How To Create A Commission Structure

If your sales organization is struggling to strike a balance between company requirements and the compensation needs of employees, it's likely time to reevaluate your compensation plan and commission structure.

As a salesperson, it's valuable to know what types of commission plans are available and what salary and commission rates you should look for from an employer.

Luckily, I've compiled some resources for you to determine the best sales commission structure for your sales team or yourself. Ready to learn more?

Sales Commission

Sales commission is a key aspect of sales compensation. It's the amount of money a salesperson earns based on the number of sales they have made. This is additional money that often complements a standard salary.

In his book, "The High-Velocity Sales Organization", sales strategist, Marc Wayshak, discusses how important compensation and commission is to your sales infrastructure. He offers a few tips to keep in mind when creating a commission structure:

1. Don't cap salaries.

Capping salaries decreases the earning potential of your salespeople. Sales management should be supportive of their team and want individuals to make as much as possible in return for their hard work.

2. Do it right the first time.

In sales compensation, there isn't room for do-overs. Introducing a new compensation plan moves your sales team's goals and targets, diminishing your reps' morale and motivation.

3. Keep it simple.

Make your compensation and commission plan clear. Not only will this make the commission structure easier to implement, but it will also ensure there aren't any loopholes in the plan. A salesperson should be able to fill in the blanks: If I do X, then I will make $Y.

Sales Commission Structure

A sales commission structure outlines how much an organization will pay its salespeople for each individual sale. When planning a commission structure, sales leaders should consider factors like how much of their budget they can allocate for commission, how much they'll pay for different levels of sales output, employees' base salaries, and any potential bonuses or incentives they're willing to include.

So, what commission structure should you choose? Well, there are a few to pick from. Common structures include:

1. Base Salary Plus Commission

The base salary plus commission plan might be the most conventional commission structure With this plan, salespeople are provided a base salary with commission. The standard salary to commission ratio is 60:40, where 60% is fixed and 40% is variable.

When to Use It

This structure is ideal for companies where sales rep retention is critical to the success of the sales organization. The company is actively investing in the success of a given rep while incentivizing their performance.

2. Straight Commission Plan

With this plan, sales reps' income comes directly from the sales they earn — there is no base salary. High-performing sales reps typically thrive in environments set by this plan, but the structure doesn't lend itself to stability.

When to Use It

This particular structure is usually leveraged by startups or other businesses that might lack reliable access to capital. In a lot of ways, it amounts to a pay-as-you-go plan — that often suits businesses that don't have the resources to provide competitive base salaries.

3. Relative Commission Plan

With a relative commission plan, the commission a rep earns is directly proportional to how much of a set quota they hit. That compensation comes on top of a base salary, providing reps with more of a safety net than a straight commission plan.

When to Use It

This plan is essentially the more secure answer to a straight commission plan. It's still directly tied to performance, but it doesn't alienate reps that might be running into trouble — leading to less turnover.

4. Absolute Commission Plan

An absolute commission plan pays reps for hitting set goals and performing specific activities, like acquiring new customers. In a similar vein as the relative commission plan, an absolute commission structure can help incentivize underperformers — but the emphasis is less on revenue and more on activity.

When to Use It

This strategy is most often employed to help direct sales reps' focus. If a business needs to improve its numbers with respect to a specific activity, it might use an absolute commission plan that revolves around it.

5. Straight-Line Commission Plan

A straight-line commission plan rewards salespeople based on how much or little they sell. As the name implies, it's rooted in a straight correlation — a trend that typically holds true even after reps meet their quota. It's one of the better ways businesses can incentivize underperformers to meet quota without slowing overperformers down.

When to Use It

A straight-line commission plan works best for organizations that want to incentivize reps to reach their full potential and have the resources necessary to accommodate an uncapped commission structure.

6. Tiered Commission Plan

A tiered structure encourages reps to put in extra effort by providing higher commission as they hit substantial sales milestones. Here, reps could be paid increasing commissions as they meet their quota, exceed their quota, and continue to close more deals than they're expected to.

