The ins and outs of sales commission schemes
The success of every business, regardless of innovation or strategy, ultimately rests on sales. As a result, corporate revenue is primarily generated by professionals in this specialised field, with commission forming a significant salary component. Despite this, there is a serious lack of accessible information on sales commission schemes and structures.
Why pay commission?
Because selling (across the board) is the lifeblood of any business, good salespeople must be regarded as major assets. However, no matter how great the intrinsic, personal rewards for making a sale, it is undeniably a highly stressful and often thankless game, requiring incentive and motivation in the form of remuneration.
Skilled professionals command a considerable sum. But, regardless of individual ability, on what basis should a company structure performance-based sales compensation?
Thoughts on sales commission schemes & reward strategies
- Obviously, commission structures and reward strategies are determined by the specific requirements and financial position of the employer.
- There is no universally “right” scheme, as this is dependent on corporate culture, general sales environment, degree of competition and employee input, as well as the size of orders.
- Commission schemes should be simple, understandable and above all, easily calculable, to achieve the aim of encouraging staff to perform better and thereby increase revenue.
- Whatever the basic salary paid (without commission), this should be sufficient to tide sales staff over, or companies stand the risk of losing key people during lean months, when the economic environment is more challenging and sales are slower.
- Many companies opt for paying salespeople a lower basic salary than that of other staff members on the same level, on the understanding that their sales commission earning capacity will adequately compensate.
- All sales staff within a given category should be on the same compensation scheme, earning the same percentage of commission, regardless of individual performance.
- Top performers can (and should) be rewarded in the form of additional annual bonuses.
- To make commission a more effective and immediate motivational tool, salespeople should be paid on a monthly basis (for example, the following mid-month after an order has been placed), ideally without having to wait for customer payment. If this is not forthcoming, the amount can later be deducted.
- Commissions on orders originated by one staff member, and later handled by another, should be split evenly between the two.
- Sales staff members leaving a firm’s employ should be entitled to commissions earned at least until the end of that month, or on a negotiable basis.
Popular sales commission schemes and reward strategies
1) Percentage of turnover: The major pitfall here is that salespeople can earn good commission on what may be unprofitable business for company.
2) Percentage of GP: This is the most common scheme, as payment is only made on obvious financial contribution – however, it is more difficult for sales staff to calculate, and therefore less motivating.
3) Percentage of GP over a given “baseline”: Many experts believe this to be the most equitable method for staff and company, as salespeople do not earn extra until their costs are covered, yet their earnings are easily calculable.
Commission escape clause
Businesses employing sales staff should insert a special clause into employment contracts, to the effect that the company reserves the right to withdraw or amend the commission scheme and structure within a specific notice period.
Emergence Growth is a Human Capital/HR specialist operating throughout Africa and the Middle East, combining global best practice with local knowledge and environments. Contact us to help you design a sales commission scheme that will benefit your staff and grow your business profits.