The compensation given to an employee based on the amount of revenue they generate for your business is known as a commission structure.
Commission structures are most often found in industries that are sales heavy or that deal with direct sale services or products but lack a storefront. These industries include real estate, retail, the stock market, and insurance.
Which Sales Commission Structure is Best for you?
The best sales commission structure for you is dependent upon your business and the goals you have set. You also have to make sure your reps will love your new plan. There is no one size fits all commission structure. To determine which structure will bring you the most desirable results, you must be willing to test the waters.
Don’t worry; I won’t let you jump in unassisted. This article will provide you with a life vest of helpful information, so you can better decide what structure is most likely to benefit your business.
Let’s dive in!
Flat Rate Commissions
The simplest of all structures is the flat rate commission structure. It is easy to comprehend, calculate, and utilize. With this structure, when a product is sold, the employee will receive a set percentage commission. This commission percentage is received regardless of what the value of the order is.
The amount the employee receives is entirely dependent upon what the flat rate percentage per sale is.
Let’s say your flat rate percentage is 10%. If an employee sells a service or product for $1,500, they will receive a commission of $150. If an employee sells a service or product for $3,000, they receive a commission of $300 in their paycheck.
The Pros & Cons of a Flat Rate Commission Structure
While the flat-rate structure is simple and easy to follow, this can also be its downfall. Because all sales are rewarded with the same commission percentage, there is no push for representatives to sell more, like there is with a tiered structure that will be discussed below.
There are two ways you can implement a flat rate commission: Flat rate per order & flat rate per item.
Flat Rate Per Order
A per-order based commission, where the flat rate percentage is applied to each order received, with a fixed 1 per transaction.
A vendor sells item A for $200, and the commission fee is 10% fixed 1 per order. The customer purchases 2 of item A; the vendor will receive $20 in commissions.
Flat Rate Per Item
A per-item based commission is where the flat rate percentage is applied to every individual item sold (whether or not it is part of a larger order).
A vendor sells item A for $200, and the commission fee is 10% fixed per item. The customer purchases 2 of item A; the vendor will receive $40 in commissions.
Is a Flat Rate Commission Right for your Business?
Flat-rate commissions are commonly found within the insurance, property, and retail industries.If you sell a service or product that is in high demand, has a short sales cycle, and is comprehensible to your targeted market, a flat rate model is a great jumping-off point for you. Click To Tweet
A commission awarded to employees for attending training, resolving customer complaints, the timing of deals, and customer outreach, is known as an event-based commission.
The impact this structure has on company culture, customers, and brand recognition isn’t immediate, but with time, it can prove to be significant.
Your employee attends a training seminar to further their knowledge. The same employee also runs a customer outreach event. Your company pays a 5% commission for training and a 1% commission for customer outreach events.
If the employee base yearly pay is $75,000, the employee will earn $3,750 for training, and $750 for the customer outreach event.
Is an Event-Based Commission Right for your Business?
An event-based commission structure is optimal if your service or product is niche, has a long sales cycle, is high-valued, puts customer experience first, or is dependent on forming long-term relationships.
A tiered commission structure can be a bit more complicated than a flat-rate commission structure. In this structure, the amount of commission that is paid out progressively increases as the amount the representative sells increases.
There are two types of revenue that a tiered commission structure may follow, marginal revenue, and retroactive revenue:
In this structure, the increased commission rates are applied only to the achievement inside of a higher tier.
Tier 1 is everything earned up to 15,000, which then begins at tier 2. So, $15,000 receives a 5% commission of $750.00. If the representative sells $15,100, the first 15,000 would still receive the 5% commission, while the $100 would earn a tier 2 commission of 10% garnishing a total of $760.
In this structure, an increased commission rate is attained by reaching higher tiers and is applied to all revenue. This structure brings about a drastic increase in the amount of commission a representative can achieve.
Tier 1, at 5%, pertains to any earnings under $15,000. Therefore, a representative that brings in $14,999 receives a 5% commission of $749.95. However, if a representative earns $15,000, they will then qualify for Tier 2. Let’s say Tier 2 earns the representative a 10% commission. The representative would earn $1,500 in commissions. This number is over twice as much as what they would have received had they brought in a single dollar less in revenue.
