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Sales commissions are performance-based compensation structures crucial in motivating and rewarding top sales performers. By tying commissions to specific sales goals, you can ensure that your teams are focused on the most vital objective–driving more sales.
However, designing and managing sales commissions can be a tough nut to crack for many businesses.
In this article, we will understand commission management and how you can design an effective commission plan to boost sales performance and facilitate business growth.
What is a sales commission?
A sales commission is a financial incentive paid to a salesperson for achieving a specific level of sales or other predetermined performance goals.
A sales commission is often calculated as a percentage of the sales generated and paid out regularly (e.g., monthly or quarterly) or as a one-time sum.
Sales commissions are also used to motivate salespeople to sell more products and help grow business revenue. Offering sales commissions can significantly impact sales reps and business outcomes.
What is sales commission management, and why is it important?
Sales commission management is administering, calculating, and distributing commissions to salespeople for their efforts in selling a company's products or services.
A proper commission management system is vital for accurately calculating and tracking commissions and timely distribution of payouts to the sales team. Without one, there may be issues with delayed payments, leading to frustration and decreased morale among sales staff.
Additionally, a lack of a transparent and fair commission process can lead to a lack of trust in the company, potentially leading to employee turnover.
Therefore, it is essential to have a reliable sales commission management system to improve employee morale and performance and produce positive business results.
An effective sales commission management system offers the following benefits:
- Streamlined administration: Streamlines sales commissions process end-to-end, freeing up time for other tasks, such as strategizing new sales plans, focusing on customer needs, and growing the business.
- Accurate calculation: Automates tracking and calculating commissions, ensuring accuracy to prevent errors and disputes among stakeholders. This ensures that sales staff are paid correctly and on time.
- Greater transparency: Provides sales managers and representatives complete real-time visibility into targets, earnings, and program details. This helps them to act proactively and optimize plans to achieve sales targets.
- Improved motivation: Motivates salespeople to drive more sales by tying commission structures to targets and providing visibility into their earnings and performance. With a transparent and fair commission system, sales staff are more likely to feel motivated and valued, leading to higher retention rates.
Various stakeholders involved in sales commission management
Sales commission management is a complex process that involves a wide range of stakeholders. From sales leaders and managers to sales reps and operations teams, each of these stakeholders plays a critical role in the success of a commission plan.
Here are the various stakeholders and their respective roles:
- Sales leaders: Sales leaders, such as sales managers or directors, are responsible for setting commission rates and goals, tracking sales performance, and motivating and supporting the sales team.
- Finance: Typically tracks commission payments against the targets achieved and ensures they are reflected properly on the payroll.
- Sales reps: They are the primary stakeholders in commission management, earning and receiving commissions for selling a company's products or services.
- Operations team: The operations team helps track and record sales activity, sets up and maintains the commission management system, and supports the sales team.
How to design the perfect commission plan for your sales team
Creating an effective commission plan for your sales team drives sales and overall business success. A well-designed commission plan will motivate your sales team to reach their personal and professional sales targets, positively impacting your company's performance.
However, you must understand that a one-size-fits-all approach will not be practical. To create an ideal commission plan, you should consider the specific needs of your sales team and your company's goals and carefully evaluate the options.
Here are a few steps you should follow when designing your commission plan:
Step 1: Determine the overall sales strategy and goals
The foundation of a successful commission plan is a well-defined sales strategy and clear goals. By evaluating the company's objectives, businesses can align commission plans with these goals and gear up to drive desired results.
This includes identifying eligible sales activities, determining appropriate commission levels for different types of sales, and crafting a plan that incentivizes the sales team to achieve the company's objectives.
Step 2: Set commission rates
One of the key steps in designing a commission plan is determining commission rates. This should include factors such as the complexity of the sale, potential revenue generated, skills, and experience of the salesperson.
However, setting the correct commission rate can be a significant challenge for many organizations, with 64% of companies reporting it as a critical issue.
To help you in this process, here are the median commission rates across various industries as reported by the Bureau of Labor Statistics Occupational Employment Statistics (OES) survey:
- Sales representatives in wholesale and manufacturing: $62,890
- Insurance sales agents: $49,840
- Real estate brokers and agents: $48,770
- Advertising sales agents: $52,340
- Retail salespersons: $31,920
- Services, SaaS, and business support representatives: $71,110
- Door-to-door sales agents: $34,970
- Sales agents in the securities, commodities, and financial services industry: $93,260
- All other sales and related occupations: $38,840
It is important to note that commission rates can vary depending on the company size, region, industry, type of sale, and more.
Step 3: Set sales goals
An integral part of any commission plan is setting clear and measurable sales goals for the team. The goals should be challenging yet achievable and align with the company's overall strategy and the sales team's capabilities.