When to Use It

A tiered commission plan is ideal for organizations with salespeople who consistently reach (but not exceed) their goals — it also offers a little more control on commission rates than the straight-line commission plan.

7. Territory Volume Commission Plan

With this commission structure, salespeople work with clients in clearly defined regions — and they're paid on a territory-wide, team-oriented basis versus one revolving around individual sales.

When to Use It

First and foremost (and perhaps most obviously), a territory volume commission plan suits businesses that have presences in multiple territories. It's ideal for team-based organizations who are wanting to fortify in specific service areas.

8. Recoverable Draw Against Commission Plan

With a recoverable draw against commission plan, a sales rep receives their commission in advance at the beginning of a pay or sales period in the form of a predetermined lump sum. At the end of that sales period, that lump sum or "draw" is subtracted from that rep's total earned commissions.

When to Use It

A recoverable draw against commission plan is typically used to get reps off the ground in some capacity. It's often used to compensate newly hired, ramping reps as they onboard. It might also be used to pay a rep who's getting acclimated to a new territory.

9. Non-Recoverable Draw Against Commission Plan

A non-recoverable draw is more or less a fully guaranteed commission stipend. Like its recoverable counterpart, it starts with a firm giving its reps a predetermined lump sum, but with a non-recoverable plan, reps aren't expected to pay any of that money back.

When to Use It

This plan isn't particularly sustainable or motivating. It's typically used as a short-term measure during times of company, industry, or broader economic uncertainty to ensure that sales reps have a stable source of income.

10. Residual Commission

A residual commission structure is based on the long-term value of individual accounts. With this structure, salespeople who close deals continue to receive commission from those accounts on an ongoing basis — so long as they continue to generate revenue. This particular structure can be higher-stakes than most.

On one hand, salespeople can build a breadth of solid, productive income streams over time. On the other, losing an account — for reasons that might have nothing to do with the salesperson who landed it — can take a sizable hit on commission that might be hard to recover.

When to Use It

This structure is best suited for businesses that maintain long-term relationships with clients, including entities like advertising agencies or consulting firms.

This ultimate guide to sales compensation provides even more detail on sales commission structures and compensation plans. And it will help you determine which structure will work best for your company and sales team.

What is a fair commission rate for sales?

The concept of a 'fair commission rate for sales' is fluid and tends to vary by industry and role. A sales commission rate can reflect factors like the value of products or services sold, employee involvement in the sales process, or the size of an employee's sales territory. There's no exact science to pinning that figure down, but referencing average commission rates for your industry can be a solid starting point.

Averages for salary and commission allow sales leaders to see how their sales commission plan compares to the rest of their industry. And for salespeople, they can see how their sales compensation plan stacks up.

Average Sales Commission Rates by Industry

The wages below are from the BLS Occupational Employment Statistics (OES) survey. These wages reflect the median average pay for each industry. The commission rate will depend on the company and the commission structure they choose.

1. Wholesale and Manufacturing Sales Representatives

Median pay: $63,000

These kinds of sales representatives sell goods for wholesalers or manufacturers to businesses, government agencies, and other organizations. Their job security and livelihood are often almost entirely intertwined with the volume of merchandise they can sell. Their commission structure tends to reflect that. These reps are often paid with absolute or base salary plus commission plans.

2. Insurance Sales Agents

Median pay: $50,940

Insurance sales agents contact potential customers to sell different kinds of insurance. Agents spend time directly interfacing with clients, completing paperwork, and preparing presentations. They also fulfill other customer-facing and administrative responsibilities. Commission for this brand of sales is generally paid on a base salary plus commission basis. Commission percentages tend to vary by the type of insurance agents are selling.

3. Advertising Sales Agents

Median pay: $53,310

Advertising sales agents sell advertising space to businesses and individuals. They often work across a variety of industries and media, including advertising agencies, radio, television, and Internet publishing. Advertising sales agents often have strict quotas and receive a commission for meeting or exceeding them.

