Extrinsically motivated salespeople make up the great majority of salespeople. As a result, your sales commission system is critical to attracting, maintaining, and motivating your sales representatives. This is more critical than ever as we continue to experience a labor shortage.
However, there is no one-size-fits-all solution for compensating your representatives. Different types of pay programs encourage different types of behavior:
- Commission-heavy programs will attract highly aggressive salespeople who will shoot first and ask questions later, whereas base-heavy plans would attract less aggressive salespeople.
- Sellers who are rewarded for bringing in first-time consumers are more likely to bring in lower-quality clients, resulting in high turnover rates.
- Plans with a tiered structure encourage salespeople to pursue fewer, larger deals rather than a huge number of smaller ones.
There’s a lot to think about in this situation. So, let’s go over 11 different types of sales commission plans so you can figure out which one is best for your company.
Types of Sales Commission Structures
Let’s take a look at the different ways to compute a sales commission before we get too deep into the different types of sales commission plans.
1. Revenue Commission Structure
Variable compensation as a percentage of a sale amount is the simplest and most popular commission system. So, if a sales representative earns a 15% commission on sales and closes a $10,000 contract, they will earn $1,500. Smaller teams and businesses with a less complex product or service offerings benefit greatly from these programs.
2. Gross Margin Commission Structure
The gross margin commission structure is similar to the revenue commission structure, except that the commission is based on the gross margin rather than the sale amount. So, if you had a $10,000 sale that cost $1,000 to produce, the rep would get 15% X $9,000 = $1,350 in commission.
3. Tiered Commission Structure
Tiered commissions encourage salesmen to sell above a specific amount of money. A sales representative might earn a 5% commission on all sales up to $100,000, 7% on sales up to $300,000, and 10% on sales exceeding that amount under this arrangement. These strategies are best suited to larger, more established sales teams with a focus on dramatic growth and scalability.
4. Draw Against Commission
The plans for drawing against commission are a little more sophisticated. A predetermined sum is paid with each paycheck to the rep, comparable to a loan or cash advance. The salesperson is then forced to repay the draw if they make more than a specific amount.
So, if a sales rep is paid $500 but produces no sales, they keep the money. However, if they make $2,000, they will repay the $500 and make a profit of $1,500.
This type of strategy aids new reps during their onboarding process and in times of uncertainty.
5. Multiplier Commission Structures
The multiplier commission plan combines a standard revenue commission with a quota achievement percentage component. Let’s say a salesperson has a $300,000 quota and earns 5% + 2% on the first third, 5% + 4% on the second third, and 5% + 6% on the last third. On the first $100K, they’d make $7,000, $9,000 on the second $100K, and $11,000 on the third $100K.
Types of Sales Compensation Plans
Let’s look at how the sales commission system work in some common sales compensation programs now that we’ve gone through a few different incentive models.
1. Base Salary Plus Commission
The most popular sales compensation plan pays the salesperson a base wage plus a commission. In most circumstances, the ratio is 60% set and 40% variable, though this might change depending on how you wish to motivate your salespeople.
2. Commission-Only Plan
Straight commission schemes are popular among certain sorts of salespeople, notwithstanding their rarity. The rep does not earn a base salary under this arrangement, but the commission is usually a bigger percentage of the sale (as high as 40 percent in some cases). With this method, you’ll virtually always attract pushy salespeople, but it offers little security or motivation for them to stay.
3. Relative Commission Plan
The rep earns a commission based on how much quota they hit vs the precise revenue amount, as well as a basic income, under a relative commission plan.
4. Absolute Commission Plan
Reps in an absolute commission plan are paid for achieving specific goals and completing specific tasks. Obtaining a specified amount of SQLs, new customers, or even reaching certain activity levels, such as call counts, are examples of these activities. These strategies work best for directing sales representatives’ attention and offering rewards in areas where they may be underperforming.
5. Straight-Line Commission Plan
The commission is tied to a quota in a straight-line commission plan. For example, if a rep achieves 50% of the quota, they will receive 50% of their commission; if they achieve 150 percent, they would receive 150 percent.
Underperforming representatives are incentivized to meet quota, while reps at all levels are incentivized to reach their maximum potential. This form of commission structure, on the other hand, only works if you have the financial resources to support what is basically an uncapped commission structure.
6. Territory Volume Commission Plan
Representatives are paid on a territory-wide, team-oriented basis under this scheme. This strategy entails accumulating all commissions and dispersing them among the team. This strategy is designed for team-based enterprises that want to improve service in certain areas.
There is no such thing as a one-size-fits-all sales commission system, as you’ve probably understood from reading this post. A variety of criteria go into determining which one will work best for your team and organization:
Determine the behaviors you wish to encourage. Certain commission plans will work better than others depending on how you want your salespeople to behave and what you want your organizational culture to be.
Keep your sales objectives at the forefront of your mind. You won’t get the results you want if your commission plan encourages “churn-and-burn” practices, but you want to establish a loyal, dedicated customer base.
Recruits are used to test new commission arrangements. If you’re not sure whether a strategy will work, give it a try. In sales, turnover is common, and what worked in the past may not work now.