A sales commission is a compensation given to salespeople for reaching or exceeding a specified sales target. A salesperson usually has a base salary which is given by the employer regardless of the number of units the salesperson sells.
In most cases, however, a salesperson is given a promise of extra cash if a certain sales figure is reached. An employer might set different levels for different commissions so that the higher the sales, the bigger the commission.
Sales commissions serve to incentive employees to put extra efforts as well as recognize and reward top-performing salespeople. Offering employees commissions has proven to be a great way to motivate employees and achieve higher sales of commodities.
The essence of a base salary in addition to commissions
Some argue that a salesperson should only be paid in terms of sales commissions without the base salary. While this is the case for some salespeople, many employers know that not all the employee’s time is spent while directly selling the product.
There are other aspects of salesmanship that an employee needs to be paid for too. Such include entering sales records into the system, collecting customer information, as well as offering training to customers on how to use the products.
Types of sales commission plans
There are three types of sales commission plans that come with a basic salary and another type of commission plan that does not come with a basic salary.
1. With basic salary addition
- Gross commission plan – in this plan, the employer pays the employee a specific percentage of total sales in a month. For example, an employee who makes $25,000 annually in base salary may be offered a 3% commission on the sales he/she makes per month. If the total sales in one month total $9,000, then the commission per month is $30.
- Tiered commission plan – a tiered commission plan rewards more for bigger sales. It works by increasing the percentage commission as the total number of sales increases. Employees may be offered 3% for up to $10,000 in sales, then 5% from $10,001 to $15,000 and 8% for sales above $20,000.
- Multiplier commission plan – this has a great semblance to the tiered commission plan only that the sales commission may be influenced by another product line. For instance, an insurance salesperson may be offered 5% on all vehicle insurance sold. If the same salesperson is able to sell 5 home insurance simultaneously, then the vehicle insurance commission may increase to 10%. The multiplier is the home insurance.
2. Without basic salary
- Straight commission plan – the salesperson has to depend solely on the commissions from sales. This is very common with realtors.