Sales Commission Plan
The prime intent of providing a commission component to a salaried sales compensation plan is to provide a performance incentive to the salesperson. The exact structure of any such commission program is best determined by the specific requirements and financial structure of the employer. A basic plan might incorporate the following strategies:
- The starting point is to determine the objectives and desired outcome for the business.
- Next step is to determine the target earning for the position and how much you wish to pay the salesperson, say $80,000 annually.
- Approximately three-quarters of this amount should be in the form of salary. (This may vary based upon size of average sale, sales cycles, client base, etc.) In our example that amounts to $60,000 ($5,000 a month). Through a commission plan the salesperson should be readily able to earn the balance of the $20,000 in that he/she is taking a risk by being compensated on commission.
- Next the current value of the salesperson's territory is calculated. For example, let's say that the territory currently generates $1,500,000 on an annualized basis.
- To determine the commission rate we divide the $20,000 by the $1,500,000.The resulting figure is .013 or 1.3 percent. That's his/her commission, paid monthly.
There are some other basic dos and don'ts:
- Keep the formula as simple as possible and make tracking system readily available.
- The sooner the salesperson receives his/her commission the more effective it is as a motivational tool. Pay a commission on each month's sales by the middle of the following month.
- Should a salesperson leave the firm then pay him/her for orders received at least up to the end of that month.
- Should a salesperson be transferred to a new territory, then consider granting that individual a hold on some half dozen of his/her existing customers for a designated period of time to address transition and usual “ramp-up” time.
- It is common practice to split commissions on orders that originate in one territory and are shipped into another territory.
- If a salesperson closes a HUGH order pay the full commission. Remember that there are many times that the salesperson missed out on a large order.
- Don't worry if the salesperson makes more money than the employer's President. The suggested compensation program above minimizes that risk, but a large commission payout represents a win-win situation for both the salesperson and the employer.
For assistance with your sales commission programs, contact Joe Rahal from our Contact page