Sales and commissions are so linked, it can almost be a guaranteed part of total compensation for most sales representatives. The tricky part is that there are hundreds of sales commission types available for sales managers to pick from or design. It is so easy to get caught up in the tiny details of commission plans, but in the end, compensation strategies stem from just 4 major methods. So let’s start with the top 4 sales commission types to better break things down, simplify, and demystify sales compensation:
1. Revenue Commission
Revenue commission is a compensation plan where sales representatives receive a certain percentage of all revenue that they bring in. For example, if a commission is set at 5% total revenue and a sales rep brings in $100,000, the sales representative’s total commission will be $5,000. It’s that simple.
Now, things of course will look different across industries and even for each sales representative on your team. That’s the beauty of a revenue commission plan: you set the terms and revenue percent for each team member. You get to decide what would be most motivating for each employee at each level of professional role.
2. Gross Profit
Gross profit is another type of commission that pulls compensation from a percentage of total profit made on a sale. What is gross profit? If a sales representative sells a technology package for $1500, but it’s cost basis is set at $1000, that’s a total gross profit of $500. A sales representative may then get a percentage of the total gross profit on the sale. Usually these percentages range from 10-50%. So anywhere from $50-$250 could be the total commission made on the sale.
Gross profit compensation plans can benefit both the company and the sales representative. In spreading gross profit out, businesses can retain as much of the gross profit as possible while incentivizing employees.
3. Placement Fees
A placement fee is a type of sales commission that involves a set amount monetarily earned for each unit sold. It often occurs in auto sales, and as each unit (car) is sold, sales representatives receive a set amount that is added as additional bonuses at the end of a fiscal year. If a placement fee is set at $500 per unit sold (per car), and a sales representative sells 10 cars, that’s $5000 in commission.
Placement fees typically are added as additional bonuses and not the only component of a compensation plan. In companies with only a placement fee plan, there is often high turn-over rate among the sales representatives due to the fixed nature of commission.
4. Revenue Gates
Certain plans incorporate revenue or performance gates that reward the highest achievers. Check points and performance objectives can drive sales representatives in self-competition, but these plans can be complicated. Typically, these plans are modeled so that the more a sales representative sells, the more they earn each sale.
Here’s an example of a revenue gate plan:
|
Step |
Revenue Sold |
Profit Percentage |
|
Step 1 |
$0 - 10,000 |
8% |
|
Step 2 |
$10,001 - $50,000 |
10% |
|
Step 3 |
$50,001 + |
15% |
These plans can be complicated, but can effectively incentivize employees while providing the most efficient use of revenue.
Understanding commission plans can be challenging, and picking the right type of compensation plan for your team can feel overwhelming. Let Blitz help. With almost 2 decades of experience, we provide businesses with the information and tools they need to make the best decisions for their teams. Check out Blitzrocks.com today to speak with one of our representatives about how our commission plan software can further simplify your compensation plan processes.