The sales commission a company offers its employees plays a vital role in the company's sales organisation. A good sales commission structure influences the profitability of the company because salespersons remain motivated to sell more because they feel they have a stake in the business every time they're able to close a deal. It is therefore necessary to understand how sales commission works if you're considering a sales-based career. In this article, we explore what sales commission is, its types and the key elements of a sales commission agreement.
Related: 15 Sales Jobs That Pay Well
What is sales commission?
Knowing the answer to 'what is sales commission?' is important if you're considering a career in sales; better commission structure means better income. A sales commission is the extra income a sales representative earns that complements their base salary arising from sales they made. It's often calculated based on the salesperson's performance, the number of sales made and the sales commission structure agreed upon by the salesperson and the company. Not all companies introduce compensation packages in addition to their employees' standard salaries. Most companies that sell upscale products such as buildings, electronics or cars offer to do so.
Different types of sales commission structures
To determine the adequate commission a salesperson is entitled to, employers use different types of sales commission structures. Depending on the products or services your company offer, here are seven types of sales commission structures you need to know about:
Tiered commission plan
This sales commission plan is designed to encourage salespeople to put in extra effort and outdo their initial sales milestones by providing them with higher commissions when they do. In this commission structure, a salesperson's commission rate increases in percentage as they sell products. For instance, a salesperson may receive a base commission of 3% for every sale totalling £5,000 and 5% for every sale totalling £10,000. Such organisations pay their sales representatives increased commissions anytime they close more deals, meet and exceed their quotas.
Revenue commission plan
This sales commission plan is often used by companies that are goal-oriented and sell products with fixed unit prices. Employers that use the revenue commission plan offer their employees a predetermined commission rate in addition to their standard salary, irrespective of the enormity of the deals closed. What this means is that if the set commission rate of the company is 7%, then whether the employee closes a deal of £5000 or £10,000, their commission remains at 7%.
Gross margin commission structure
The gross margin commission structure is a subtle variation of the revenue commission plan. It takes into consideration the expenses incurred by the company for every product that was sold. In this structure, salespeople are entitled to a stipulated commission rate. But instead of receiving a percentage of the sales price or revenue, they calculate their commission using a percentage of the profit after deducting the overhead cost incurred through the sale.
An example scenario would be, if a set commission rate is 5% and the salesperson sells a car worth £5,000 but the expenses associated with the sale totals £1,000. This means that the company only made a profit of £4,000. The commission of the employee then becomes £200.
Straight commission plan
In a straight commission plan, salespeople don't earn a base salary, they strictly based their earnings on the commission received from sales made. This is one of the most unpopular commission structures and is often adopted by companies or startups that don't have too much capital and high-performance salespeople. It's also known as 100% commission.
Draw against commission
In the draw against commission models, employers offer sales representatives a guaranteed amount of commission every month, irrespective of how many sales they make. They do this in the belief that salespeople shall, in the future, make more sales to cover for the draw in sales commission. When this happens, they can deduct the draw from the pre-paid commission.
Jobs that usually earn sales commission
Usually, the jobs that often pay their employees commission are sales-based. Below are some of the most popular sales-based jobs where you can receive commissions on an hourly rate, standard salary or even 100% commission:
Real estate brokers
The real estate agency is a classic commission sales job. They help clients to either rent, buy or sell their properties. The person who bought the property often pays a commission price, and both the buyer's agent and the seller's agent are entitled to a certain percentage of the total sales made from properties they sold. But sometimes, instead of percentages, real estate agents can also charge fixed rates for different services.
Travel agents help groups and individuals to plan, prepare and book their travels. This includes transportation, activities and lodgings for day trips and group tours. They even help you plan alternatives if your plans change. Often, the vendors who provide holiday packages for visitors and tourists compensate the travel agents with commissions based on what they sell. These commissions are intended to entice travel agents to choose their services and properties over their competitors and encourage their clients to do so, too.
Stockbrokers receive a brokerage commission fee when they trade financial commodities and securities. Usually, it is the investor who is buying and selling the securities that pay the stockbrokers their commission. Depending on the account's size, they can make a percentage of the flat fee or a stock trade. However, there is no fixed rate for these commissions, as they vary from one brokerage firm to another.
Related: How To Become a Stock Broker
Insurance sales agents
Insurance sales agents sell various types of insurance their company offers. This could either be for auto, life, health or home insurance and for every policy they sell, they receive a commission rate. The percentage of this commission rate is often higher when it is for a client signing up for a new policy and lesser when the client is simply renewing their existing policy.
Advertising sales agents
Advertising sales representatives sell advertising space such as billboards, radio ads, website ads or television commercial slots to companies, businesses and individuals. They also help companies to create their advertisement copy and design their ads. Their responsibilities therefore require them to maintain customer accounts and make sales presentations. For all of these, they're entitled to a commission rate subject to the agreed commission structure.
What is a sales commission agreement?
A sales commission agreement is a legal document signed by a company and a salesperson that sets out the salesperson's compensation structure. It also highlights the commission plan to be adopted by the company when paying the salesperson for the job done. Likewise, it outlines the terms of employment and the working relationship that shall exist between the employer and employee.
Key elements to include in a sales commission agreement
Sales commission agreement helps employers and sales representatives to consent to specific job responsibilities, compensation and commissions. Here are six key elements that need to be included in your sales commission agreement:
In this section, the company endorses you as having the right to sell products and services within stipulated territories on behalf of the company. The employer also sets the price for the products and prohibits the reselling or rebranding of their products.
Example: Royal Holdings endorse Taylor Smith to sell buildings on behalf of Royal Holdings within the cities in London as defined in Appendix B of this document and shall set the price for the buildings.
Here, the salesperson agrees to use company approved documentation and tools in recording their sales activities and uses this information and their sales tracking system to update their sales information.
Example: Taylor Smith shall track all sales using Royal Holdings Sales Tracking System and shall bring up to date their sales information before the close of any business day.
This clause requires the employee to refrain from selling any product or service that is similar to that sold by the company within a certain number of weeks or months after they leave the company's employ.
Example: Taylor Smith shall not sell any product similar to that sold by Royal Holdings for at least 6 months after leaving the employ of Royal Holdings.
This clause enjoins the salesperson not to disclose the company's intellectual property, trade secrets or confidential information to any individual or organisation.
Example: Taylor Smith shall under no circumstance share with any individual or professional Royal Holdings' intellectual property or confidential information as enunciated under Appendix C of this document.
This is where the commission structure is determined. Here, both the employer and sales representative decide the commission, bonuses and performance incentives as part of how and when they're to be paid.
Example: Royal Holdings agrees to pay Taylor Smith an annual base salary of £25,000. Likewise, Taylor Smith shall be entitled to 5% of the profit made from every sale.
Contracts exist upon agreements. Hence, both the company and its representative and the salesperson agree to all the decisions outlined in the sales commission agreement.
Example: Both parties are in agreement with the terms and conditions stated therein in this document.
Royal Holdings Representative: Davies Atkinson, 20/08/21
Sales Representative: Taylor Smith, 20/08/21