4. Real Estate Brokers and Sales Agents

Median pay: $50,730

Real estate brokers and sales agents help clients buy, sell, and rent properties. Every state requires real estate sales professionals to be licensed. That could mean completing courses or passing a state-specific exam. They're often self-employed, so many have the flexibility to define their own commission structure.

5. Securities, Commodities, and Financial Services Sales Agents

Median pay: $62,270

Securities, commodities, and financial services agents buy and sell securities or commodities in investment and trading firms. They can also provide financial services to businesses and individuals. Some advise customers about stocks, bonds, mutual funds, commodities, and market conditions. These salespeople often charge flat-rate commissions either per share or per trade.

6. Sales Representatives, Services, SAAS, Business Support, All Other

Median pay: $56,130

This category of sales encompasses salespeople in positions and industries in a wide variety of service-based businesses, including business support, technical consulting, electronics, telecommunications, computer systems and electronics, and software as a service. It excludes advertising, insurance, travel, and other categories. Given the wide range of industries and companies encompassed in this category, it can be hard to identify its most common commission structure.

7. Door-to-Door Sales Workers, News and Street Vendors, and Related Workers

Median pay: $27,420

Several different kinds of salespeople fall under this category, including professionals in telecommunications, residential building construction, and subscription programming. Like the previous one, the wide range of industries and companies encompassed in this category makes it hard to pin down a standard commission structure.

8. Retail Salespersons

Median pay: $25,250

Retail sales refers to the occupation in which merchandise (such as clothing, furniture, or appliances) is sold in a retail brick-and-mortar environment. These environments include everything from general merchandise stores to dealers specializing in specific wares such as sporting goods or musical instruments.

Since success is often dependent on foot traffic rather than sales activity, retail salespersons are often compensated by a base salary only. However, retail environments with high-ticket items often pay flat commission rates.

9. Sales and Related Workers, All Other

Median pay: $31,820

This category of sales encompasses salespeople in positions and industries that don't fall into any of the ones mentioned above. This can include roles at automobile dealerships, in non-depository credit intermediation, and with food and beverage retailers. The range of roles that fall into this category is broad, so the variety of the commission structures used tends to be as well.

Before agreeing to accept a sales job at a company, you should have a clear outline and understanding of its commission structure and compensation plan. The sales commission agreement should tell you everything you need to know about the commission and salary you're going to make.

What is a sales commission agreement?

A sales commission agreement is a document that includes the terms of a salesperson's employment. It outlines their commission structure, details the nature of the employee-employer relationship, establishes a timeframe for employment, and specifies the employee's commission percentage.

A sales commission agreement is prepared by an employer and agreed upon by a new employee — and both parties must have a thorough understanding of what's in it.

As we've touched on, a sales commission plan can take on a lot of forms — so new hires need to know exactly how they'll be compensated for their efforts. Beyond that, employers have to establish and document clear terms of employment to protect themselves from legal recourse if an employee has an issue with the commission structure they're working within.

In short, it allows both the salesperson and their employer to agree on compensation, commission, and job responsibilities. Here are the key elements that should be included in a sales commission agreement.

1. Authorization

This section gives the okay for the salesperson to sell products or services on behalf of their employer. The employer often limits the selling by restricting the regions or territories in which the offerings are sold and prohibiting the rebranding and reselling of their products.

2. Documentation

The salesperson must agree to use documentation and tools that are approved by the company to keep track of their sales activities. That might include resources like CRM databases, software, or forms.

3. Non-Compete Clause

A non-compete clause requires the salesperson to refrain from representing or selling on behalf of a competitor for a period of time after leaving their employer.

4. Non-Disclosure Clause

The non-disclosure clause ensures that the employee agrees to refrain from sharing confidential information or intellectual property.

