As a rule, there are no complications related to how an employee is compensated for his services. You yourself determine the salary when applying for a job, and that’s it! But it is not so easy to make a decision about the payment of employees of the sales department. This is where the concept of commission sales comes in.
Let’s not forget that the sales department is one of the most important and valuable parts of the company. It is sales that bring you income. Consequently, a large burden falls on the shoulders of sales representatives. They are responsible for attracting new customers and retaining old ones.
So how do you compensate them? You need to make sure that employees feel rewarded for their work. At the same time, it is very important to make sure that you do not have too high expectations. Understanding how commission sales work can make things easier for you.
What is commission sales: everything you need to know
Let’s start by introducing you to the concept of commission sales. The commission refers to a portion of your salary based on the number of sales you make. Or similar to other performance-based goals your company has chosen!
Some positions remain fully commission-based. Employees make money only when they are successful in sales. In other cases, commission sales mean only promotion. Employees receive a flat rate salary along with a small percentage of commission for every sale they make.
The way commission sales work is confusing to many. Typically, employers calculate a commission based on sales during each pay period and include it on an employee’s paycheck. Some companies take a different approach, where commission sales are made at the end of the year or quarter.
How they are calculated is usually decided at the time of the job offer. Typically, most companies follow three basic commission sales structures.
This means that the employee receives a fixed percentage of sales, or a flat rate, no matter how many sales they make. For example, if he earns $10,000 from sales and receives a 10% commission, he will earn $1,000.
In this structure, the sales rep can also receive a bonus every time they make a sale. The cost of the transaction or printing does not matter. This is called the placement fee.
This structure is mostly followed by companies that want to encourage their employees to increase sales instead of rewarding them. Employees can earn higher commissions based on how much they sell. For example, if an employee was originally assigned a $10 per hour commission sale, the amount increases to $12 per hour if they manage to sell $2,000 per week.
Sometimes employees can also be encouraged to achieve higher sales targets. The company sets milestones, and if an employee reaches them, their commission percentage increases. For example, an employee will receive a 2% commission on sales up to $50,000 and 4% on sales above that amount.
It is quite common for companies to pay out a portion of their gross profits in the form of sales commissions. This usually occurs in companies that adhere to the practice of contractual pricing.
Naturally, the seller will try to negotiate a higher price. And as a reward, he will receive more profit in the form of commissions. For example, if a product costs $6,000 but you manage to sell it for $8,000, $2,000 will be your commission.
Why commission sales are profitable and how it can be profitable
You may be wondering why so many companies follow a commission structure. What benefit does it bring to your business? In fact, there are many positives associated with it. Let’s take a look.
- First, you are basically paying for performance. They encourage the good work of your employees. When your sales force is tempted to earn commissions, they are encouraged to reach your financial goal. It also makes it easier for you to maintain your sales budget.
- They allow you to attract the best sales representatives for your company. Most people lean towards the idea of earning high commissions instead of a fixed salary. The top performers believe in their talent and therefore know they can generate enough sales to earn high commissions.
- The commission serves as motivation and encouragement for your employees. Employees try their best at work to earn more income. It also opens the way for friendly competition between your employees.
- Understanding the commission system is quite simple, and companies also do not need to make efforts to implement it. Calculating how much an employee earns also allows a better assessment of their performance.
- With commission plans, you pay your employees based on their sales. It is actually better for your company economically. If your company does not have a stable cash flow since it just started, this payment method can really help you save start-up capital.
Use commission sales to increase productivity
Commission sales can benefit your company in many ways. You attract the best talent. All your employees are interested in excelling in their work, because they have something to work for. Implementing this structure in your organization will definitely make operations and sales more productive.