Sales Commissions: Find the Plan That Works for You
For every sales representative, there’s a perfect product and a perfect commission structure. Finding both leads to sales success. Common structures for sales commissions include being paid a high salary with low commission or being paid based on individual sales, territory sales volume, a share of the profits, bringing in new business, maintaining old business, wholesale or net (retail) sales, hitting an exact sales target or hitting variable targets.
What product you sell, whom you sell it to, the length of the sales cycle and your experience may dictate the type of commission you’re offered, but knowing the pros and cons of different sales commission plans can help you choose the right one for you. The most common pay plans include:
High Salary, Low Commission
Inside sales, in which the sales rep is given a list of customers to contact, often offers a high base salary and low commissions. Those who don't mind making cold calls and need a guaranteed paycheck will be happy with this plan, says Greg Bennett, a senior account executive for The Mergis Group (a division of Spherion) in Durham, North Carolina.
Payment for Individual Sales
If you’re a sales rep focused on your direct relationship to the customer and individual transactions, getting paid a commission for individual sales is a great fit, says Donna Flagg, president of The Krysalis Group LLC, a New York City organizational development consultant and former Chanel salesperson. Look for a low base and the highest possible commission.
Payment for Territory Volume
If you’re all about building networks and teams and excel at getting others to participate in the process, you’ll do best when you’re paid based on territorywide sales versus individual sales, Flagg says.
Remember that a sales territory is only as rich as the customers it contains. “You have to know who your target market is and if they’re located in that territory,” says business coach Tom Maier of Action Coach in Shelton, Connecticut.
A protected territory keeps others in the company from poaching your customers, but prevents you from following customers who move out of your territory or selling to customers’ out-of-territory branches.
A Share of the Profit Margin
Companies that sell services often pay their sales reps a percentage of the profits. “The employer will say, ‘If you can get a better profit out of that deal, your commission rises,’ but it’s still split with the company,” Bennett explains. The catch? If you have to discount the price due to competitive pressure, the discount comes directly out of your paycheck.
New Business vs. Old Business
Like to make the sale and move on? Look for a company that offers bonuses for bringing in new clients or opening new territories. Enjoy maintaining customer contact? Seek a company offering residual commissions for customers that continue to spend, says Edward Navis, CEO of Full Spectrum HR Services in Little Falls, New Jersey. Warning: The lure of residuals may force you to choose between spending your time servicing old clients and talking to new ones. Also, when you leave the company, you leave any outstanding, unpaid residuals behind.
Retail vs. Wholesale
Retail companies typically pay based on retail or wholesale sales, offering a lower percentage commission on retail sales or a higher percentage on wholesale sales. “Roll up the math, and they should end up being pretty close,” Flagg says. “If they’re not, go for the higher number.”
Some companies offer sales commissions based on company net profits. “If the company’s operations aren’t efficient, the net can be lower than it should have been,” Maier says. Instead of agreeing to such a deal, ask if you can be compensated on the gross value of your sales and bonused based on the efforts of the entire corporate team delivering the product.
Payment for Hitting Targets
Some companies set sales targets and increase your commission as you sell more and more. This structure is great if you’re motivated by a challenge but can backfire if the lowest goal is unreachable because the sales cycle is longer than the commission cycle or the product isn’t priced correctly.
Other companies set a total sales goal -- say, the same amount sold in the prior year -- and base your commission on how close you come to that total. With this structure, you can usually count on a sales commission even if you don’t reach your total goal, Flagg says.
Whatever Works for You
There may be endless combinations of commission structures, but only a few will really work for you. “You have to think about what position you’re in,” says David Cocks, managing partner for CompensationMaster LLC in Charlotte, North Carolina. “It’s not necessarily about the split -- it’s being able to achieve your goals in alignment with the company’s goals, so you’re covering their cost of operation.”
Learn more about sales careers.