By establishing specific sales goals, organizations can ensure that their sales team is focused on achieving the desired results and earns a commission based on performance.
Additionally, it is important to regularly review and adjust the sales goals to ensure they remain relevant and aligned with the company's objectives. Many companies adopt a collaborative approach to ensure that quotas are realistic and achievable, with input from senior management and the CEO.
Step 4: Determine payment methods
Clearly outline the payment methods in your commission plan for compensating the sales team. Specify how and when commissions will be paid, such as through a commission account or direct payment.
This ensures that the sales team is aware of when and how they will be compensated for their efforts and also avoid disputes between stakeholders. The organization should also consider the tax implications of the selected payment method and ensure compliance with all relevant laws.
Step 5: Communicate the plan to the sales team
Once the commission plan has been developed, communicate it to the sales team, help them understand the rules and guidelines for earning commissions, and motivate them to perform at their best.
However, it's important to remember that not every organization is the same; therefore, a conventional approach to commission plans will not work for everyone. Therefore, tailoring your commission plan to fit your organization's needs is crucial.
Here are a few things to consider to tailor your commission plans:
1. Review annual sales goals: Reviewing the annual sales goals helps determine the company’s overall sales strategy and targets. Having a clear idea enables you to estimate the revenue from your team, identify gaps in the sales pipeline, and enhance the sales process further. Consequently, these goals act as an excellent foundation for the commission-related decisions you'll be making.
2. On-target earnings: On-target earnings (OTE) is a crucial metric for determining the potential income of a salesperson in a specific period. By factoring in OTE when developing a commission plan, you can ensure that your sales team understands their earning potential. This can help set realistic expectations and increase motivation among your team. On average, OTE for a sales representative is around $115,000.
3. Revenue goal and budget for the year: The revenue goal and budget for the year will help determine the overall resources available for commission programs, which will influence the design of the commission structure.
You must be mindful of what you can and cannot promise your team before you set anything in stone. Once you grasp what numbers you're working with, look at how your sales reps can have a measurable impact on revenue goals.
4. Set KPIs for your sales team: Setting and tracking the right KPIs is crucial for the success of your commission programs and business. Choosing relevant KPIs that align with your industry and business objectives is essential, as focusing on the wrong ones can be costly and hinder your progress.
These are some of the most commonly used KPIs:
- Sales growth rate
- Profit margin
- Quotas
- Market penetration
- Close Ratio
- Customer Lifetime Value (CLV)
- Existing client engagement
- Upsell and cross-sell rates
5. Geographical and regional aspects: When developing a sales commission plan, it's important to consider geographical and regional factors, especially if your company has a globally-spread sales team. This helps to account for economic differences like currency conversion and tax laws that could impact sales performance in different regions.
It's also important to be aware of regional regulations affecting sales, such as laws prohibiting specific sales tactics. Considering these factors, you can create a compelling sales commission plan in all markets.
Mistakes to avoid while designing a sales commission plan
Here are a few mistakes that companies must avoid when designing a sales commission plan:
- Recycling other companies' sales commission plans: A sales compensation plan that works for one company may not align with your company's goals, culture, or market conditions.
- Designing complex commission plans: If incentive structures are difficult to understand, it can affect both sales reps' performance and compensation admins' ability to implement the plan effectively.
- Not considering the size of the sales team: Managers should design plans considering the size of their sales team; a plan that works well for a small team may not be effective for a larger team.
- Not reviewing and optimizing the plan regularly: The commission plan should be reviewed and revised periodically to ensure that it meets the needs of the sales team and the company.
- Not automating your sales commission management: If plans are not automated, they can lead to increased workload, inaccuracies, poor visibility, and delays in paying out commissions.
Different types of sales commission structures and how they work
A sales commission structure is a plan that outlines how much commission a salesperson will earn based on their sales. It can be a simple plan that pays a certain percentage of the sale, or it can be more complex, with different levels of commission tiers based on the type of product sold or the value of the sale.
These are some of the most common commission structures:
1. Base salary plus commission
In a base salary plus commission structure, salespeople receive a fixed salary and a commission for their sales. For example, a salesperson may receive a base salary of $50,000 annually and a 10% commission on each sale.
This type of plan is ideal for companies where sales rep retention is a key factor in their organization’s success. By investing in the success of individual reps, the company can create a supportive environment that leads to higher retention rates and a more successful sales team.
2. Straight commission plan
In this plan, the salespeople will receive a commission for each sale they make but won't receive a fixed salary.
For example, if offered a 15% commission on all sales, they would earn $3,000 from a $20,000 sale. This type of plan does not provide any additional compensation beyond the commission earned from sales.
Startups and other businesses with limited access to capital often use straight commission plans. It allows them to pay their employees based on the work they complete rather than offering a fixed salary.
