How To Structure Sales Commissions

The broad types of compensation and commissions plans are explained in our previous blog. Do give it a read to know the basic frameworks of plans in general.

Factors to consider while structuring sales commissions

Once a structure is identified, the next thing is to define the exact numbers. The following are some important factors which should be taken into consideration while arriving at numbers.

Deep-dive into the existing structure

Ideally, to revamp any structure, the first good step is to evaluate the existing one. The following data and answers should be looked at, analyzed, and interpreted to actually understand the performance of an existing structure.

  • Does the compensation seem fair by the sales representatives?

  • Is it easy for them to track, understand, and reconcile the compensations?

  • What is the difference between the highest commission payout versus the lowest? And how do these number fare with the average commission payouts?

  • What is the iteration rate across performers?

  • Are the sales reps performing evenly throughout the month?

Understanding answers to these questions are useful in revamping the commission structure.

For example, if the difference of commission payouts between the top performer and the lowest performer is not much, a better reward system is necessary to keep the sales representative motivated. Similarly, if the iteration is above the industry average it is worthwhile to understand if people are leaving to get more base salaries or for better commissions. And, if the sales representatives are not performing more or less the same throughout the month, it is better to have tiered commissions to give motivations boost after each milestone.

All these models are also helpful if the representatives are easily able to access and track their commissions. It also helps to bring a level of transparency in the organization thereby making it perceived as a fair one.

Deciding split between the base salary and commissions

Once a suitable structure is finalized, deciding the split between the base salary and that of commissions is important. A typical benchmark of 60:40 between both can be used. However, depending on the industry, stage of the business, and priorities this split should be changed.

For example industries with really long sales cycles, in which a lot of customer education is involved, the base salary percentage can go higher and vice versa.

Similarly, depending upon the exact roles in the sales organization the ratio changes. For example, someone responsible for upselling and account management may have a higher base salary ration versus those in the lead generation and customer acquisition side.

Business priority

All things aside, important decisions are always dependent on what the business is focussing on. Whether the business is prioritizing for growth or profitability or customer retention and LTV, determines how the sales commissions will be fixed.

For example, if you want your sales representatives to focus more on growth then it might make more sense to incentivize customer acquisition highly than the other sales functions. On the other hand, if the focus is on customer retention, higher incentives for account management would just help create the desired result.

Industry commission bench-marking

Considering the industry average numbers for deciding the exact commissions is important. Research from Hubspot is a good reference to benchmark commission rates across industries specifically for the US market.

It is important to have competitive commissions in your industry if the talent is to be retained. Payout is a big motivation factor for sales representatives and having commissions which are not in sync with the industry you operate might be unproductive.

General Recommendations

Apart from the above-listed factors which should be considered while finalizing the commissions, the following are a few recommendations which should be taken note of.

  • Keep iterating and experimenting with your compensation and commission plans. The perfect recipe takes time and evolves for every organization. Even the right kind of sales talent which you would want to attract and retain will evolve from such iterations.

  • Having some other incentives also helps. Timely recognition and appreciation, appropriate promotions are a great way to keep sales representatives motivated.

  • Standardize as much as possible. Keep the earning numbers transparent and readily accessible. These measures help build confidence in the sales representatives.

With Elevate, you can plan, design & manage both commission plans as well as quota-based plans with the utmost ease.

Elevate aspires to bring transparency in sales compensation. Sales reps can view all details regarding their commissions’ payout, quota attainment & revenue goals. Leaders can track the performance of every team member, manage product-based & territory-based revenue targets.

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