The Pros and Cons of a Tiered Commission Structure
A tiered commission structure can be complicated and confusing for employees to understand. In turn, errors in commission payments can happen if you are not careful. However, this commission structure (when implemented correctly) is a fantastic way to push for higher sales and achieve growth.
Is a Tiered Commission Structure Right for your Business?
A tiered commission structure may work well if your company has tried a flat rate plan previously, with less than desirable results.If your sales team needs encouragement with exceeding their quota, a tiered commission structure can provide a push in the right direction. Click To Tweet
This structure also works well for you if you are an extensive B2B business with a strong sales focus or looking to grow in new areas.
A trailer commission is a percentage usually between 0.25% to 1% of a mutual fund’s annual unit worth. It is awarded to a salesperson or representative when they can extend services to the buyer past the first-term contract. Representatives are often relied upon for advice, consulting, or support, therefore incentivizing the representative to establish and maintain an enduring relationship with the customer. This commission is paid annually as long as the relationship continues.
A client’s annual unit fund is worth $3,000. The Trailer commission is set to 1%; your representative will earn a $30 commission for said client.
The Pros and Cons of Trailer Commissions
Trailer commissions motivate representatives to build relationships with clients that are beneficial to your long-term business goals. On the other hand, because these fees are ‘hidden,’ they are a heated topic in the investment world.
Is a Trailer Commission Structure Right for your Business?
If you are part of the investment industry, then a trailer commission structure is probably right for your business.A trailer commission structure can also be excellent for a SaaS business because it relies upon an ongoing service that requires a yearly fee to maintain. Click To Tweet
What is a Good Commission Rate?
The commission rater you set for your business should be based around several factors.
If your business is looking at the long-term bigger picture, you may want to consider setting a volume-based commission rate. However, if your business prioritizes building client or customer relationships, you will want to utilize a commission rate that accounts for your individual sales numbers.In order to find the perfect solution for your business, you will need to keep a close eye on how your commission rates affect employee performance and your bottom-line. Click To Tweet
When you find a number that works for you, expect to see revenue increase, as your employees become more incentivized to work harder for your company.
How to Pick the Right Commission for your Business
Begin by conducting a thorough analysis of last year’s commission and compensation plans. Pinpoint what worked and what didn’t (bonuses, commission structures, etc.)
What parts of your plans motivated your employees and led to deals that increased revenue? Using this data can help you determine what commission plan may work best for your business in the coming years.
Be Competitive, and Consider Your Industry
To bring top talent into your company, you need to have a competitive commission structure.
Observe what commission structures are being implemented by your direct competitors and top-performing competitors within your industry.
Individual commission plans can work well within one industry and fail miserably in others. It is important to take your industry into consideration before beginning to implement a sales plan. Here is a general rundown of what commission plans are normally found in what industry.
- Flat-Rate Commission: Utilized by industries that offer high-demand products or services, with short sales cycles. Namely: retail, property, and insurance industries.
- Event-Based Commissions: Industries that utilize this commission plan offer niche products or services, and have long sales cycles, with an emphasis on putting the customer first. Namely: corporate event planners, wedding planners, etc.
- Tiered Commissions: Great for B2B businesses that focus strongly on sales and expanding growth into new areas. Namely: Pharmaceutical sales and retail.
- Trailer Commissions: Utilized by companies that rely upon customers or clients to invest in ongoing services. Namely: Companies within the investment industry, SaaS businesses.
Create a Commission Team
Bring together a small group of 5-10 senior representatives from different areas of your business, including human resources, finance, marketing, sales, and legal.
This group of experienced professionals can offer you valuable feedback on what commission plans they envision working best from their perspective.
Use your commission structure to create sales leaders
A commission structure is a great way to encourage the desired behavior from your representatives. While there are a few structures to choose from, you now have the information and tools to apply a suitable structure to your business.
About the author:
Andrew Gazdecki is the Chief Growth Officer at Spiff – the leading sales commission software. Gazdecki has been featured in The New York Times, Forbes Wall Street Journal, Inc. Magazine, and Entrepreneur Magazine, as well as prominent industry blogs such as Mashable, TechCrunch and VentureBeat. At Spiff, he’s on a mission to help companies automate commission calculations and motivate sales teams.