Commission Calculation: 10 Typical Sales Commission Structures

Commission Calculation

The structure of your sales commissions and proper calculation are crucial to the success of your business. It establishes the standard for the level of talent you’ll attract to your sales team. A salesperson’s higher earning potential from a commission-only compensation scheme may not always be worth the risk of not having a guaranteed income source.  Salespeople see their base compensation as a reflection of how the company will appreciate and treat them.

Commission calculation, which has its own set of tax requirements, can be done in a number of ways. We’ll go through some of the most common methods for rewarding salespeople for a job well done.

Typical Sales Commission Structures – Five Key Sales Commission Structure and Calculation

The variable component of a total sales pays package is known as sales commission. The overall commission earned is based on the unique goals and performance of each salesperson. The right plan will help you motivate your salespeople, increase their productivity and effectiveness, and even lower their turnover rates.

Below we show the different ways sale commission calculation is done based on the sales commission structure

1. Commission Only Structure

When a salesperson completes a transaction, the Commission Only structure,  pays them a fixed commission. Representatives are not given a base income and are unable to increase their commission rate.

A sales representative, for example, earns a 25% commission on every product he sells. He would earn $70,000 in commissions if he sold 30 things at $1,000 each, 20 products at $5,000 each, and 15 products at $10,000 each over the course of a year.

When should you use it? Companies that use temporary and/or contract salespeople, have short sales cycles and can give huge commissions tend to benefit the most from such structures. Most salespeople, on the other hand, despise this structure since it causes them stress. They don’t get paid if they don’t close deals.

2. Revenue Commission Structure

Every time a sales representative sells a product or service, they are paid a predetermined commission. One of the reasons this commission system has proven so prevalent among outside sales teams is because it is simple.

For instance, if your company sells a $500 service with a 10% commission rate, a sales agent will make $50 each time they sell that service.

Products and services with a fixed price point work best with this type of sales commission structure.  They’re also good for companies looking to expand their market share or enter a new industry because they’re less concerned with making a profit and more interested in attaining a wider business goal.

It’s worth noting that revenue commission plans often fail to match with a field sales organization’s wider, broader aims or the particular DNA makeup of a sales team. As a result, caution should be exercised when using them.

3. Territory Volume Commission Structure

The Territory Volume Commission Structure is a one-of-a-kind system. The commissions earned from sales made within a territory are divided equally among all the sales representatives who work within that area.

For instance, the sales quota for three sales reps working in a 100-mile radius is $75,000. The first salesperson makes a $30,000 profit. The second salesperson makes a $26,000 profit. The third representative sells $22,000 worth of merchandise. The salespeople made a total of $78,000, exceeding their quota. As a result, they share the 20% commission equally and earned $5,200 each.

To make this sales commission plan work, your sales team must foster a collaborative atmosphere in which each team member is motivated to contribute to the larger goal.

Must Read: 6 Things to Look for in a Sales Commission Software

4. Gross Margin Commission Structure

Commission structures for gross margin commissions are similar to those for revenue commissions. The difference is that a sales representative’s commission is based on the gross revenue generated by each sale rather than the wholesale price.

To make this sales commission plan work, your sales team must foster a collaborative environment in which everyone is motivated to contribute to the larger goal. Sales representatives are paid a commission depending on this figure.

For example, if your company’s service costs $1,000 but incurs $500 in transaction costs, the sales representative will be paid a percentage of the remaining $500 profit.

Those who support a gross margin commission structure feel that all sales should benefit the business’s bottom line.

5. Commission Structure with Levels

Sales representatives, particularly those who are top performers and/or highly driven, prefer a tiered commission structure. In a short, salespeople get higher commissions if they close a certain number of deals or generate a certain amount of revenue.

For example, a sales representative earns a 5% commission on all products sold up to $10,000 in total revenue. After surpassing $10,000 in revenue, the same sales representative would earn 8% on any revenue generated under the tiered approach.

If you’re trying to develop your sales team, this commission structure is ideal because it rewards top performance and encourages representatives to explore new revenue channels like upsells and cross-sells.

Conclusion

The sales commission system and commission calculation you select for your company are critical. The appropriate strategy will encourage your salespeople, boost their productivity and effectiveness, and even help you lower the turnover rate in your department.

When it comes to compensation schemes, you may select one of the ten options presented in this article. You may also mix and match them to create a custom plan that’s tailored to your specific squad.

Whatever you do, remember that the more you pay your salespeople, the harder they’ll work for you, helping you to attain greater success.

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