Compensation is an important factor in attracting and retaining employees, especially in sales. Imagine if almost half of your sales team left the company because of a poorly designed compensation plan.
The results wouldn't be pretty.
If your sales organization is struggling to strike a balance between company requirements and the compensation needs of employees, it's likely time to reevaluate your compensation plan and commission structure.
As a salesperson, it's valuable to know what types of commission plans are available and what salary and commission rates you should look for from an employer. Luckily, I've compiled some resources for you to determine the best sales commission structure for your sales team or yourself. Ready to learn more?
Sales commission is a key aspect of sales compensation. It's the amount of money a salesperson earns based on the number of sales they have made. This is additional money that often complements a standard salary.
The sales commission is an amount of money salespeople earn as a result of sales they've made. It's often an additional sum that's provided alongside a base salary, but this will depend on the commission structure a company chooses.
Sales Commission Structure
The sales commission structure outlines how much a sales organization is willing to pay salespeople for each sale. As a sales leader, it's important to ask the following questions when determining a sales commission structure:
How much of the budget will go towards commission?
How much are you willing to pay if a salesperson can produce $X in sales?
What is the base salary?
Will additional bonuses or incentives be a part of the compensation plan?
In his book, "The High-Velocity Sales Organization", sales strategist, Marc Wayshak, discusses how important compensation and commission is to your sales infrastructure. He offers a few tips to keep in mind when creating a commission structure:
Sales Commission Tips
1. Don't cap salaries.
Capping salaries decreases the earning potential of your salespeople. Sales management should be supportive of their team and want individuals to make as much as possible in return for their hard work.
2. Do it right the first time.
In sales compensation, there isn't room for do-overs Introducing a new compensation plan moves the goals and targets and the morale and motivation of your sales team will diminish.
3. Keep it simple
Make your compensation and commission plan clear. Not only will this make the commission structure easier to implement, but it will also ensure there aren't any loopholes in the plan. A salesperson should be able to fill in the blanks: If I do X, then I will make $X.
So, what commission structure should you choose? There are a few to pick from and common structures include:
Absolute Commission Plan: This is when a commission is paid as a result of specific activities or milestones. For example, a salesperson might be paid $1,000 for each new customer.
Relative Commission Plan: The relative commission plan is when a target or quota is set. Let's say a salesperson has a quarterly quota of $90,000 and a quarterly commission of $10,000. If they meet 85% of the quota, they'll receive 85% of the commission.
Territory Volume Commission Plan: With this commission structure, salespeople work with clients in clearly defined regions. And they're paid on a territory-wide versus individual sale basis.
Straight-Line Commission Plan: A straight-line commission plan rewards salespeople based on how much or little they sell. For example, if they reach 90% of their quota, they receive 90% of their commission
This ultimate guide to sales compensation provides even more detail on sales commission structures and compensation plans. And it will help you determine which structure will work best for your company and sales team.
For salespeople, before agreeing to accept a job, the sales commission structure and compensation plan should be clearly outlined and easy to understand. The sales commission agreement should tell you everything you need to know about the commission and salary you're going to make.
Sales Commission Agreement
What is a sales commission agreement? It includes a salesperson's terms of employment, outlines the compensation structure, and outlines the working relationship between employee and employer.
In short, it allows both the salesperson and their employer agree on compensation, commission, and job responsibilities. Here are the key elements that should be included in a sales commission agreement.
This section gives the okay for the salesperson to sell products or services on behalf of their employer. The employer often limits the selling by restricting the regions or territories in which the offerings are sold, and by prohibiting the rebranding and reselling of their products.
The salesperson must agree to use documentation and tools that are approved by the company to keep track of their sales activities. For example, this would include CRM databases, software, forms, etc.
3. Non-Compete Clause
A non-compete clause requires the salesperson to refrain from representing or selling on behalf of a competitor for a period of time after leaving their employer.
4. Non-Disclosure Clause
The non-disclosure clause ensures that the employee agrees to refrain from sharing confidential information or intellectual property.
5. Commission Structure
This is where you share the details of the commission structure. After reading this section, the employee and employer should have a clear understanding of:
The compensation structure (e.g., commission, performance incentives, bonuses)
When a commission is earned
When commissions are paid
Consequences of cancellations, refunds, or default of payments from customers
Both the salesperson and their employer agree to the details of the sales commission agreement by signing and dating the document.
For additional recommendations and insight, consult your legal team or seek out the advice of a lawyer to help you carefully craft your sales commission agreement.
Sales Commission Agreement Template
If you need some help developing a sales commission agreement, these templates are a great way to get started.
This sales commission agreement template builder will help you outline the working relationship between employee and employer. It includes general information (e.g., address and phone number), commission structure, documentation, and non-compete and non-disclosure clauses.
With this fill-in-the-blank sales commission agreement, you're able to quickly plug in the details for your document. And it includes a progress bar to show you how much more of the agreement needs to be completed.
Average Sales Commission Rates by Industry
Wholesale and Manufacturing Sales Representatives: $61,660
Insurance Sales Agents: $50,600
Advertising Sales Agents: $51,740
Real Estate Brokers and Sales Agents: $50,300
Securities, Commodities, and Financial Services Sales Agents: $64,120
Door-to-Door Sales Workers, News and Street Vendors, and Related Workers: $26,430
Sales and Related Workers, All Other: $33,220
Averages for salary and commission allow sales leaders to see how their sales commission plan compares to the rest of their industry. And for salespeople, they can see how their sales compensation plan stacks up.
With a well-planned sales commission structure, you'll attract top employees and retain them. And clearly outlined compensation plans will make it easier for employees to understand expectations and earn their commission.