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Retail commissions are one of the best ways to retain employees in a competitive world such as the one we live in today. The commission structure for retail sales usually decides whether employees will stay in the organization or keep passively looking for one that pays more competitively.
Retail commission structures help in estimating the overall OTE or on target earnings for employees. Coupled with other benefits such as incentives, cash rewards or non monetary rewards, employers can engage and retail retail sales employees effectively.
In this blog, we highlight the various retail sales commissions that employers offer for their employees along with the factors that influence the commission structure and ways to implement them successfully in the organization.
What is retail commission?
A retail sales commission is a percentage of the sales value that is achieved by the sales employee which is paid out to the retail sales employee for the achievement of the sales quota or target as set by the employer. Retail commissions are usually set between 5 and 45 percent based on the type of product.
If the base pay is set to the industry standard or slightly above, the commissions may start at 5 percent. But the most common method of paying out commissions is by paying an average base pay and a higher percentage of commission value set between 20 and 30 percent - which helps in motivating sales employees to sell more in order to earn more.
Sales employees in the retail sector are going through ‘the great resignation‘- a time where employees are quitting their jobs to find better jobs that are worth their while. Almost 4 million people quit their jobs in 2021 which indicates poor sales structure and job satisfaction. Of the people who quit their jobs, 63 percent of employees revealed that the most important reason was the lack of satisfactory compensation which may include wages, salary, commissions and incentives.
5 Types of retail commission structures
In the retail space, commissions and incentives are a driving force for sales employees and control their overall compensation, job satisfaction and growth opportunity in the company.
Based on the type of company and the kind of sales cycle or products that the employee would be dealing with, employees should be given a specific type of commission structure.
Here are some of the most common type of commission structures offered in the market today:
1. Flat rate commission
Flat rate commission is a common form of commission system in retail for independent contractors or freelancers and are paid out a flat percentage of sales for no matter what sales volume they achieve.
This system is good for contract based employees but does not work for overperformers as it does not reward their productivity nor does it work for underperformers.
An example of flat rate commission structure is if a company offers 100 USD flat commission for recommending products at a display, expo or a kiosk such as in fairs, exhibitions, malls etc.
2. Percentage-based commission
This is the most popular form of commission in the retail segment. In this structure, employees are paid a percentage of sales volume as a commission, which drives them to sell more and therefore benefit the employer. This technique does not work great for high profit products that cannot be sold in high numbers.
An example of percentage based commission is - a company gives 10 percent flat commission on whatever sale volume an executive makes in an electronics store. So if the employee makes a sale of 10000 USD, he gets 10 percent of 10000 USD, which is 1000 USD additional to his pay.
3. Tiered commission
This is a more sophisticated and more rewarding sales commission system that not only promotes better selling, it also awards high performing sales employees. Tiered commission has different sales volume or value brackets and awards higher percentage as the value rises.
For example - a supermarket or hypermarket store may set the sales commission for sale of 100 to 200 units as 10 percent but for 200 to 300 units, the commission percentage can be set to 15 percent.
4. Residual commission
Residual commissions work best for retail of high value or membership based services that require customers to renew their membership or their contract. This means that sales employees must stay in constant touch so as to improve their earnings, which is an excellent way to retain customers.
Sales employees are paid a small, upfront commission percentage but are also paid additional commissions each time the customer renews the membership/ contract/ or subscription from the company.
A classic example of this type of commission is in software sales - employees receive a small percentage of commission based on how many softwares they sell every month but also receive a percentage of commission when customers renew their membership or license.
5. Bonus or incentive-based commission
Bonus, sales commission and incentive based commission is used differently by each company.
Some companies may offer additional bonus or incentive to sell a specific set of products which fetch a better commission percentage than other products. Some companies may pay out additional bonus or performance based incentives on the sale of high volume or overachieving targets.
An example of this type of commission can be seen in automobile sales - most cars have the same percentage of commission but the most expensive car may have a higher percentage with an additional bonus or incentive for selling that particular product.
5 Key factors to consider when designing a retail commission structure
The current turnover in the retail sector stands at a shocking 60 percent. Poor commission and compensation structures are the number 1 reason for employees to leave their jobs.
Many internal and external factors can influence the sales commission structure that retail companies may offer for their employees. As an employer, paying retail sales employees one of the most competitive and industry standards helps in retaining them and engaging them at work.
Below are some of the key factors that may influence the retail sales commission offered by employers:
1. Sales goals and company objectives
The goals of the company and the sales employees must be created in a way that they align with each other. On the basis of the sales goals and the company objectives, retail sales commissions may be set by the management of the company.
Some companies focus on high sales volume, such companies may provide a smaller percentage of commission as it associates with high volume sales. On the other hand, companies that focus on the value of the sale may offer a higher commission as the product or service may be too complex to sell in high volume.
2. Competitive benchmarking
Another most important factor that influences the retail commission is the compensation or commission structure offered by similar companies or competitors in the market.
Employers must look into what kind of commission percentage is being offered by other competing companies, what structure of retail commission is offered etc to create their own unique offering to attract and retain employees.
