Once you start employing sales people, you need to consider whether or not you’ll be offering a commission plan for them. Most successful sales people will expect to earn commission on top of their basic salary, which means that their job performance is directly linked to how much they earn.
Deciding which commission structure is right for the business and right for the sales person can be a challenge. Ultimately this depends on what it is that you want to incentivise, not just in terms of revenues generated, but also in terms of the sales behaviours that you want to encourage.
Typically, there are six types of remuneration structure you could consider for sales people:
1. Straight Salary
With this compensation method, the amount of money that can be earned each year is determined up front. An employee’s pay cannot be changed unless the contract is re-negotiated.
2. Salary Plus Bonus:
Arguably, this is one of the most reliable pay structures. Under this arrangement, the sales person receives a pre-determined salary each month. At specific intervals, (typically quarterly or annually), the sales person also receives an additional fixed bonus payment if performance hits or exceeds targets.
3. Base Salary Plus Commission
This is the most common form of compensation in sales. With this structure, a salesperson will receive a pre-determined and fixed annual base salary. Commission earned is based either on the amount of sales generated or, in some cases, on the gross margin that they generate. Margin based commission structures work well in businesses that buy products from one source and then “resell” them to customers.
4. Straight Commission
Straight commission means there is no base salary. An employee earns a percentage of each sale, but this is the only way to make money. This used to be very common with “door to door” type sales environments, such as double-glazing sales.
5. Variable Commission
Variable commission is similar to straight commission, but the rate of commission goes up and down depending on whether sales goals have been exceeded and by how much. Often the commission rate varies in “tiers”…. The sales person might receive a 5% commission on sales made over and above their target, but receive 6% on sales once they achieve 110% of target…. And so on.
6. Residual Commission
As long as a particular customer is generating revenue, the sales person continues to receive commission on that account every pay period. Over time, this becomes a steady income that can be relied upon.
When you add a new sales person to the business, it may take time for them to build up a sales pipeline of opportunities, which means that it may be some time before they start to earn commission. If the individual you’ve recruited has been used to earning commission and, to some extent, has relied on commission payments, then you may want to consider making interim commission payments that will be offset against future earnings when they start to bring in sales.
When should you pay commission?
Commission is typically paid monthly or quarterly, with perhaps an additional payment at the end of the year, but it’s also worth considering at what point in the sales cycle you actually pay out. If your business is one where customers pay in advance or immediately an invoice is raised, then commission can be paid immediately the sale is made. However, if you give customers extended payment terms (e.g. paying 30 or 60 days after the date of the invoice), or if payment is spread over time (if you’re delivering a project in phases), then it’s probably better to delay paying commission until the customer has paid (either in part or in full).
Which commission plan is best?
When it comes to deciding on the specific commission structure you want to implement, the process is never black and white. Before you start to develop a commission structure, you should carefully consider what it is you want to achieve. What is it that you want to incentivise the sales person to achieve and do?
If you’re not comfortable putting these models together, work with your accountant. They’re ideally placed to help you develop financial models and help you think about the implications of each.
Well thought out commission structures can have a major impact on the success of your sales efforts and on the success of the business, but equally if they’re not planned well they can have disastrous results. Take time to consider a variety of options before you implement them.
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