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Sales commissions are how salespersons get rewarded for their effort and expertise. With the commission rate depending on how many sales a rep can generate, this figure is undoubtedly the most significant factor influencing their performance and income.
However, several factors are involved when calculating the commission one would receive, and it is common to see incorrect calculations being submitted. This ultimately leads to salespersons getting compensated way less than the effort they put into landing the sales.
But, there is an efficient formula that can help you make sure that your calculations are always correct. While memorizing the formula for calculating, this article can be the golden ticket to ensure that you submit the valid value every time, one that gets you every penny's worth of the effort you put into getting your sales.
Essential factors required for calculating sales commission
Calculating sales commissions is essential for many businesses, especially those that rely on a sales team to generate revenue. Considering the importance of the process, it is necessary to understand that several essential factors must be considered when determining how much commission to pay a salesperson.
So, before we tell you how to calculate sales commission, it is best to familiarize yourself with the essential factors that influence the calculation of your sales commission.
1. Commission base
The commission base is the revenue or profit a salesperson's commission is based on. This can be the total sales revenue, the profit margin on sales, or some other metric that reflects the salesperson's contribution to the company's bottom line.
2. Commission rate
The commission rate is the percentage of the commission base that a salesperson will receive as a commission. For example, if the commission base is $100,000 and the commission rate is 10%, the salesperson would receive a commission of $10,000.
3. Commission period
The commission period is the time over which the commission is calculated. This could be a week, a month, a quarter, or some other period appropriate for the business and the sales cycle.
4. Commission tier
A commission tier is a structure that sets different commission rates based on varying performance levels. For example, a sales representative might receive a commission rate of 10% on the first $50,000 of sales, 12% on the next $50,000, and 15% on any sales above $100,000.
In this case, applying the appropriate commission tier is essential to ensure that the sales representative is compensated somewhat based on their performance.
5. Override
An override is an additional commission paid to a salesperson who manages a team of other salespeople. The override is calculated as a percentage of the commission earned by the salespeople on the team.
6. Split
A split is used when two or more salespeople work together on a sale. In this case, the commission is split between the salespeople based on some agreed-upon formula. For example, the commission might be split 50/50 between two salespeople who worked together on a sale.
These factors are important to consider when calculating sales commission, as they can significantly impact the commission a salesperson receives. By considering these factors and creating a fair and transparent commission structure, businesses can motivate their sales team to achieve their goals and drive revenue growth.
How to calculate sales commission in 8 simple steps?
Calculating sales commissions involves several steps to ensure that sales representatives are compensated fairly for their work. While there are technologies in 2023 that allow you to automate your commission calculation, you may want to do it all manually.
So, here is a detailed explanation of the steps involved in calculating sales commission if you wish to go about the manual calculation way:
Step 1: Determine the commission period
The first step is to determine the commission period, the period over which the commission will be calculated. This could be weekly, monthly, quarterly, or annually. So, choose the period you seek commissions for and then round up the sales you conducted in this period.
Step 2: Identify the commission base
Identify and keep handy the commission base for each sales transaction you are seeking commission for. Since the base amount can be different for each sale you succeeded in generating, it is essential to keep strict track of it for easy calculation later on.
Step 3: Multiply the commission rate by the commission base
Now that you have the commission base ready multiply it by the commission rate to get the base amount of commission you are due.
But remember, this is not the final value since there may be additions or even deductions on this base commission value depending on your contract terms.
Step 4: Consider various commission rates
Change the value of your commission rates in the case of instances where your rate is different from your regular rate.
For example, if your commission rate for one business or transaction is 10% but 12% for another business/transaction, then multiply the commission base for that particular business/transaction with the respective commission rate for accurate calculation.
Step 5: Apply commission tier (if applicable)
In addition to the different commission rates you must be mindful of, you must also track any businesses/transactions with tiered rates. Since most sales transactions are not tiered, it is easy to miss out on one, in which case, you will be compensated much less than what you are due.
So, keeping a separate list of businesses offering tiered commissions along with the tiers for convenient calculation at the end of the commission period is best.
Step 6: Calculate the override commission
Claim the commission you are entitled to from sales successfully closed by reps you manage. Multiply the commission rate by the total commission your team members have earned, and then add the resulting value to your commission calculation.
Step 7: Deduct any returns
Note the commission value you received until the last step and deduct any earnings from sales that the client canceled or returned.
While you may have closed the deal initially, such dealings are considered void if your company ultimately has to return the money or did not receive it in the first place due to the client canceling the sale.
Step 8: Split the commission (if applicable)
From the commission value you arrived at, deduct the share of your fellow reps if you were involved in closing any of the sales with them.
For instance, if you and your colleague closed a deal at 10% commission with the split being done at a 50/50 share, remove 50% of the total commission rate received for that particular sale.
By the steps, the final commission calculation of all your sales can be determined to be:
A = Commission base for determined commission period x Respective commission rates for different transactions
B = A + Commission value as per different tiers
C = B + Portion on commission earned by team members
D = C - Sales commission value for returned or called sales transactions
E = D - Sales portion of colleagues in case of split commissions
To further calculate the sales commission percentage formula, take the value of 'E' from the above formula and divide it by '100.'
Conclusion
Converting leads into sales takes considerable effort, and you must ensure you get adequately compensated. This begins by submitting the correct calculations considering everything that needs to be added or deducted.
With this easy guide on calculating sales commission, you can now ensure that all your efforts are recognized and that you get every penny of the commission you deserve. So, round up all your sales transactions and calculate your commission with this sales commission percentage formula that is as easy as "ABCD!"
FAQs
Q: How often are commission rates reviewed and updated?
A: It depends on the company's policies. Some companies review commission rates annually, while others may review them more frequently or less frequently.
Q: Is the commission paid on the sale price or the profit margin?
A: It depends on the company's policies. Some companies pay a commission on the sale price, while others pay a commission on the profit margin.
Q: Are commissions subject to taxes?
A: Yes, commissions are considered income and are subject to taxes. The taxes owed will depend on the individual's tax bracket and other factors.