A study reveals that employees should be paid slightly better than competing companies so as to retain them with the employer for longer. Companies who paid competitively in the 75th percentile had 50 percent less turnover amongst sales employees.
3. Profit margins of products
When it comes to retail, many different kinds of products and services are included such as automobile, FMCG product retail, fashion and apparel, skincare and cosmetics, jewelry etc.
Some products have high profit margins such as in the case of luxury car retail. In such retail companies, employees are paid a profit based commission structure.
On the other hand, markets such as FMCG, apparel or electronics may have smaller profit margins, such companies offer an industry standard commission and base pay structure and depend more on volume based sales or a tiered commission structure.
4. Complexity of the sale
Retail sales can include both products that are easy to sell and do not need any complex selling cycles while there are others that require complicated selling techniques and preparation. The commission for the products that sell easy such as FMCG, apparel retail, and small electronics are usually low - between 5 to 15 percent.
Sophisticated products that need experienced sales employees and months of training such as in the case of automobile retail, luxury item retail, fashion brands etc may have higher commission percentages - usually between 20 to 45 percent.
5. Encouraging upsells and cross-sells
Commissions may also be paid to help upselling and cross selling to expand the business growth and to increase the revenue within the brand.
Sales commissions are paid specially for employees who can upsell to their customers by showing them a better product that is priced higher and convince them to purchase the latter such as in the case of phones or laptops.
Cross selling is a technique to sell other related products from other verticals that will complement the purchase such as selling earphones, headphones, phone case, bluetooth speaker or other related accessories with a phone.
7 Ways How to implement a retail commission structure
Given that retail commission structures are influenced by so many factors as mentioned above, it is important for the management to come up with the choice of the right commission structure and the most effective strategy to put the commission in place.
Studies reveal that in 60 percent of companies, the commissions are created by the senior management or CEO with the help of the sales managers. Here is a simple and effective way to create and implement a retail commission strategy:
1. Choose the appropriate commission structure
Based on the type of product or service and the complexity of sale, companies must choose the right type of commission structure that they want to offer to their employees. Not all employees may benefit from the ‘one size fits all’ approach.
2. Set realistic targets
Targets or quotes for retail sales employees must be set by taking into account the overall sales objective for the year and the number of sales employees using which, realistic goals must be provided as sales quotas for month, quarter and annually.
3. Communicating with sales team
Sales employees in the retail sector tend to shuffle a lot - this means that companies may have to deal with new employees a lot. Keeping quotas and commission structure clear and communicating them effectively helps in better productivity from the employee.
4. Establish effective tracking and reporting systems
Employees in retail usually lack the technology to report and track their sales data and their achievements. Make sure that employees have the right tools to record their day to day sales achievements and proper reporting format for the same on a weekly or monthly basis.
5. Consider tax implications
Commissions are taxable under the income tax and IRS norms of the US. This means that employers must withhold the tax before paying them as commissions to the employees. Make sure that tax amounts are calculated properly and the right commission structure and payment is made as per the taxation laws for employers.
6. Track employee performance
Tracking of employee performance helps the management to identify areas where intervention is required and areas where the employees are doing well. This helps in adjusting the commission structure or introducing additional training, sales incentives or rewards programs to help the employees out.
7. Continuous improvement
As employers in the retail space, strategies and payment structures should be dynamic and adjust to the market conditions and competition in the industry. Creation of strategy and making sure all employees are benefitting from the same must include activities such as:
- Gathering feedback from sales team on their satisfaction level with regards to the current compensation and commission structure - 63 percent employees agreed that collecting their feedback to create a better workplace would make them keener.
- Adapting to changing market conditions and checking for competitor compensation strategies using competitor analysis tools
- Staying informed about industry trends and creating provisions for other monetary and non monetary benefits for employees.
Case studies
- Walmart is one of the biggest retail stores and an employer of over thousands of workers. Walmart aims to reduce its turnover in their sales division and help employees with better standards of pay and quality of work. Walmart uses various benefits and perks to capture employee retention and improve their quality of life including:
- Recognizing employees for their performance
- Additional benefits based on hierarchy
- Higher wages and better performance based incentives
- Healthcare insurances starting at 25 USD per day
- Employee discounts etc
- LL Bean is a company known for outdoor clothing and gears for adventures and has faced challenges retaining employees in the post covid era. To counter the same, LL bean offers amazing benefits such as:
- Industry standard pay
- Cash bonuses
- Performance linked incentives
- Generous discounts on merchandise and products
- Health programs, outdoor programs, fitness programs etc
- Tuition reimbursements
- Medical and life insurance etc
Conclusion
Retail employees are the backbone of the retail industry and yet, there is a very high turnover and churn rate at about 60 percent. Even though there are so many opportunities in the market at all times, there are more than 1.86 million vacancies.
Many of the employers are cutting down on their employees (21 percent down since last year) because of the lack of trained and experienced retail sales staff that they can rely on.
By providing good compensation and a competitive commission structure, employers can ensure employee engagement and better retention of employees. Studies have revealed that employees who are well paid, are respected and have good recognition for their work have a positive attitude towards work and are highly likely to retain their jobs.
