Using Sales Commission Structure to Motivate Behavior
Employers should design an effective sales compensation plan that rewards the behaviors the organization needs to promote. For example, if the inside sales team works with the same customers and any sales representative can take a call or respond to a customer request for a quote, you wouldn’t want to pay sales commission based on individual performance.
Instead, you would want to share sales incentives equally among team members to encourage a teamwork spirit. People working in a shared environment tend to help each other regularly. Paying individual sales commissions in this collaborative environment will result in discord and a focus on the wrong selling behaviors.
Note: Sales commission is effective for individual performance because it allows employees the opportunity to earn additional compensation that rewards their efforts, particularly their achievements. Many find this recognition rewarding and fulfilling both personally and professionally.
Why is a Base Salary Paid for Sales?
Employers typically pay base salaries for sales along with sales commission. Salaries acknowledge the reality that a sales employee’s time is not fully utilized in direct selling. There are other aspects of the job that need to be compensated for sales employees to complete.
These tasks may include entering sales into a tracking system, inputting customer contact information into the company’s shared database, gathering names for contact lists, and networking with potential customers at industry events and trade shows. They may also include following up with buyers of their product or service to gauge how well their needs are being met. (These calls may also include requests for suggestions for improvement.)
Note: Base salaries may also vary from company to company depending on the level of support and service that is expected from a sales representative in helping the customer learn how to use or integrate the product. While some companies have additional staff in technical support or customer service roles, others expect this tracking and teaching to come from their sales force.
How Does Sales Commission Work?
Depending on the compensation system, a sales commission may be paid to the representative based on a percentage of the sales value, such as 3% of the total sales price, a standard commission on any sale like $500 for each sale exceeding X sales in a week or month, or a percentage based on total department sales for a specified time period.
Note: In a sales commission plan based on a percentage of sales, the sales commission can increase or decrease with rising sales volume. This is important because you want to encourage sales employees to increase sales. You don’t want representatives to become complacent with producing sales at a certain level when your goal is to grow your company.
Depending on your company’s culture and your expectations of employees, employers may choose to pay a standard bonus to all employees when sales exceed a certain dollar amount. Employers can also pay a bonus based on a percentage of increased sales.
Note: This cultural model emphasizes that while the sales representative may have closed the actual sale, customer service, training, and technical support have educated the customer on how to use the product. Marketing brought the customer to the door until the sales representative had the opportunity to make the sale. Engineering designed and manufactured the product, and so on.
Note: Employers may also choose to reward employees with quarterly profits where a percentage of sales is distributed to employees to reward and appreciate their efforts. In a profit-sharing system, the employer communicates that profitability is the responsibility of every employee. Whether the employee is making direct sales or controlling costs or improving core processes, every employee is rewarded for their contribution to the company’s success.
Plan
Tiered Commission
In a tiered commission plan, the sales commission amount increases as the sales representative sells more of the product. For example, for sales up to $25,000, the sales team receives a 2% commission. For sales between $25,001 and $50,000, the sales team receives a 2.5% commission. For sales between $50,001 and $75,000, they receive 3%, and so on.
The tiered commission plan encourages employees to achieve a continuous increase in the amount of product sold. It also provides sales staff with an additional incentive to sell new products and upgrades to existing products and to stay connected with recurring potential customers.
Draws
In the case of draws on future sales commissions, the employer pays the sales employee an amount of money in advance. The employer assumes that the representative will sell enough products later to earn further sales commissions from the drawn amount. The draw amount is deducted from future commissions.
This is a commonly used tool when a sales employee starts a new job in an organization. It allows the sales employee to have income before they achieve sales qualified for commissions. It is assumed that the employee will take some time to familiarize themselves with the products and make connections, and so on.
What is a Sales Quota?
A sales quota is the cash amount of sales that a sales employee is expected to sell within a specified time frame, often a month or a quarter. A sales quota can motivate the sales employee to sell more or may negatively affect employees and cause significant stress.
Note: You can set a realistic sales quota by looking at the average sales per employee in the department and negotiating flexible targets from there. How to set a sales quota, whether the sales quota is a moving target, or whether it takes factors like the state of the economy into account, impacts the level of pressure and motivation of your sales force.
Sales quotas can encourage and motivate sales staff to achieve higher sales, as people want to know what the goal is, and provide clear expectations to management about what constitutes success in sales within your company.
Sales quotas can encourage poor customer treatment and lack of follow-up with customers — functions that are not considered part of achieving the sales quota. They can also lead to employees not completing necessary job components that do not earn commissions, such as updating customer databases, seeking sales opportunities, and maintaining customer relationships.
How to Pay Sales Commissions
You should pay sales commissions to employees in their regular paycheck after a sale is made. Another model pays commissions monthly. It is unfair to ask employees to wait until the customer pays in order to receive their commissions. The employee has no control over when the customer will pay the invoice.
It diminishes the enthusiasm and morale of the sales representative to have to wait to receive their commissions. In fact, if sales commissions depend on any factor outside the employee’s control, you risk dismantling the motivation and positive engagement of the employee in an environment of disengagement.
By paying the employee after a sale is made, you enhance the employee’s motivation to continue producing sales.
Conclusion
A thoughtfully designed sales commission strategy will help your sales team produce the sales that drive company growth while performing the essential tasks required for the job. A sales commission plan can also reward other team members for the role they play in the sales team and the success of the company.
Updated by Lars Peterson
Source: https://www.thebalancemoney.com/what-is-a-sales-commission-1917856
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