When to Increase Base Commission as a Sales Manager
If the performance of a company's sales department is underwhelming, a business can help improve overall sales numbers by adjusting its sales commission plan. Increasing the commission rates earned by a sales agent often has the effect of increasing the motivation to complete sales transactions that are beneficial to the company. Any increases in your sales commission plan should be distributed among your entire sales staff, giving them an opportunity to voice concerns if necessary.
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Why Increase Commission
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The most basic reason that a sales manager would increase the commission rates for his sales agents is to increase their motivation to sell products or services. An increase in the commission rate may also improve a company's profitability when commission increases are used strategically. For instance, if a company sells two products, one of which nets more profit per sale, increasing the commission for sales of that product may keep sales staff focused on selling the more profitable product.
Effective Contribution
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Determining a sales agent's effective contribution to company profits is one way that sales managers try to deduce whether an increase in base commission rates is appropriate. The effective contribution rate is an expression of how much money must be earned through an agent's sales before it covers both operating expenses and an office's profit goal. For example, a profit goal of $50,000 may be easily achieved by 10 sales agents each selling $5,000 worth of products, but commissions, travel reimbursement and other expenses can increase the amount needed to be sold to earn a profit. In this example, assume that these operating expenses amount to $2,500 per agent. If sales agents begin to exceed their effective contribution rate of $7,500, the commission rate may be increased without hurting profitability.
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Types of Compensation Plans
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Sales managers may utilize a number of different types of commission plans to motivate their sales agents. A straight commission plan indicates that a sales agent earns commission rates only without a base salary, which directly ties operating costs to sales but affords little financial security for workers. More commonly, a combination sales commission plan is offered to sales agents, which promises a base salary as well as a certain commission rate for sales. Sometimes sales agents, especially entry-level agents, work in salary-only positions for a period of time before being allowed to earn a commission on their sales.
Developing a Commission Plan
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A sales commission plan should reflect a business's marketing strategy. A sales manager should consider performance benchmarks that might increase the amount of commission earned by a sales agent, as well as governance measures that provide agents an opportunity to ask questions or lodge complaints. Once a compensation plan involving a commission rate has been chosen, the payout formula must be clearly defined and distributed among the sales staff. A 2008 survey by the National Association of Sales Professionals reported that the most common compensation plans among sales agents were either 80 percent salary and 20 percent commission or 70 percent salary and 30 percent commission.
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