5. Commission Structure

This is where you share the details of the commission structure. After reading this section, the employee and employer should have a clear understanding of:

• The compensation structure (e.g., commission, performance incentives, bonuses)
• When a commission is earned
• When commissions are paid
• Consequences of cancellations, refunds, or default of payments from customers

6. Agreement

Both the salesperson and their employer agree to the details of the sales commission agreement by signing and dating the document.

For additional recommendations and insight, consult your legal team or seek out the advice of a lawyer to help you carefully craft your sales commission agreement.

Sales Commission Agreement Templates

If you need some help developing a sales commission agreement or strategic business plan, these templates are a great way to get started.

1. Sales Commission Agreement Template from PandaDoc

Edit and customize this sales commission agreement template to fit your needs. This template can be signed by your recipients, and you'll be able to track the document's opens and views.

2. Sales Commission Agreement Template from FormSwift

This sales commission agreement template builder will help you outline the working relationship between employee and employer. It includes general information (like address and phone number), commission structure, documentation, and non-compete and non-disclosure clauses.

3. Sales Commission Agreement Template from RocketLawyer

With this fill-in-the-blank sales commission agreement, you're able to quickly plug in the details for your document. And it includes a progress bar to show you how much more of the agreement needs to be completed.

Sales Commission Rate Examples

1. Base Salary Plus Commission Plan Example

With a base salary plus commission plan, a salesperson working for a high-end retail outlet might be working for $25 per hour plus an additional 5% of any sales they make.

2. Straight Commission Plan Example

With a straight commission plan, a sales rep at a B2B SaaS startup might make a 12% commission for every sale they make. If they land a deal worth $10,000, they would make $1,200 on the sale — but they wouldn't receive any base compensation beyond that.

3. Relative Commission Plan Example

If a salesperson was being paid according to a relative commission plan, they might have a quarterly quota of $90,000 and a quarterly commission of $10,000. If they meet 85% of the quota, they'll receive 85% of the commission — or $8,500.

4. Absolute Commission Plan Example

A salesperson working with an absolute commission plan might receive a flat $500 commission for every new customer they acquire — regardless of deal size.

5. Straight-Line Commission Plan Example

Like a sales rep working within a relative commission plan, a salesperson working within a straight-line commission plan would receive compensation proportional to how much of their quota they hit.

The difference is that commission earnings would keep coming even after their quota has been met — so if a rep has a quarterly commission of $10,000 and exceeds quota by 10%, they would receive $11,000 in commission.

6. Tiered Commission Plan Example

With a tiered commission plan, a rep might receive 5% commission on all sales up to $50,000, 7% on sales between $50,000 and $100,000, and 10% on sales $100,000 and above.

7. Territory Volume Commission Plan Example

A team operating in a specific territory might operate according to a territory volume commission plan. If a team of five manages to generate $750,000 in sales within their territory at 10% commission, they would split it and receive $15,000 each.

8. Recoverable Draw Against Commission Plan Example

With a recoverable draw against commission plan, a sales rep might receive a draw of $5,000 at the beginning of a given month. If they only reach 90% of quota, they'd be expected to essentially pay $500 of that $5,000 back to their employer.

9. Non-Recoverable Draw Against Commission Plan Example

With a non-recoverable draw against commission plan, a sales rep's employer would give the rep $5,000 in good faith, assuming they'll hit quota. If they don't, the employer can't recoup that draw.

10. Residual Commission Plan Example

A sales rep who works within a residual commission plan might bring in a large account. If that account pays a recurring payment of $5,000 per month, a rep making 7% commission would earn $350 per month in residuals from that client.

Thoughtfully Plan Your Commission Structure for Long-Term Success

With a well-planned sales commission structure, you'll attract top employees and retain them. And clearly outlined compensation plans will make it easier for employees to understand expectations and earn their commission.

Editor's note: This post was originally published in January 2020 and has been updated for comprehensiveness.

Originally published Nov 9, 2021 6:00:00 PM, updated November 09 2021

How To Create A Commission Structure

Source: https://blog.hubspot.com/sales/sales-commission

Posted by: frittsfeellen.blogspot.com

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