How Does Retail Commission Work: The Short & Quick Guide

How does retail commission work in the retail space? How are retail sales employees rewarded for their sales achievement? Is it different from the rest of the industries?

If you were pondering over these questions, this blog will help you with all the answers. Retail sales employees earn a handsome commission for the sale they make - this commission could be based on volume of sale or the value of the sale. 

The commission structure that is used by retail businesses is slightly different from other industries. Only by using a robust and competitive commission and incentive structure can an employer retain and maintain well trained and efficient sales employees in a dynamic market.

In this guide, we will discuss the types of commissions, what factors affect them and how to create and update commission and compensation structures in a volatile retail space. 

Types of commission structures in retail

The Gartner review states that each employee who leaves an organization costs the company more than 18,591 USD. An employer spends so much money and time in selecting, onboarding employees, training them and adding them to payroll systems.

Attrition is extremely high at 60.5 percent in the retail space and therefore having a good salesforce that is compensated well with a good commission structure helps in retaining high performing, trained, valuable resources. 

Here are some popular commission structures in most retail companies:

1. Straight commission

Straight commissions are paid to employees when their pays depend solely on how much they sell, either by volume or by value. This is a common type of commission structure utilized by companies such as insurance, retail banking products, real estate etc. 

2. Base salary + commission

This type of system is popularly used for agents and high level sales reps who sell high value and luxury products or even for smaller goods such as FMCG, fashion and apparel. The employees are provided an OTE commission structure. 

3. Tiered commission

Tiered commission strategy attracts varying percentage of commission as and when employees are able to achieve higher volume of sales.

For example, the commission for selling 100 units could be 10 percent but between 100 and 200 units could be 15 percent etc. This system is utilized in FMCG, fashion, apparel and related companies.  

4. Revenue or Gross margin commission

This type of commission is best suited for high value products that build profit margin for the company.

Employers motivate sales employees to sell for higher profit margins so as to provide a cut to the sales employees directly from the profit. A good example for this is in SaaS, IT and hardware products, automobile and real estate sales. 

Factors influencing commission rates

There are many factors that play into the commission rate structure offered by a retail firm.

It is important to keep in mind that offering an attractive commission rate can be tricky as the employer must be able to make good revenue so as to share the profit with the employees. A good commission structure takes both the employer's revenue as well as the employee's needs into consideration while formulating a plan. 

A study conducted by Harvard business review on 13657 revealed that performance linked commission structure offered job satisfaction and had a positive effect on employees. But what kind of commission structure should one be offering to employees? This depends on number of factors such as:

• The type of the product or the service being sold - is it measured by value or volume?
• Demand for the product in the market - how easy is it to sell by the sales employee?
• Complexity of the product - how easy is it to approach and sell in the market?
• Turn around time and sales cycle - how long does it take to sell the product?
• Industry standards - how are the competing brands and employees performing?

Compensation components

Retail sales staff in the US are paid around 27, 570 and 35, 964 USD on average but this figure varies based on the product retailed by the sales staff. Products such as insurance, real estate, IT and hardware, fashion and luxury retail can fetch a handsome commission structure. 

On the other hand, FMCG, home furnishing and other related retail sales may fetch smaller commissions. The typical retail sales staff in the US are paid a base salary along with a commission percentage of the value or volume of sales they achieve. 

Below are some of the common components of the retail sales employees:

Fixed components of compensation

• Base Pay 
• 401K plans
• Retirement plans
• Health and life insurance plans

Variable components of compensation

• Commission on sales
• Performance linked incentives
• Cash bonuses (one time or recurring)
• Cash reward, gift vouchers and other discount schemes
• Reimbursement for commute/ cell phone bills
• Employee assistance programs
• Non monetary rewards (team outings, vacation vouchers, dining and meal vouchers etc)

Calculating retail commissions

Studies reveal that only 32 percent of employees in the retail sector were actually satisfied with their compensation from their employers.

This is the reason why people move away from retail jobs which leads to loss of money and valuable human resource for the employers. By putting in place a solid retail commission structure, employers can retain more employees. 

Cities like New York and Chicago paid a good basic pay structure of 55,983 and 52,087 USD per year. Commissions are paid over and above this value based on the sales quota achievement.

Employees who have more than 10 years of experience are paid between 65K and 70,000 USD per year as base pay which supports the earning potential of sales employees in the long run. 

Sales commission is calculated by multiplying the commission percentage with the sales quota that needs to be achieved. Typical sales commission percentage for B2C is 10 to 30 percent based on the product. For B2B clients, this value is estimated at 7 to 15 percent. In garments and fashion, the percentage for commission is set between 10 and 20 percent. 

For example: if an employee's base salary is 10,000 USD and his sales commission is 10 percent for target achievement, then his commission on achieving 100 percent quota achievement of 20,000 USD would be: 10,000 + (10 X 10,000) = 11,000 USD. 

This is an example of the base + commission model. If employees in the commission only model, the sales quotas are higher with higher percentage and value of commission.

For example, a luxury car seller may have a commission only structure of 25 percent on sales deals closed. So for the sale of one luxury car of 100,000 USD, the commission is calculated as: 100,000 USD X 25 = 25,000 USD 

Chanel, a luxury brand that sells a variety of jewelry, accessories, apparels and other fashion items offers one of the best compensation and commission structures for its sales employees.

