How to Structure Employee-Based Commission Sales

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Pay for performance plans, particularly sales commission plans, are preferred by many business managers. The reasoning is that the manager believes that an employee will work harder when he has the potential to earn more money, and see the rewards of his success in his paycheck. Other people think that commissioned sales people become too pushy, and are not concerned with customer satisfaction over the long term. Correctly structuring a commission plan can help lead to customers who are satisfied, and employees who are correctly motivated to meet the needs of the business.

Determine the type of wages you are going to pay your sales force. You can pay 100 percent salary or 100 percent commission. Many businesses decide to mix the two. High commissions tend to create aggressive sales people who go after more business, while higher base salaries create loyal employees. If your business is getting started, or aggressively seeking new customers, it may be wise to pay a higher commission rate. If you want more focus on growing existing accounts and providing good service, you can concentrate on paying a higher base salary.

Develop meaningful sales commission formulas. To do this, you must know the bigger picture of what your goals are as a company. It might make sense to reward sales volume, but you may also want to include a metric that pays commission based on gross profits as well to avoid more sales being made at a deep discount. From these goals, develop the formulas that calculate the commissions paid. A good rule of thumb is to keep the formulas as simple as possible; difficult-to-calculate commission formulas can be a de-motivator.

Roll out your plan to all of your sales employees. The best time to do this is at the beginning of a pay period, or the beginning of the month or year. Have a presentation prepared on paper and perhaps on an overhead or slide show to outline the pay plan to the employees. If this is a major change, it is helpful to have real-world examples of the previous plan and the present plan to put everyone's mind at ease, or show where differences in performance will be necessary to maximize earnings.

Measure the results from any performance based pay plan. By keeping track of the metrics and employees who meet their objectives, you can see if the commission pay plan is successful. Communicate each employees performance to them on a regular basis, using scorecards that you develop or one of the many Web-based solutions, including salesforce.com or Incentive.

Tips & Warnings

  • Make sure that you consider your individual business and what you are looking for from your salespeople when structuring a pay plan. Consider how influential your salespeople are on the selling process with the customer. Also, base your plan on the length of the sales cycle. Longer sales cycles often dictate a higher ratio of salary to commission, whereas shorter sales cycles may indicate a higher commission level.
  • A draw against commission, where a newer salesperson can borrow from future earnings, can have its disadvantages. A salesperson runs the risk of never getting up to speed and owing money on the draw that he can't pay. You could also terminate him, which would mean that you can never collect the money.

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