Sales Commission Definition: How to Determine Your Team’s Incentive Structure

When employers hire salespeople, one of their top tasks is determining the type of sales compensation to use. Since salespeople generate a commission, employers must decide the typical sales commission structure. This commission will help supplement their base salary and, in some instances, is their main income, making it a critical incentive for the sales team. We’ll look at the more popular types of commission structures and provide examples of when a particular sales strategy is best used.

Sales Commission Definition

An employee’s sales compensation can be broken down into two main parts: base wages or salary and the sales commission. The salary part is fairly straightforward to calculate and determine because it’s either a set amount per month/year or an hourly rate. However, there are different ways to structure the commission.

A sales commission definition is as follows: It is a structure of payment designed to reward or incentivize employees to achieve their sales goals. There are different sales commission rates by industry and job. However, the commonality between them is that the employee receives an additional reward based on sales performance.

Common Types of Sales Commissions Structures

As noted, there are various sales commission structures. Some common types include:

Base Rate Plus Commission

This is probably one of the more typical sales commission structures and one you may be familiar with. It includes paying the employee an hourly rate or salary plus a pre-determined commission on every sale. Companies can use this structure easily due to its flexible nature. Employers may also modify the rate to fit a sales manager’s commission structure.

Straight Commission

The straight commission is based on commission-only sales jobs. This cuts out the base salary and gives the person a commission off each sale they make. Since the salesperson isn’t getting a regular salary, the commission rate will be higher than a typical sales commission. As a result, an employer might find this structure attractive when looking to employ highly skilled or competitive salespeople.

Gross Margin Commission

The sale item’s profit is a significant consideration with a gross margin commission structure. The salesperson earns a portion of the profit only. In other commission structures, the percentage is off the total sale price. This encourages salespeople to practice their upselling techniques, and they are less likely to give customers discounts.

Tiered Commission

A tiered commission structure is exactly how it sounds — tiered with different commission rates. The salesperson starts out making a certain percentage of each sale. Then, as they hit certain sales milestones, their commission rate will increase accordingly. The tiered commission approach encourages salespeople to close more deals and exceed sales goals.

A tiered commission plan is ideal for companies who have salespeople who may reach their goals but need an extra incentive to exceed them.

Territory Volume Commission

A territory volume rate works best with a company that employs different sales teams in specific regions or territories. The organization then creates a sales goal for the territory. If the team meets the goal, the employer gives them a share of the commission.

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Creating a Typical Sales Commission Structure for Your Team

When it comes time to create your team’s incentive structure, find the best sales commission method by determining what fits your organization’s needs. Select a commission structure and amount by looking at the sales commission rates by industry. Or, if you have various companies in different regions throughout the U.S. that range in sales, you may decide the territorial volume commission works best for you. You’ll also want to see how the current structure is performing to identify if it’s working. Employers may discover where to make a change to give sales a boost.

Finally, create a sales plan with identifiable goals in mind, then look at what commission structure will help you achieve those goals. Next, track your progress to ensure you use an effective system to meet the goals. You should regularly assess the progress to see whether the sales goals align with the actual sales. If things need to be tweaked over time, you can do so based on the results.

If you’re seeking support to fill your sales position(s), iHireSalesPeople has industry-focused hiring solutions as well as an Employer resource page with additional insights, tips, and tools to support your recruiting efforts.