Pay-as-you-go plans are also beneficial for employee retention. They allow reps to feel supported and invested in their role, leading to higher retention rates and a more successful sales team overall.
3. Relative commission plan
In a relative commission plan, a sales representative's commission is directly proportional to the quota they hit.
For example, a rep might have a quarterly quota of $150,000 with a corresponding quarterly commission of $20,000. If they meet 75% of their quota, they will earn 75% of the commission, or $15,000. This structure provides a sense of security for reps, allowing them to make some commission even if they don't achieve their quotas completely.
4. Absolute commission plan
An absolute commission plan rewards reps for achieving set goals and completing specific tasks, such as acquiring new SQLs, gaining new clients, or meeting certain activity levels.
Companies often use this commission plan to incentivize employees to focus on specific goals to help the business reach its objectives. For example, if a company wants to increase the number of new customers they acquire, it would likely use an absolute commission plan that rewards employees for every new customer they bring in.
This type of plan can be effective in driving specific behaviors and helping a business achieve its goals. However, absolute commissions must be aligned with the business's overall goals and stay within the reps' ability to concentrate on their primary goals.
5. Straight-line commission plan
A straight-line commission plan is a commission structure that rewards sales reps based on the percentage of their sales quota they achieve. This is similar to a relative commission plan, but in a straight-line commission plan, the sales rep would receive compensation proportional to how much of their quota they hit.
In a straight-line commission plan, the rep would receive a commission even if they exceed their quota. For example, if a rep has a quarterly commission of $20,000 and exceeds their quota by 10%, they would receive $22,000 in commission.
This type of plan effectively motivates reps to reach their full potential and ensures they maximize their earnings within the company.
6. Tiered commission plan
With a tiered commission plan, sales reps get a certain percentage of their sales based on the tier they fall into.
For instance, a sales rep may receive a 4% commission on all sales up to $70,000, 8% on sales between $70,000 and $150,000, and 12% on sales of $150,000 and above. This commission plan encourages sales reps to aim for higher sales goals, as they earn a higher commission for each tier.
7. Territory volume commission plan
A territory volume commission plan is one where sales reps are compensated based on the sales volume generated within their designated territory.
For example, if a sales team of 4 is responsible for generating $500,000 in sales within their territory and the commission rate is 10%, each team member would receive a commission of $12,500. This commission plan often incentivizes sales reps to increase sales in their designated territory.
8. Recoverable draw commission plan
A recoverable draw commission plan is where a sales rep is given an advance, or "draw," at the beginning of a specific period. This draw is then recovered from the rep's commission earnings if they do not meet their predetermined quota.
For example, if a sales rep has a draw of $10,000 at the start of the month and only reaches 75% of their quota, they would have to pay back $2500 of that $10,000 to their employer. This commission plan provides reps with a steady income while incentivizing them to perform well and meet their quotas.
Leverage sales commission management software to streamline your sales commissions
Sales commission management software is a tool that automates calculating and tracking commissions for a sales team. The benefits include:
- Streamlining the commission calculation
- Tracking real-time performance
- Providing visibility into the sales pipeline and commission payout schedule
This technology automates and simplifies the management of complex commission structures end-to-end. Not only does it save time and resources, but it also helps disburse accurate and timely commission payments.
Furthermore, the software's ability to provide actionable insights into performance and earnings can drive sales predictability and growth. As the demand for such software continues to rise, the market is projected to experience significant growth, reaching a value of US $6.4 Billion by 2032.
The benefits of using commission management software are:
- Streamlined commission calculation: Automates calculating commissions, reducing the risk of manual errors.
- Improved commission tracking: Provides a central repository for commission data, making it easier for salespeople and managers to track and access commission information.
- Simplified reporting: Generates reports that provide sales leaders with insights into commission performance and trends, making it easier to make informed decisions.
- Enhanced visibility: Provides salespeople and managers with real-time visibility into commission performance, allowing them to track their progress and identify areas for improvement.
- Improved accuracy: Improves commission data accuracy by eliminating manual errors and ensuring up-to-date and consistent data
- Integration with other systems: Integrates with other systems, such as CRM and accounting software, to streamline commission management.
- Ensuring Compliance: Ensures compliance with relevant regulations by tracking and reporting on commissions to meet security and compliance requirements.
Final thoughts
Effective commission management is vital for the growth of any sales organization. By designing a commission structure that aligns with the company's objectives and the sales team's needs, businesses can motivate and incentivize their sales team the right way, resulting in improved productivity and performance.
However, commission management can be a complex and labor-intensive task. Companies need to have the appropriate tools and strategies to simplify the process. Xoxoday Compass is a valuable tool that can streamline your commission management, reducing processing time by 100% and boosting sales productivity by 80%.
