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Topic: Strategy

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How To Make Sales Commission Scheme ?

Posted by mannthar on 500 Points
Dear All Experts I am looking for your highly appreciated assistance on helping me out for making Sales Commission scheme for my Company.

For example:-

If I Put Sales Target = 100,000
Sales Rep achieved = 100,000 ( Means 100% achieved target)
Sales Rep commission suppose = 2%
Sales Supervisor commission = 1.5%
Sales Manager = 2%

This calculation is based on Sales, similar calculation i can make it on Gross profit base,

But what if Sales Rep did not achieve his target 100%, he only achieved 80%, I wanted something that motivate them even they achieved 80% of targetů

Plus also I want to motivate them some scheme if they achieved more then target.
e.g target is 100,000, he achieved 101,0000 means 10% more. I will give him commission on his 10% as well.

My Real question is give me other options for Sales Scheme , Because I am not satisfying by this way to our Board of Director. Or somebody maintain a total scheme of 100% and 80% and other great options.

Could you please give me real calculation with examples with detail proposal so I can give to my Board of Directors.

Your cooperation will be highly appreciated.


  • Posted by CarolBlaha on Member
    At first glance I thought maybe your product is high volume and low margin-- cause 2% (2K on 100K) commission wouldn't motivate me at all. Then I saw your expected results-- $100K sales in a high vol/low margin product is nothing! So what is it? Perhaps this is a bonus or spiff vs commission??

    I suggest putting it all down on spreadsheet for your CEO. What would an extra $100K in volume mean for the companies bottom line-- and what portion of that can go to the reps for the company to still be profitable. Include their base. Then do several "what if" scenarios. Try altering their plan-- less base, more commission.

    I also maintain an independent rep agency. I am paid straight commission-- no base-- from 4%- 12% on high volume, low margin items-- that is about 50% of my agency volume and nets me about 80K in commissions.

    Then I have low volume specialty items-- they pay up to 30%-- and are the other half of my biz-- same 80K here. Those are my actual last year figs. My biggest year was 325K, lowest 120K. My biggest year was 75% specialty items-- so you can see how those higher commissions can alter commission.

    As an agent, I have a "grid" on where to price projects. I am compensated at the higher end for negotiating high, and my commission slides as the company's profit does. So I'm incentized to get the job-- at a good price and not leave any $$ on the table.

    As far as "what if" the rep only achieves 80% of the volume? Well in my game, it means zero (when its a spiff vs commission). If you want to make it amiable, instead of the whole 100K, break it down in milestones and award quarterly or monthly incentives.

    Sell Well and Prosper tm
  • Posted by adammjw on Member
    I understand you 100 k is just an example.Anyway as a starting point I suggest you take gross profit or better still adjusted gross profit.By adjusted gross profit I mean profit adjusted by inventory carrying costs.
    I totally agree with CarolBlaha that the system should reflect how much money goes to the company bottom line.The more company earn the more should a sales person earn.If you need a detailed idea of how the system should be constructed contact me offline using the email address you will find in my profile.
    Getting back to your example if reaching say 90% of your target by a sales person is acceptable to the company you could think of some portion of the commission to be offered as consolation prize.


  • Posted on Accepted
    Far too many companies launch into commission plans without considering all the factors at play. In the industrial, electrical and power transmission distributor industries, changing commission is often listed as one of the biggest issues in salesperson - sales manager relationships. Wholesale Distribution companies use a number of different commission structures.

    Here are some points to consider:
    1) What do you really want to achieve with your commission plan? Commission plans improperly conceived drive sales of the wrong products.
    2) Will the same plan work for everyone? Companies always have good territories and bad territories. How do you balance these?
    3) How often do you plan to change the commission structure? Remember changing the structure is always a point of potential conflict.
    4) Do you ask your salespeople to do non-sales things? If so, what will you say when they tell you they are doing these "for free" and consider them a waste?

    Now after these thoughts:
    I prefer to pay on gross margin.
    I prefer to pay after the company has been paid.
    I prefer to have noone on 100% commission.
    I prefer to have an agreement that commissions will be revamped every 2 years.

