How to Create the Best Sales Commission Structure for Your Staff

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Without sales, a business is nothing. Strong sellers drive the company forward and can cover up a multitude of sins on an otherwise shaky bottom line. When you’re creating the perfect team, they need the motivation to do their best. That’s where a sales commission structure come in.

Meeting benchmarks has proven to be a major difficulty in this field. According to the Salesforce report, The State of Sales, 57% of salespeople missed last year’s quota. That’s why designing and implementing a commission plan to streamline data are the ultimate tools in helping a company achieve success.

In this article, we’ll cover questions you should ask before you look into sales commission software. Questions such as what is a commission structure? How do I pick the best one for my sales team? And how can sales commission software help optimize my team? Read on to find out more.

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How to Pick the Right Sales Commission Structure

A few simple steps for picking the perfect sales commission structure.

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What is a Sales Commission Structure?

A sales representative commission structure, or commission plan, defines the rules for how and when a salesperson gets compensated This is tied to sales, quotas, volume, completing specific tasks and more. Most plans combined a fixed amount with a variable amount. In other words, one part of the salary is consistent, while the rest depends on the worker’s performance as seen in the example below.

Commission Reporting and Analytics

Individual progress is just as important to track as overall team performance.

Different payments target different metrics and have different goals. Such structures incentivize the top performers, encourage accountability and improve profitability. We’ll be examining the various structures shortly, but first, let’s examine what questions you should ask when you start your commission plan journey.

Questions to Ask

Before we get into the nitty-gritty, it’s important to understand the basics of a sales commission. That’s why we’re diving into the questions which cut to the heart of the what, when and why of how these structures work.

Here are the best questions to get you started:

Why should I use a sales commission structure?

Commissions are common in the sales world. Why? External motivators, such as financial incentives, are a great way to motivate people doing repetitive tasks, according to this article from ScienceForWork. Selling is an art, but it also involves a lot of cold calling and tedious email sending.

There are many other situations where this payment works particularly well. It’s appropriate for companies looking to target a few specific products or sell during a short amount of time. It’s effective in bringing a team together to work toward a group reward, building cohesion and galvanizing staff.

Once a commission plan is in place, managers can oversee and help employees achieve their goals. Unfortunately, this is where confusion and poor recording can cause issues. No one wants to muddle the waters with miscommunication, errors in calculations and poor transparency. Tempers run high when money is on the line.

Fortunately, this is where software helps the most. Before we talk about that, however, let’s get our definition straight.

What worked well in past plans?

Before planning for the future, it’s always best to gather as much data as possible. Analyze and survey staff about past structures. What’s worked best? Where did challenges arise? Besides examining data, survey the staff. Which plans made them feel the most motivated? Did any of them cause undue stress?

Does the plan align with your company’s budget and sales goals?

Make sure your commission structure ties into your strategic planning. Whether your goal is to expand one portion of the company, grow your market share or tighten your margin, the plan should support it. Encourage behaviors that correlate with overall objectives.

Teams can either use cascading goals, where sales derive their goals directly from the company’s strategic plan, or use objective key results where each department creates goals that support the plan, even if they don’t directly tie in.

Are you paying your reps fairly and avoiding turnover?

If turnover has been a big concern in sales, it’s definitely time to reevaluate compensation. Does your staff feel adequately compensated and appreciated for their work? Are the goals attainable? Is it overly complicated? Is it in line with the rest of the industry? If you’re losing a lot of staff to competitors, it might be an issue of payment. Keep your ear to the ground to ensure equity.

Does your plan account for high and low performers?

It’s a mistake to create a plan that can only be achieved by one or two staff members. Make sure that your plans are designed so you still have enough revenue if a high performer leaves. While you should push lower performers, you don’t want to discourage and demoralize them. By the same token, there must be worthy rewards for the best of best so your top talent doesn’t get poached away.

How do I choose the best structure for my staff?

There are a few steps necessary for discovering the best type of plan. The first thing a team must do when tweaking the structure is make a clear set of goals and priorities. What behavior are you looking to encourage? Are you more interested in expanding territory or landing big accounts? Are you looking to control expenses or create more collaboration? Once that’s decided, it’s easier to see which plan gets the job done.

