Sales Commission Structure
Updated: 5 days ago
The performance of salespeople is a factor of great relevance for a company to remain competitive and the financial incentives are ways to streamline this process, providing greater profitability to the business organization.
The good performance of the functions of the salespeople is essential for the success of the company that intends to consolidate itself in the market and requires the use of a medium and long-term strategy, which follows the increase in sales volume. Therefore, it is essential that managers seek incentive and motivation mechanisms, so that they raise the sales margin, resulting in an increase in the enterprise's revenues.
Sales commission structure concept
Sales commission is nothing more than an additional amount that the trader earns based on the number of sales he has made, it is a charge that supplements the standard monthly salary.
So, in the same point of view, sales commission is the payment made to employees based on the number of sales made. It can be part of a salary package, only the commission can be a form of "incentive payment".
However, there are other ways the company can work with commissioning (which will be described below). Before getting to know them, it is essential that the company needs to consider several factors related to the budget to decide which structure is best, and the way the company pays it can affect profitability while helping attract and retain the best sales force.
Types of structure
Base Salary Plus Commission
The base salary plus is one of the most common commission structures as it serves as the best example for motivating people. 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, being 60% for base rate and 40% for commission. The plan best serves as an incentive or motivation to increase sales performance.
The base rate plan pays the sales representative an hourly or fixed salary. This commission structure benefits companies where salespeople spend a lot of time educating and supporting customers before and after sales. There is no incentive to upsell or sell more products or services.
Another type of commission is a revenue commission, this puts sellers earning a certain percentage of what they sell. Thus, this type of commission is only favourable for sellers who acquired to sell high-profit items since the percentage they will earn will automatically be higher.
Gross Margin Commission
Everything has a base price, in this sense when sold to the consumer for a higher price, the seller keeps the difference and this difference is called 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 pay period or sales period, depending on the agreement, the draw is deducted from the employee’s commission.
Usually, companies that seek to motivate employees prefer to use the tiered commission structure, as after the salesperson achieves a certain number of sales, his commission increases.
How sales commission can motivate sales people
Currently, companies want to be recognized in the market not only for the results they obtain but also for the professionals they manage to attract and retain. Upon realizing this need, organizations seek to encourage people's development to make them more confident and competitive. So, when employees are valued and respected, they feel more involved with the organization, because they feel they are part of it.
According to Colvin (1998), it is possible to confirm that organizations use ways to motivate employees through compensation, as it is believed that they do a better job when there is some kind of incentive.
Organizations have a reward system that offers them a different and positive attitude towards the organization. The reward system is a big influencer when it comes to people's motivation to achieve goals.
Another 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, whereas hygiene factors are related to the environment in which the employee works, involving the company's policy and administration, supervision, working conditions, interpersonal relationships, money, status, and security.
According to Dave Kurlan, “Everyone is motivated by different things and for those who are clearly 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 in an appropriate manner too.”
Colvin, G. (1998). What money makes you do. Fortune
Wang, D., Waldman, D. A., & Zhang, Z. (2014). A meta-analysis of shared leadership and team effectiveness. Journal of Applied Psychology,
Kurlan, D. (2020, September 27). New: The 21 Sales Core Competencies for 2020 And beyond.
Connect with Eduardo Costa on Linkedin
BA in Human Resources Management,
University Lusófona do Porto