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How to create an effective sales commission strategy

Companies implement sales commission strategies to incentivize their sales teams and drive revenue growth. By offering financial rewards tied to performance, these strategies motivate salespeople to meet or exceed targets, align their efforts with business goals, foster healthy competition, and attract and retain top talent. Sales commissions provide flexibility in compensation, enabling companies to reward high performers generously while controlling fixed labor costs. They also boost morale, encourage upselling and cross-selling, and adapt to changing market conditions, making them a powerful tool for achieving sales objectives and overall business success. Plentive creates individualized incentive plans for every employee.

Creating a sales commission strategy requires careful planning and consideration to align the interests of your sales team with the goals of your organization. Here are some helpful steps to create an effective sales commission strategy:

How to Create an effective sales commission strategy

  1. Define Clear Sales Objectives:

Start by outlining your company’s sales objectives and goals. What do you want to achieve through your sales team? This could include revenue targets, market share goals, or specific product/service sales targets.  We believe creating team and individual objectives is crucial.

2. Understand Your Sales Team:

Understand your sales team’s composition, including the size, experience, and skills of your salespeople. Different team members may require different commission structures.  Having team leads help create individual team members and team goals is necessary.

3. Determine Compensation Philosophy:

Decide on your company’s compensation philosophy. Are you aiming to motivate high performers, retain top talent, or encourage specific behaviors (e.g., selling high-margin products)? Your philosophy will influence the design of your commission plan.

4. Set Commission Structure:

  • Choose a commission structure that aligns with your objectives and philosophy. Common structures include:
  • Straight Commission: A percentage of the sales revenue.
    • Tiered Commission: Commission rates increase as sales targets are met or exceeded.
    • Profit Margin-Based: Commission based on the profitability of the sale.
    • Team-Based: Encouraging teamwork and collaboration with shared commission. Bonuses and SPIFFs: One-time incentives for specific achievements

5. Set Commission Rates: Determine the commission rates for different sales roles and products/services. Consider market standards and the competitive landscape. Ensure that the rates motivate your sales team to meet or exceed targets. 

6. Be Transparent and Communicate the Plan:

Clearly communicate the commission plan to your sales team. Ensure they understand how they will be compensated, what’s expected of them, and how performance will be measured.  Sales software’s provide excellent data and feedback for your team. They can see where they stand and you can set the metrics together.

7. Monitor and Measure Performance:

Implement a system to track and measure sales performance. Regularly review progress against quotas and targets. A sales commission software comes in handy here. Interested in learning about Plentive? Schedule a demo now.

8. Review and Adjust:

Periodically review the effectiveness of your commission strategy. Make adjustments as needed to align with changing business objectives, market conditions, or shifts in your sales team’s performance.

Remember that a well-designed commission strategy should motivate your sales team, align with your company’s goals, and be adaptable to changes in your business environment. Regularly evaluate and refine your strategy to keep it effective and competitive.

Download our FREE guide: Commission Plan Optimization: 5 Top Tips

What is the standard sales commission rate?

The industry average for sales commission typically falls between 20% and 30% of gross margins. At the low end, sales professionals may earn 5% of a sale, while straight commission structures allow a 100% commission.

But There is no one-size-fits-all standard sales commission rate, as it can vary significantly depending on the industry, company, type of product or service being sold, and the specific sales role. Sales commission rates are typically determined by the employer and can be based on a variety of factors. However, here are some general guidelines:

  1. Industry: Different industries may have different commission rate norms. For example, industries with higher-priced products or services might offer higher commission rates.
  2. Type of Sales Role: Inside sales, outside sales, B2B (business-to-business), B2C (business-to-consumer), and sales management positions may have different commission structures.
  3. Product or Service: Commission rates can vary depending on whether the product or service is a one-time purchase, a subscription, a high-margin item, or a low-margin item.
  4. Sales Performance: Many companies offer a tiered commission structure where higher sales performance leads to higher commission rates.
  5. Base Salary: Some salespeople may have a lower base salary with higher commission rates, while others might have a higher base salary with lower commission rates. We love giving employees the choice. Would they prefer a higher base or higher commission?
  6. Market and Competition: What other companies in the same industry and region are offering can influence commission rates.
  7. Negotiation: In some cases, individual salespeople may negotiate their commission rates as part of their employment agreements. Plentive always suggests negotiating bonuses as part of your contract,

Common commission structures include:

  • Straight Commission: Salespeople earn a percentage of the total sales they generate. For example, if the commission rate is 10%, and they sell $10,000 worth of products, they earn $1,000 in commission.
  • Base Salary Plus Commission: Salespeople receive a base salary in addition to commissions. The base salary provides financial stability, while commissions incentivize performance.
  • Tiered Commission: Commission rates increase as sales targets or quotas are met or exceeded. This structure can motivate salespeople to achieve higher sales levels.
  • Draw Against Commission: Salespeople receive a regular draw (like a salary) against future commissions. They need to earn enough commission to cover the draw, or else it may be deducted from future earnings.
  • Bonuses and SPIFFs (Sales Performance Incentive Funds): Some companies offer one-time bonuses or SPIFFs for achieving specific sales goals or selling certain products.

It’s crucial to review your employment agreement or discuss commission rates with your employer or potential employer to understand the specific commission structure in your situation. Additionally, commission rates may change over time, so it’s important to stay informed about your company’s policies and industry standards. We highly recommend bringing up bonuses in your interviews. Ask about the companies structure and if there are ways to earn more money.

Why should I use a sales commission strategy?

Using a sales commission strategy can bring several benefits to your organization, making it a valuable tool for incentivizing and motivating your sales team while aligning their efforts with your business goals. Here are some compelling reasons why you should consider implementing a sales commission strategy:

  1. Motivation and Performance: Sales commissions serve as powerful motivators, encouraging salespeople to strive for higher performance. The opportunity to earn more money through commissions can inspire them to meet or exceed sales targets.  We have found that when employees are working towards a goal (typically monetary) their output is incredible.
  2. Revenue Growth: A well-structured commission strategy can directly contribute to increased revenue. Sales reps are incentivized to close more deals, upsell, cross-sell, and focus on selling high-margin products or services. This can often be called pay for performance. When an employee is receiving benefits for selling the product, they often sale more. The sweeter the benefit, the more output from the employee.
  3. Alignment with Objectives: Commission plans can be tailored to align with your company’s specific objectives and priorities. You should design them to encourage sales reps to pursue strategies and behaviors that are in line with your business goals.  Always be clear with those company goals from the start. Let your employee know what your goals are for the company as well as for them as an individual.
  4. Attracting and Retaining Talent: A competitive commission plan can help attract top sales talent to your organization. It can also play a role in retaining high-performing salespeople who are motivated by the opportunity for higher earnings.  To put it bluntly, when an employee is making a killer commission, why would they leave?
  5. Healthy Competition: Sales commissions create a competitive environment within the sales team, driving individuals to outperform each other. This healthy competition can lead to innovation, improved sales techniques, and better results.  If for any reason you feel it has become unhealthy between team members, scale back and re-evaluate ways to create healthy competition.
  6. Focus on Key Products/Services: Commission plans can be structured to emphasize the sale of specific products or services that are strategically important to your company’s growth and profitability.  We love our software for this. Each individual metric can align with a commission. Schedule Demo now.
  7. Variable Compensation Flexibility: Sales commissions provide flexibility in compensation. You can reward high performers more generously while keeping fixed labor costs manageable, which can be especially useful during economic downturns. The more sales individuals can bring in for the company, the more they can earn. We love no limit approaches.
  8. Performance Measurement and Accountability: Commission plans typically include clear performance metrics and targets. This facilitates performance measurement and holds salespeople accountable for their results.
  9. Sales Team Morale: When sales reps see that their efforts directly translate into higher earnings, it can boost morale and job satisfaction. This leads to a more engaged and committed sales team.

However, it’s essential to design your commission strategy carefully, taking into account your business’s unique needs and ensuring that it promotes ethical and sustainable sales practices. Additionally, transparency and clear communication about commission plans are crucial to maintaining trust and motivation among your sales team.

Conclusion:

In conclusion, implementing a sales commission strategy is a powerful tool for driving revenue growth, motivating your sales team, and aligning their efforts with your company’s objectives. By offering financial incentives for high performance, you can attract and retain top talent, encourage healthy competition, and adapt to changing market conditions. A well-designed commission strategy not only boosts morale and job satisfaction but also provides a clear path to achieving your business goals. It’s a win-win approach that can drive success for both your sales team and your organization as a whole.

If you’re looking for a sales commission software that can automate the entire thing, let us jump on a call and walk you through how easy it can be.

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