Employers offer a variety of pay structures to their workers depending on the specific characteristics of the worker role. In most cases, employees receive a fixed base salary, either hourly or salaried. Some employees are eligible for additional compensation in addition to their base salary, often in the form of a tip from a customer or employer offering a commission.
In this article, Giaiphapdonggoi.net explains what a Sales Commission is, describes different sales commission payment structures, gives tips for choosing the best sales commission structure for you. , which details the sales commission agreement, lists the steps to create a sales commission agreement.
1. What is Sales commission?
What is sales commission?
Sales commission is the additional income that a salesperson earns on top of their base salary from the sales they have made. While not every salesperson's compensation package includes a commission, most companies that sell high-value items, like cars or electronics, offer sales commissions to salespeople. their staff. The amount of side income you can earn as a salesperson through commissions depends on what you sell, how much you sell, and the specific commission structure your company offers. use.
2. Types of Sales commission structure
Employers use a variety of sales commission structures to pay their salespeople. The structure your company uses may depend on the industry you're in, the number of salespeople on your team, and the type of products or services you sell. Review some of the most common types of sales commission structures to better understand how sales compensation strategies work:
Types of Sales commission structure
Revenue commission plan
Employers using a sales commission plan will pay their salespeople a set percentage of each sale they make in addition to their base salary. For example, if a salesperson makes $10,000 worth of sales and the company offers a 5% sales commission, the salesperson will earn $500 in sales commissions. This is the plan used most often by smaller businesses that sell low-volume, high-value items.
Gross margin commission structure
The gross margin commission structure is similar to the sales commission plan. Salespeople earn a certain percentage of sales, but instead of using sales prices to determine commissions, companies use a gross profit commission structure minus any overhead. involves selling from the sale price and then determining the commission.
For example, a salesperson earns 5% commission on every sale they make. Let's say they sell a $10,000 product to a customer, but the company incurs $1,000 in costs in the transaction. The company made a profit of $9,000, which became the base number they used to determine sales commissions. Salespeople earn $450 in commissions. This type of sales commission structure is popular with companies that sell high-value items but incur high internal costs in doing so.
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Tiered commission plan
In a tiered commission plan, the percentage of sales that a salesperson earns from a commission increases as their total sales increase. So, for example, a salesperson's base commission could be 5% on any sales up to $100,000 in total sales. They then earn 7% commission on any total sales between $100,000 and $200,000. Levels can continue from there. Companies that use tiered commission plans often do so to help incentivize their salespeople to make good on their original sales goals.
Draw against commission
This commission structure eases the financial burden some salespeople may experience if they experience a month of slow sales by providing a guaranteed commission payment on each paycheck. Usually, the guaranteed commission functions more like a loan than a payment. For example, one company guarantees a salesperson $700 per commission, even if the salesperson doesn't sell anything during that pay period. Next pay period, if the salesperson earns more than $700 in guaranteed commissions, they will pay back the $700 they "borrowed" in the previous pay period and keep the rest
This is a common sales structure for companies that may face seasonal sales trends to help their salespeople maintain financial stability during the slow season.
Multiplier commission structure
The exponential commission structure is basically a custom commission plan made for each salesperson. This type of commission plan typically considers factors such as quotas, sales cycles, and overactive goals to establish a commission structure that serves the company and inspires salespeople. This type of structure is less common than others because it can take a long time to build. However, it is very useful in promoting specific sales activities and goals.
Straight commission
In the straight commission model, the salesperson's only income is from commissions. They do not receive any guaranteed base salary from their employer. Straight commissions are not as popular as many other sales commission structures that offer some guaranteed income. They are most common in industries with very short sales cycles, allowing salespeople the opportunity to make a number of sales during a pay period.
3. Tips for determining the best Sales commission structure for you
When considering your job options as a salesperson, it's important to understand the sales commission structure the company offers before taking the job. Use the following tips to help you gauge if the structure is right for you:
Tips for determining the best Sales commission structure for you
Review your financial situation. If you have a steady side income, perhaps from a partner or passive investments, a riskier sales commission structure like straight commission may be right for you. If not, you should consider looking for another position that offers more financial stability.
Make sure the sales commission structure provides enough incentive to make the sale and meet the quota. Usually, most salespeople like to find a good balance between base salary and commission.
Look for a sales commission structure that allows for growth. You can also find structures that provide increased income if you exceed certain quotas or goals.
Compare the recommended sales commission structure with others in the industry. Most sectors use similar sales commission plans to best serve the company and its salespeople. If the structure the company is offering is fundamentally different from the industry norm, consider looking elsewhere.
4. How to create a Sales commission agreement
A sales commission agreement is a contractual document signed by both the company and the salesperson that outlines the specifics of the salesperson's compensation and commission plan. In most cases, this is a composite document that may undergo some negotiation-based changes during the hiring phase.
How to create a Sales commission agreement
How to create a sales commission agreement
Follow these steps to create a sales commission agreement that you can present during salary negotiations for a new sales position:
Know the expectations
Most likely, your company will have a standard sales commission agreement that it uses for new incoming salespeople. Know what it is and what it entails before working on your sales commission agreement. Ask for a copy of the company's sales commission agreement or sample for your review.
Include relevant factors
Make sure your sales commission agreement includes the necessary components. Most likely, the first few sections will follow company policy while you will have some potential input on the commission structure part:
Authorization: The authorization section of a sales commission agreement usually states where and how you can sell the company's products or services.
Documentation: The documentation section details how you'll track your sales - usually through some sort of company-based software system.
Non-compete clause: The non-compete clause sets out how long you must wait to sell to a competitor if you leave the company.
Non-disclosure: The non-disclosure clause outlines what information your company can and cannot share with others.
Commission Structure: The part of the commission structure is the longest and most important part for you as an employee. It details your sales commission payments and additional salary.
Agreement: The agreement section contains your signature and the employer's signature to enter into an agreement on the details of the document.
Present your document
After you have made any changes you want to the sales commission agreement and are satisfied with the terms listed, present the document to your employer. You can do this simply via email or in a web meeting