Second, it’s always necessary to look at the current data. Identify trends, metrics, benchmarks and areas that need improvement. Then, be prepared to track the same measures over a period to see what’s working and what’s not. Combine goals that target productivity and in-house objectives with broader business goals.

Third, make sure the plan is consistent with the industry. You don’t want to shortchange your staff or choose something that’s completely off base. Keep current on the information. What are the trends? What metrics are making the most difference for the big players? Keep updating the plan semi-regularly to adapt to sudden shifts.

Fourth, consult your sales team. Your best brainpower comes from the people out in the field every day. You never know whose diverse background can come into play in the most surprising way. Everything works best when everyone is on board and is happy with their compensation. What better to get them excited than letting them help design it?

The Best Sales Commission Structures

There are a variety of compensation plans, each with different strengths and weaknesses depending on the situation. Here are the most typical sales commission structures:

Straight Commission

Also known as 100% commission or commission-only income is based on sales, putting the pressure on selling. For aggressive salespeople with a high-quality product, this allows them to operate with no commission cap. It’s common in startups who need to get products out quickly with low income, especially since they’re usually considered independent contractors. They control their own hours but don’t get the benefits that come with a salaried position.

It’s risky, and best for companies looking to cultivate a certain kind of employee with shorter sales cycles. For this reason, it’s not common. It’s high risk, high reward for more experienced team members, but could lead to a difficult work environment.

Base Rate Commission

In this plan, workplaces pay an hourly or flat rate, like the one for other salaried workers. This isn’t as popular in modern workplaces because it doesn’t reward high sales in the same way. For competitive employees who stand out at the top of the pack, there isn’t as much motivation to work as hard.

This is appropriate for businesses that involve a lot of teaching, consulting and other support before or during the sales process. Therefore, you want to prioritize knowledge and qualified support over numbers. It’s also used for companies that have mostly inbound leads. Team members can be honest and unbiased since it doesn’t contribute to their bottom line. If they still want to use money as a motivator, managers still have raises and bonuses to reward their best workers.

Base Salary Plus Commission

One of the most common plans, this includes a set salary alongside a commission structure, often in a 60-40 ratio of salary to commission. It gives the rep a sense of security but still pushes them to make their numbers. The benefit of this plan is that they have a salary to fall back on if something drastic changes in the industry, but have the potential to make much more.

Draw Against Commission

This plan combines elements of the previous two. Each salesperson receives a guaranteed monthly payment and commission. If they earn less from the commission than they do from their salary, they keep the commission and the difference between it and the draw amount. These are usually advanced payments that the employee pays back.

Here’s an example of how this works:

  • The set draw is $3,000. The worker earns $1,000 in commission.
  • They earn $3,000 for the month; $1,000 from commission and $2,000 from the company.
  • The employee now owes $2,000 to the company to be paid back at a future date.

This is often used to motivate new hires who have to build a client base and can be somewhat difficult. The biggest risk is that of actually owing the company money if the salesperson continues to pull in less than they expect.

Tiered Commission

In a tiered commission, the payment increases once the salesperson reaches a predetermined goal. This encourages the sales team to exceed their goals and close the highest volume of deals. In this system, they may use accelerators or elements that increase the payout exponentially.

Gross Margin Commission

This structure takes expenses into account since sellers earn a percentage of the profit. It’s a great way to encourage tightening margins. If a company’s cost or bottom line is ballooning, this can be an effective way to combat it. However, this also means there’s a bottom to the number of discounts to offer a client. It’s an especially useful tool while trying to scale a business.

Residual Payments

When a worker keeps the same customer over a long period, the payment increases. It encourages customer retention. It’s especially useful for consulting services or any business that counts on repeat customers for survival. If a company has a problem losing accounts, this could be a way to encourage better service.

Revenue Commission

Organizations rely on this structure when they’re focused on big business goals instead of the total profit. This is especially effective in encouraging big sales and top performers. Companies also use it when they’re expanding their share of the market, expanding into a new area, focusing on a single product or encouraging success when there’s fixed pricing.

Multiplier / Combined / Customized Commission

A custom plan that combines one or more other plans to incentive certain behaviors, volume, dollar amount or other goals. Some plans add one or more multipliers which multiples the commission by a certain percentage based on the amount of the quota that’s reached. These plans are good for organizations with specialized needs, especially ones that need their teams to perform well often.

