How to structure your sales commissions (with examples)
Sales commissions are typically structured around a sales rep’s goals and peak performance, but how you reward their hard work can vary depending on your industry and preferences. For example, selling a car might involve a placement fee commission structure, while selling pharmaceuticals may come with a territory or tiered commission structure. There are plenty of options to choose from, but it can be hard to discern which works best for your sales reps.
Although there are no hard-and-fast rules for commission structures or a hard science behind them, the real goal is to find what motivates your team while benefiting your bottom line at the same time – without setting unrealistic goals. Here’s how to structure your own sales commissions – with examples.
Base salary plus commission
Offering employees a base salary and commission ensure they can cover their living expenses while still incentivizing them to perform and keep productivity high. Some companies even offer a high salary and a low commission to ensure their employees’ success and potential loyalty. However, the type of product or service you sell may also not work well with a high commission structure. For example, a company that sells high-end industrial products a few times a year may need to offer their employees a solid base salary to stay motivated and keep their cash flow steady.
The base salary and commission you offer your employees can vary, but a good rule of thumb many companies follow is to offer a mix of 30% income from base salary and 70% from commission. However, if you don’t have many competitors in your space, you could try a 50:50 mix.
It’s also worth considering what your employees are motivated by before offering a base and commission structure. After all, not everyone is incentivized strictly by money and may instead want the stability of a high salary and additional perks. Some employees are more motivated by flexible time or a fantastic company culture that values their contribution.
Companies that want to ensure their employees are highly motivated and only compensated when they convert sales should look to a commission-only structure. This type of situation can work well for both businesses and employees alike. Businesses only pay when sales are added to their revenue and bottom line. This ultimately ensures that the business has the money to pay their sales representative. Meanwhile, employees can work as long or as hard as they want to exceed their financial goals and keep scaling their careers.
Some businesses are a better fit for a commission-only structure than others. For example, realtors typically only receive a commission when they sell houses and are also required to pay part of their earnings back to the parent company they work with. According to Bankrate, the standard real estate agent commission on a transaction is 6% of the property’s sale price with the buyer’s agent and the seller’s agent splitting the money. You can structure a similar commission-only structure for your company, but make sure your sales team can live off of their earnings and that commissions are processed quickly.
Capped commissions put a limit on the amount of commissions a sales agent can earn. In most cases, that means if an agent can only earn $100,000 in commissions, they will not earn any extra for selling more products. As a result, a capped commission can be a somewhat controversial compensation model, as some companies feel it will deter their best performers in the long run.
Capped commissions can also be seen as a negative for high-performing salespeople who want the freedom to earn as much as they are capable of. But this type of commission structure can also give your team a big boost in their finances by offering them the chance to earn big until they reach that cap.
However, some industries like real estate may use a commission cap with a modification. In the above example of Keller Williams, 64% of the commission goes to the agent, 30% goes to the Market Center as a variable cap, and 6% goes to Keller Williams but is capped at $3,000. This all means that realtors can retain more of their commission in the long run. In this case, the commission they are paying out is capped, as opposed to what they are earning themselves.
Some salespeople are motivated to crush their quotas and sales goals and hit new financial success. You should tap into their momentum and come up with a commission that motivates them to keep exceeding their goals. In this case, instead of simply offering them a commission-only structure, you can further incentivize them with a tiered commission and give them a reason to keep pushing themselves.
Here’s how that might look for your own company. On any sales your team earns of up to $25,000, your company could extend a commission offer of 2%. When they hit $25,001 to $50,000, you can increase their commission to 2.5% or 3% to keep their motivation high to keep exceeding their quotas and goals. Insurance agents, solar panel dealers, and security system sellers are all examples of positions that typically come with a tiered commission structure.
If your sales team tends to work with the same clients in a particular area, you should look into a commission plan that both benefits and protects them. For example, businesses with a rich network and plenty of clients to choose from may benefit from a territory volume-based commission plan. This type of commission structure allows teams to focus on growing their networks and working together as a team. Salespeople are then paid based on territory-wide sales instead of individual sales.
A territory volume should come with an attractive commission and a desirable territory. According to Time to Hire, one model for territory volume commissions is a 25% commission on gross revenue with an exclusive territory. An insurance agency or B2B business selling tools and supplies directly to other businesses may work well with a territory volume strategy. The upside to assigning a territory is that it offers protection so that others can’t poach hard-earned customers. The downside is that a sales rep who worked hard to build up their customer base will suffer if those clients leave the territory and resettle elsewhere.
Some industries and positions may fare better with a placement fee commission structure than others. Car dealers often work on this type of compensation model. The sales personnel could earn a flat placement fee of $300 per car sold.
Although the placement compensation model can work well for expensive products that require a high level of customer service interaction, it can also be highly competitive. Every time a car dealer across the street raises their placement, your team could decide to leave and sign with them. Turnover can be high with companies that use placement commission models. On the other hand, this model can also work well if you’re offering the highest commission among your competitors. The real goal is to treat your sales team well, offer a healthy commission, and stay one step ahead of your competition.
Although there are best practices for structuring your sales commissions, there is no single best way to do it for your company. It’s also wise to see how the commission structures in your industry and area are set up by competitors so you can stay competitive and attract and retain top talent. And aside from what your competitors are doing, every business and its employees are also motivated by different commissions or lifestyle perks like flexible schedules. That’s why turning the sales commission into a collaborative process can help you determine the best fit for your company.
Take the time to sit down with your team and talk through what motivates them the most and how you can incorporate this into your commission structure. You may find it’s not simply money, but the chance to work their way into the best territory or product line. Or you may decide they want uncapped commissions to see just how far they can take their sales success. Not only will you walk away with a better understanding of how to properly compensate your employees, but they’ll appreciate feeling a sense of ownership in the process.
How do you structure your sales commissions? Let us know by leaving a comment below.