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Mar 28, 2018 | David Johnston lock

For many sales pros, the money earned on commission works out to be the bulk of their sales compensation. Therefore, when it comes to salary negotiations, it makes good sense to have an excellent understanding of the different types of sales commissions and just what a good package looks like. It’s in your sales manager’s best interests to provide you with a fair compensation and commission package: sales commission is the carrot that motivates a sales rep to great sales performance. Here’s what you need to know about the different types of commission so you can understand the commissions you deserve.

Commission Only vs. Base + Commission

While it varies from industry to industry, the most common situation is a balance between base salary and commission and for good reason. Commission only roles have a high turnover rate and while they do have some benefits - unlimited earning potential for example - they are not necessarily the highest paying jobs out there. If you are being offered a commission only role, make sure you understand whether or not there are commission caps and how these might limit your earning potential even if you are highly successful.

Another thing to consider is whether or not the company is offering a benefits package. Often, commission only sales reps are considered independent or contract reps who aren’t eligible for a benefits package.  If your position is considered to be a contract basis, make sure you have the freedom to sell other non-competing products or services as long as you deliver your expected results. This can open you up to a whole other revenue stream.

The reason why many sales managers and reps prefer a base salary plus commission package is that you are able to get by financially on your base salary but the commission rate is the incentive to earn more. This is often considered to be a “fairer” structure, since the rep doesn’t have to stress about putting food on the table and a roof over their head but they are still incentivised to work hard.

Revenue Commissions

Revenue commissions are frequently offered in the “base salary plus commission” compensation structure. Quite simply, you receive a set percentage of all the revenue you generate. So if your commission is 5% of revenue and you sell $100,000, your commission payout will be $5,000. Simple. These types of commission plans are great and highly profitable if you are selling high-value items but are less attractive if you work in retail where the revenue you generate is naturally much lower.

And yet, while they might sound simple, they are also frequently offered in conjunction with other compensation types and targets. Look carefully at all the measures upon which your sales performance may be measured. For example, it may be that your commission rate is on revenue, but the rate varies depending on whether revenue is from new business or a specific territory etc. Take a look at the specifics you need to look for in your sales compensation plan.

Gross Profit Commissions

If you commission is based upon gross profit it means that rather than earning a percentage of total revenue sold, you only earn commission on the difference between the product price and the selling price. It’s understandable why companies like this type of commission structure: it helps them maintain healthy profit margins. But if you are going to be successful here, you need to be a strong negotiator. If you are constantly having to slash prices to make a sale, then your  earning potential will be significantly lower than if you were in a revenue-based commission structure. The plus side to these types of commissions is that they are often offered at higher rates - up to as much as 50% of profit. If you are confident in your negotiation skills, these types of commissions could work in your favour.

Revenue Gates

If you are a high performer, then commissions with revenue or performance gates structures will be most profitable. In a nutshell, the more you sell, the more you earn per sale. It might work something like this. If you generate up to $10,000 in revenue, then you’ll earn 1% commission; if you generate between $10,001 and $20,000, you’ll earn 3%; if you generate $20,001+, it’s 7%.

Placement Fees

Rather than a percentage, placement fees offer a set amount per unit sold. These may work in your favour if you are selling lower ticket items.

In figuring out how good your plan or potential commission plan is, it is important to take into consideration the industry you work in and your own strengths and weaknesses. If you sell specialized products or services AND you are a great negotiator, gross profit heavy plans may be best. If you sell inexpensive items but can bring in large volumes, then placement fees or revenue gates would be more attractive. Whatever the situation, make sure you truly understand the fine details of the sales compensation plan in front of you so you don’t get any nasty surprises when it comes to your commission cheque.

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About the author: David Johnston is the founder and CEO of Sales Resource Group Inc., a leading consulting company with extensive experience in the design and development of sales compensation programs for organizations across North America and around the world.

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