Commission Plans

A program must have functional logic to customize commission plans.

Other Structures

  • Absolute Commission: It’s based on certain actions or goals such as getting new customers.
  • Event-Based Commission: A plan that’s based on the time when certain actions, deals or tasks happen.
  • Flat-Rate Commission: A worker gets paid a certain percentage or a preset amount per product they sell. This is common in property, insurance and retail.
  • Industry-Specific Commission: Each industry comes with its specific set of conventions. Measuring up to that standard can mean the difference between success and failure.
  • Marginal Tax Rate Commission: It’s based on marginal dollar rates and works much like a tax bracket.
  • Relative or Straight-Line Commission: A plan that’s based on a set quota. The percentage is the percentage of the quota they meet.
  • Split Commission: A payment that’s shared by more than one department or sales rep. It’s a motivator for collaboration.
  • Territory Volume Commission: In this plan, each employee works within a specific region. Sometimes, the amount gets split between sellers who work in the same area.

Determining which sales commission structure is right for your team takes time and planning, but once you’re complete, you’ll have a polished plan ready to implement. Once that’s locked down, it’s finally time to look at software to execute in the more efficient way possible.

What is Sales Commission Software?

Sales commission software creates, manages and maintains compensation. It records the number of sales and automatically calculates the bonus. Then, it provides a snapshot of the entire process. These programs are also called sales incentive compensation management or commission tracking software.

Besides tracking and calculating compensation, it helps businesses tweak and optimize the best program possible. This assists with deployment and reporting to create the ideal plan. It tracks costs and makes sure everything is falling within the budget.

On the human capital side, it assesses performance and tracks objectives and benchmarks, making it easy to discuss individual performance. Plans and reports get customized for specific goals and help address problem areas in business from low income to poor margins to anything else.

Top Requirements for Sales Commission Software

Now that you’ve gotten an idea of what sales commission software does, let’s examine the most important features for finding the best software solution possible.

Sales Commission Software Features Checklist

What to examine when looking for sales commission software.

  • Accessibility: Having access to your network on-the-go is a huge priority. Make sure you pick a platform that works on mobile, so workers can update plans immediately.
  • Automation: Save time by eliminating manual data entry from the process. Without having to worry about updating spreadsheets or extensive coding, users can focus on the more important questions.
  • Commission Plans: Find a platform that can do the main calculation that determines payments while defining which metrics you’ll be examining.
  • Compensation Management: Factor in incentives, quotas, overwrites and accelerators to determine payment for sales.
  • Real-Time Updates: When you’re closing deals at big events, it’s important to see what’s happening in real-time, and push closed deals to the database, ensuring a seamless continuum of intel.
  • Reporting and Analytics: Generate reports, monitor individual progress and track key metrics like bonuses, incentives, commissions or changes in territory. By providing reps with projected goals they can view, they’re able to adjust plans as necessary.
  • Scalability: Consider this, if your team grows from 20 reps to 40 in the next few years, will you need a new platform? Give yourself some wiggle room for the volume of sales the system can accommodate.
  • Visibility and Transparency: Users can audit every single interaction, compare timeframes and analyze the formula to ensure there are no errors that could throw things out of whack. Catch problems before they result in incorrect checks.

If you’re interested in learning more about how to evaluate sales commissions software, download our Sales Commission Software Checklist for a comprehensive list of what you should look for when you’re thinking of taking your sales team to the next level.

Get our Sales Commission Software Requirements Template

Conclusion

When you’re looking for a sales commission structure to take your team to the next level, pick a plan that’s going to motivate your staff best. What’s most important to your team? Are you focusing on top performers or getting a certain market share? Are you a small business looking to scale or a large one that needs to tighten your margins?

Once you figure that out, you’ll be able to decide if a base salary plus commission, tiered commission, draw against commission, gross margin commission, residual payments or other plan is best for your business. Finally, look at sales commission software to make the process efficient and transparent.

With the right software and an airtight plan, you can create an optimized, excited team that’s ready to take on the world.

What Do You Think?

What’s the most effective commission structure for sales reps you’ve used? Have you found certain structures work best in different industries? Have you used sales commission software to execute it? What was your experience like? Leave us a comment below!

Grace SavidesHow to Create the Best Sales Commission Structure for Your Staff

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