Employers pay employees a sales commission to incentivize them 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. This is why the use of a sales commission is widespread in some organizations. Learn more about structuring compensation to reward and motivate your sales team.
Using Sales Commission Structure To Incentivize Behavior
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. People who work in a shared commission environment tend to help each other out regularly. An individual sales commission in this teamwork environment would cause disharmony and place emphasis on the wrong selling behaviors.
Why Pay Salespeople 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. 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.)
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. 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 the 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 so the salesperson had the opportunity to make the sale. Engineering designed and made the product, and so forth.
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%. For sales between $25,001 and $50,000, sales staff receive a commission of 2.5%. For sales between $50,001, and $75,000, they receive 3%, 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
Draw
In a draw upon future sales commissions, the employer pays the sales employee an amount of money upfront. 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.
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. Quotas 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 the necessary components of her job that don’t earn commissions, such as updating the customer database, searching for sales leads, and maintaining customer relationships
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 the bill. It is demotivating and demoralizing for a salesperson to have to wait to receive his or her commissions. In fact, if sales commissions are based on any factor that the employee cannot control, you risk that positive employee motivationand engagement will disintegrate into an environment of employee disengagement. By paying the employee after they make the sale, you are reinforcing the employee’s motivation to continue to produce sales.
The Bottom Line
A thoughtful sales commission strategy will motivate your sales team to produce the sales that drive company growth while also performing key tasks necessary to the business. A sales commission plan can also reward other members of the team for the role they play in the sales team’s, and the firm’s, success.
