How do I set up a sales commission structure?
I want to set up a commission structure for two salespeople I’ve just hired. How should I go about doing this?
Firstly, you need to determine if it’s a commission structure or bonus scheme that you need to set up because the two are different.
A commission structure usually applies when you are offering someone a piece of the action. For example: X % of the gross revenue or an amount for selling X amount of product(s). A bonus scheme, however, is based on meeting fixed monthly and/or annual targets.
The usual process in putting a commission structure together would be to look at your past sales history, volume, peaks and troughs and pipeline, so that you can set your monthly and annual targets. Obviously, if you’re a start-up this can be a bit tricky.
Also think about structuring it so that you pay higher commission on the products or services that bring you in the most profit.
Offer a base salary that is in line with your industry sector. If you offer a higher base, your salespeople will not be motivated to try and achieve their targets.
Keep the commission structure simple. So many times I have heard salespeople say, ‘I really don’t understand how my commission structure works’. This can be demotivating for high achievers who will do whatever it takes to reach or exceed their targets.
Here is an example of how I structured my sales commission structure.
My industry works on a salesperson bringing in three times their monthly salary before the commission kicks in. This ensures they are covering the cost of employing them.
Let’s say their base salary is $ 65,000 or $ 5,416 per month.
They would need to bring in $16,250 in sales per month before they would be eligible for commission. It is common to tier a commission structure with incremental accelerators to entice more sales.
Typically, it could look like this:
- $16,250 - $20,000 in new sales = 10%
- $20,000 - $25,000 in new sales = 15%
- $25,000 - $30,000 in new sales = 20 %
Lastly, work out when you will pay commission. Will it be once the sale has taken place, on delivery of the product, completion of the service or when the client/customer pays their invoice?