Sales Commission Structure

BA in Human Resources Management,

University Lusófona do Porto

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The performance of salespeople is a factor of great relevance for a company to remain competitive. Financial incentives help streamline the process, providing greater profitability. A good performance of salespeople requires the use of medium and long-term strategies. Then, this leads to an increase in sales volume. Therefore, it is essential that managers seek incentive and motivation mechanisms. Thus, they raise sales margins, increasing the enterprise’s revenues.

Sales commission structure concept

Sales commission is the additional amount that the trader earns based on the number of sales he has made. The charge supplements the standard monthly salary. So, the sales commission is the payment made to employees based on the number of sales made. It can be part of a salary package, with the commission being a form of “incentive payment”.

However, there are other ways that the company can work with commissioning. Firstly, the company needs to consider several factors related to the budget. Then, they can decide on the best structure. The type of payment can affect profitability. This helps attract and retain the best sales force. Below are some types of structures.

Types of sales commission structure

Base Salary Plus Commission

The base salary plus is one of the most common commission structures. It offers sellers an hourly or direct base salary plus a commission fee. Regularly, the base salary is often too low to fully earn one's income, but it offers a guaranteed income when sales are low. In this sense, the standard salary for the commission ratio is 60/40. To elaborate, 60% is for the base rate and 40% is for commission. The plan best serves as an incentive or motivation to increase sales performance.

Commission Only

The base rate plan pays the sales representative an hourly or fixed salary. Some salespeople spend a lot of time educating and supporting customers before and after sales. Therefore, the commission structure benefits these companies. So, there is no incentive to upsell or sell more products or services.

Revenue Commission

Thirdly, there is the revenue commission. This commission puts sellers' earnings at a percentage of the sales price of their product. Thus, it is only favourable for sellers who sell high-profit items. In that instance, the percentage they earn will automatically be higher.

Gross Margin Commission

All products have a base price. So, when sold to the consumer, the product gets sold for a higher price. Consequently, the seller keeps the difference. This difference is called the gross profit.

Draw Against Commission

Draw against commission is a salary plan based completely on an employee’s earned commissions. An employee is advanced a set amount of money as a paycheck at the start of a pay period. At the end of the period, depending on the agreement, the draw is deducted from the employee’s commission.

Tiered Commission

Usually, this strategy is used to motivate employees. After a certain number of sales, the commission of a salesperson increases. Therefore, there is more incentive to get more sales.

How sales commission can motivate salespeople

Currently, companies want to be recognized for their sales, as well as the professionals they attract and retain. So, organizations seek to encourage people’s development and make them more confident and competitive. As a consequence, employees who feel valued and respected are more involved with the organization.

Influencers of motivation

A great influencer when it comes to motivation is Frederick Herzberg’s theory of two factors. In 1960, he divided two factors into motivational and hygienic. Motivational factors involve the feeling of accomplishment, professional growth, and recognition at work. Meanwhile, hygiene factors are related to the environment in which the employee works. So, it involves the company's policy and administration, supervision, working conditions, and more.

According to Dave Kurlan, “Everyone is motivated by different things. For those who are motivated by money, and when you have a clear goal and focus for them, their compensation should and must be commission-based. When you have people who are motivated more by recognition, awards, competition, time-off, public service, or philanthropy, your compensation program should be flexible enough to compensate them appropriately too.”

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