The base pay of employees is at 137,642 USD of which commissions are valued at 57,280 USD approximately. Employees get around 20 to 25 percent commissions on various items based on the product value. 

Bonus and incentive programs

Bonuses and incentives are a part and parcel of employee compensation and studies reveal that 90 percent of high performing companies invested in cash and non cash incentives and rewards for their employees.

Benefits must include cash bonuses and other performance linked incentives to motivate employees to perform better and create an atmosphere of growth. 

Both monetary and non monetary rewards can be used as incentives to reward the right behavior from sales employees. Infact companies believed that the non monetary incentives helped 20 percent more to retain and engage their sales employees. Companies can encourage employees using specific rewards for specific performances and actions within a company. Some examples for this are:

• Higher discounts for employee friends and family
• Better compensation in peak rush and seasonal sale
• Flexible compensation and incentive plans 
• Cash rewards for exceeding targets
• Gift cards, certificates, vouchers, discount schemes for employees 

Companies like PINK and Victoria's Secret have been consecutively ranked as the best retail companies to work for by sales employees for their industry best sales commissions in the form of performance based compensation and employee benefits such as employee discounts of 20 to 30 percent, referral programs, employee perks and a relaxed and positive work environment. 

Cross-selling and upselling incentives

Expanding revenue for companies can get tricky beyond a certain limit. But sales employees can help expand the revenue by simply selling in a smarter manner - using cross selling and upselling techniques have been proven effective to attract customers to better and higher value products within the companies offerings. 

Cross selling helps clients to look beyond the catalog and invest in other related products of their intended purchase.

Upselling invokes the want of a customer to buy a better product than their intended product. A good product presentation and a good technique to convince clients to look into other products and better value products requires skills and training. 

Studies revealed that sales employees who engaged in cross selling and upselling were able to improve their revenue by 30 percent using this simple technique. Of 500 sales employees, 88 percent agree that upselling helps in identifying clients actual needs and preferences and helps drive better sales revenue.

By putting in an incentive for employees who upsell and cross sell, employers can help in expanding their revenue and help with better brand visibility. 

Apple is a classic example of upselling and cross selling. Apple employees always try to upsell customers and existing clients to the new phones and have a special commission linked to their performance and sales quota. Apple executives also bundle many products together at the time of purchase to help cross selling other related products for a Macbook or iPhone. 

Compliance and ethical considerations 

Commissions that are paid to the employees who are within the retail sales scope must abide by the labor laws of the country.

There are some regulations that apply to the commission payment of retail sales employees under the federal trade commission to protect consumers. Some of the common regulations are:

• Commissions are to be paid as per the legal contract drawn between the employee and the employer.
•  Commissions are not part of the basic pay and employers need not pay them necessarily as part of salary. 
• Commissions are to be paid based on the agreement between the two parties at the rate which was agreed upon. All disputes can be resolved legally based on employment contracts and documents.
• Commissions of a person who is relieved from the employment must be paid in full at the time of exit. 

Commissions do have an ethical implication of inducing commission based selling tendency amongst employees. Some companies are eliminating commissions entirely to remove any negative impacts, jealousy, competition and other customer based implications from the workplace.

Managers and employers must make sure that commissions are linked to positive growth and create an environment of healthy work culture. 

Sales employees owe an ethical code of honesty and transparency with their clients. Employers must ensure that employees do not over promise or oversell the product for the sake of incentives which may end up spoiling the name of the brand.

Employers must ensure that employees do not engage in ‘unfair and deceptive acts’ and that commission or any incentive is linked with positive behavior at the workplace. 

Evaluation and adjustment

As employers and retail business owners, you are faced with constant changes in the market and dynamic fluctuations in sales and turnover.

Disengaged employees are those who feel unappreciated and undercompensated for their efforts. Studies suggest that the 6 in 10 employees are ‘quiet quitters’ due to poor engagement and compensation efforts by the companies worldwide. This has cost almost 9 percent in GDP. 

Employers in retail sales space must constantly evaluate the compensation and commission structure in the market and the gap between the industry standard and the company standards.

A report on employee satisfaction suggests that sales employees in retail showed 21 percent greater profitability when they were happy and engaged. Retail companies must make realistic adjustments to the compensation and commission structure looking at various market and economic indicators such as:

• Competitor base pay and commission structure
• State of the economy and rising inflation
• Employee dissatisfaction and conflict of interest
• Product complexity and competition in the market
• Market saturation and performance indicators

As managers and employers, retail companies should constantly work on giving the best industry standards of commission to keep employees happy and engaged. The right commission structure gives them a constant nudge in the right direction. This helps with a shorter sales cycle, better product push to customers, better turnover and overall better revenue for the employer and the employee. 

Conclusion 

Employees all over the world are experiencing tremendous stress, 44 percent of employees said they underwent high stress work days on average. Studies suggest that stressed employees were less likely to retain their jobs. 

Stress in the workplace is usually attributed to poor pay, not being recognized and rewarded for the efforts and having a negative work relationship with employers. With a good compensation and a healthy commission system, employers can motivate, engage and connect with their employees in a better manner. 

Employees who feel recognized and appreciated for their efforts have better productivity and performance at work. 96 percent of employees felt that empathy from their employers was an important parameter for retaining their jobs. Using monetary and non monetary rewards and incentives, employers must ensure that employees have a good support system.

Given that employees are the heart and soul of an organization and are valuable resources, rewarding them for their efforts using commissions, bonus and incentives can enhance your employee satisfaction.