What Is a Sales Commission?
How Do Employers Approach Paying Sales Commission?
Employees with a job in sales make base salary and often a sales commission for meeting or exceeding particular sales targets. A sales commission is additional compensation the employee receives for exceeding expectations.
Employers pay employees a sales commission to incentivize the employees to produce more sales and to reward and recognize people who perform most productively. The sales commission has proven to be an effective way to compensate salespeople and to promote more sales of the product or the service.
Employers must design an effective sales compensation plan that rewards the behaviors that the organization needs to promote. For example, if your inside sales team works with the same customers and any salesperson can take a call or respond to a customer’s request for a quote, you will not want to pay a sales commission based on individual performance.
You will instead want to share the sales incentive equally across members of the sales team, to encourage teamwork.
Why Pay Sales People a Base Salary?
Employers generally pay salespeople a base salary in addition to the sales commission. The salary recognizes the fact that a sales employee’s time is not all spent on direct selling. You have other aspects of the job that you need to pay the sales staff to complete.
These tasks can include entering sales in a tracking system, entering customer contact information into a shared company database, collecting names for call lists, and reaching out to potential customers at industry events and trade shows.
The tasks of a salesperson can also include such jobs as cold-calling prospective customers and working in the booth at trade shows and other industry events. They can also include following up with the purchasers of their product or service to ascertain the degree to which it met their needs. (These calls can also include asking for suggestions for improvement.)
As you can see, the tasks of salespeople require compensation beyond just a sales commission in many instances. While some highly compensated salespeople may do these related tasks as part of the job, your average salesperson needs a base salary to make ends meet.
Base salary can also vary from company to company depending on how much support and service the sales rep is expected to provide to the customer while the customer learns how to use or integrate the product. While some companies have additional personnel in technical support roles or in customer service, others expect this follow-up and teaching to come from their sales force.
How a Sales Commission Works
Depending on the compensation scheme, a salesperson may be paid sales commission based on a percentage of the amount of the sale such as 3% of the total sales price, a standard commission on any sale such as $500 per sale over x sales in a week or month, or a team-based percentage of the total sales of the department for a specific period of time.
In the percentage of sales commission plan, the sales commission can increase or decrease as the volume of sales increases. This is important because you want to encourage the employees to increase sales.
You don’t want salespeople to become comfortable producing sales at a particular level when your goal is to grow your company.
Depending on your company’s culture, and your expectations from employees, employers may elect to pay a standard bonus to all employees of the company when sales exceed a certain dollar amount. Employers can also pay a bonus based on a percentage of sales increase.
This cultural model emphasizes that, while the salesperson may have made the actual sale, customer service, training, and tech support taught the customer how to use the product. Marketing brought the customer to the door. Engineering designed and made the product, and so forth.
Employers may also choose to reward employees with quarterly profit-sharing in which a percentage of sales are distributed to employees to reward and recognize their efforts.
In a profit-sharing system, the employer is communicating that profitability is every employee’s responsibility. Whether the employee makes direct sales, controls costs, or spends prudently, each employee is rewarded for contributing to the profits.
How to Pay Sales Commission
You should pay employees sales commissions in their normal paycheck after the sale is made. Another model pays the employees monthly. It is unfair to ask employees to wait for their commissions until the customer pays you. The employee has no control over when a customer will pay his bill.
It is demotivating and demoralizing for a salesperson to have to wait to receive her commissions. In fact, if sales commissions are based on any factor that the employee cannot control, you risk employee motivation and engagement.
By paying the employee after they make the sale, you are reinforcing the employee’s motivation to continue to produce sales.
What Is a Sales Quota?
A sales quota is the dollar amount of sales that a sales employee is expected to sell during a specific time period, often a month or a quarter. A quota can encourage a salesperson to sell more or it can affect employees negatively and create serious stress.
How you set the sales quota, whether the sales quota is a moving target, whether it takes factors such as the state of the economy into consideration, have an impact on the level of stress and the motivation of your sales force.
A realistic quota can encourage more sales, motivate employees because people want to know what the goal is, and provide management’s clear expectations about what constitutes success in sales in your company.
You can come up with a realistic sales quota by looking at the average sales per employee in the department and negotiating stretch goals from there.
Sales quotas are another frequently used concept but they have the potential to hurt employee morale. They also potentially limit how much an employee sells by creating an artificial expectation.
They can encourage shoddy customer treatment and a lack of follow-up with customers—jobs that don’t count toward accomplishing the sales quota. They can also cause an employee to fail to complete necessary components of her job that don’t earn commissions such as updating the customer database, searching for sales leads, and maintaining customer relationships.
Concepts Related to Sales Commission
You will encounter these terms when you explore the concept of sales commission further.
Draw: In a draw upon future sales commissions, the employer pays the sales employee an amount of money up front. The employer presumes that the salesperson will sell enough products later to earn more than the draw in sales commissions. The draw amount is subtracted from future commissions.
This is a tool frequently used when a sales employee starts a new job in an organization. It gives the salesperson an income before they have made sales eligible for sales commissions. It presumes that an employee will take some time to get up to speed on the products, make contacts, and more.
Tiered Commission Plan: In a tiered commission plan, the amount of sales commission increases as the salesman sells more product. For example, for sales of up to $25,000, the sales staff receive a commission of 2 percent. For sales between $25,001 and $50,000, sales staff receive a commission of 2.5 percent. For sales between $50,001, and $75,000, they receive 3 percent, and so forth.
The tiered commission plan incentivizes employees to continuously increase the amount of product sold. It also provides sales employees with additional incentive to sell new products, upgrades to older products, and to stay in contact with potential repeat customers.
You will need to provide your company name and other information, but this site has information about trends in sales compensation that you may find useful.