforts will be rewarded.
Since a commission directly impacts on your paycheck, it is crucial you understand how each type of sales commission works so you can figure out which type works best for you. Below are seven types of sales commission and how they work:
1. Base Salary Plus Commission
This is one of the most common compensation plans for real estate agents and salespeople. It is ideal for risk-averse persons looking for a low-risk mode of compensation. It usually offers a guaranteed paycheck besides the commission one is likely to make from sales. Employers often use this type of payment method to incentivize the sales representatives to work harder. Having a guaranteed paycheck also acts as security in case sales are depressed.
2. Commission Only
The commission only structure is precisely what it sounds like; there is no paycheck. The sales representatives only get paid if they make a sale. They, therefore, work extra hard, knowing that their pay will be calculated based on the deals they have made within a specified period. This pay for performance model works on the assumption that a sales representative has to make money for the company so the latter can have money to pay them.
If you are a highly motivated, hardworking employee to whom making sales is a breeze, you will find these types of sales commission highly ideal. This is because it attracts a higher commission percentage out of the total sales.
3. Territory Volume
A commission in territory volume is based on total sales in an entire territory or region. It usually involves assigning a team of sales representatives to a specific area. Depending on the deals that a particular area makes, the total commission is divided equally among the team members in that area. To boost sales and, consequently, the commission, the employees seek to establish strong relationships with clients in their territory.
The only downside to these types of sales commission is that should the team be moved to a different region, they are likely to lose clients, and hence their sales and commissions may head south, albeit temporarily. They will have to start all over again and establish relationships with the new clients.
4. Share of Profit Margin
This plan is often used by startups due to their depressed liquidity. Typically, there is a base target a sales representative must meet. Their goal is to hit and exceed the target set to generate higher profits for the company.
For example, if a product is supposed to sell at $10000, but a salesperson sells it at $15000, with a 5 percent commission, they get $750 instead of the $500 they would have received should they have sold the product at $10000. The catch here is that whatever discount is given comes from your paycheck.
5. Placement Fees
This plan is popular among car dealerships. As a salesperson, you get a flat fee for closing a sale. In essence, the commission is based on the sales volume rather than the sale itself. Therefore, the more you sell, the higher the commission. It is in the interest of an employer to make sure employees are well compensated; otherwise, he or she might lose them to competing companies offering better deals.
6. Capped Commission
These types of sales commission place a maximum percentage commission on what a salesperson can earn over a given period. Does it really make sense to put a cap on commissions? Well, the companies that do so claim the purpose is to ensure an employee does not earn unreasonably high commissions that could affect a company’s operations.
This could work against them since the salespeople may not be sufficiently motivated to make new sales. Think about it; an uncapped commission should not hurt a company since it is just a fraction of the sales made by the employee.
7. Tiered Commission
A tiered commission increases after a salesperson exceeds a certain threshold. It is highly ideal for a highly motivated salesperson who is always working hard to close deals. For example, a company may give a 2 percent commission on sales of up to $30000, then a 2.5 percent commission for sales that exceed that amount, say up to $50000, and so on. This commission plan encourages salespersons to close more deals so they can move to the next tiered commission.
If you find yourself working in a company that does not provide a commission plan, negotiate one for yourself with the manager. A visionary manager would be receptive to an idea that works best for both the employee and the company.