    Building commission plans is one of the easiest ways to create long term conflict. Contact me via my profile if you would like to chat further.

    Frank Hurtte
    River Heights Consulting
  • Posted by CarolBlaha on Member
    Interesting-- most true salespeople will ONLY be paid straight commission. No ceiling, and once they get a taste, they won't go back. I dont' know of a single good sales rep who would do otherwise. Why do you need a base if you are producing?? Would I have ever made 300K on a base? I think not

    And, I am usually paid before the co is paid. I dont handle receivables. All my co's invoice-- they decide who is credit worthy and who isn't I have an occasional dead beat, but very very few. Granted, I can be back charged--but after the fact and only my commission. Most co's admit its their error and let it go. (non official policy)

    Sell Well and Prosper tm
  • Posted by mannthar on Author
    Thank You so much Ladies & Gentleman, i heartily appreciate your response so promptly.

    I agree with you tht commisions should be paid on gross base.

    But what i was looking to having more options as Board Director requested from me. By the way all figures that i mention is just an assumption!

    About paying commisions on what invoices that i received is also a good idea, surely not every customer paid on cash.. it will be on some credit, so how they system will work if we are having this option ?

    I think by this exchanging views we will have more options !

  • Posted on Member
    Hi mannthar,
    All the valuable feedback you got is from a US-based perspective. In Europe we do it a bit differently.
    My "how-to" would look like this:
    - first determine how much your cost of sales should be (based on budget)
    - assuming you want to stimulate overachievement, then you should plan for giving accelerators for overachievers (130% will get your sales people twice the commissions at need to skew this!!!) and not paying any commission below a certain threshold (like less than 80% or less than 60% achievement will get you no commissions, only base salary)
    - also you need to give a team based bonus (a good split is typically 80% your own result and 20% team result)
    - last (but not least), non-revenue oriented compensation (again 80% of the individual target should be based on individual sales figures and 20% should be based on non-revenue related issues) for instance: - actually participating in the courses mentioned in the personal development plan made at the beginning of the year - actually participating in the coaching/mentoring sessions mentioned at the beginning of the year ... - etc

    The figures are for you to fill in, I don't know your business...but this framework did well for me

    Ciao, Gian
  • Posted by CarolBlaha on Accepted
    When I have been paid "after" payment is received, the invoices are tagged as my sale, put in my accounting as pending commissions-- and released after payment. Its a minor accounting issue that is not hard to manage at all.
  • Posted by adammjw on Member
    I think what CarolBlaha said is only natural.Cannot imagine companies paying sales reps or inside sales persons for giving away their products.
    Mathhar, what do you mean by more options? Mor systems than one,a combination of salary and comissions, commission only system,bonus system?

  • Posted by melissa.paulik on Member
    I do like the idea of having marketers on incentive comp plans, but not everybody should be on a "commission" plan. It can widen the gap between sales and marketing and encourage even more finger pointing than before.

    I would suggest that you give marketers who are responsible for lead generation their own quota of opportunities that they need to generate. These should be "opportunties" as jointly defined by you and the sales team. In other words, these aren't just names, but leads that are qualified according to certain benchmarks you have set e.g. active project, ready to talk to sales, right target market, or whatever makes sense for your business.

    Defining an opportunity is critical to stop the finger pointing between sales and marketing. You might want to refer back to an article I wrote on my blog Leads are For Marketing. Sales Wants Opportunities.

    If you are trying to incent marketers that are doing things other than lead generation, I favor quarterly MBO goals. You could also have a bonus plan that everyone shares in if the sales team surpasses 100% of quota for the year. Those types of annual incentives can get everybody really focused at end of year. However, doing them more often can easily dilute the excitement and the incentive quickly gets ignored.

    All the best!

  • Posted by srbrts70 on Member
    Thought I would add the following article to the mix, If you're looking for real examples/calculations for your presentation, it might be worth downloading their Sales Compensation Plan Template (link found at the end of the article). It isn't that expensive, and is an Excel spreadsheet that would allow you to run different scenarios out to demonstrate the numbers to your Board.

    Hope it helps.

  • Posted on Member
    Salary-plus-commission is the way to go. This way, you can minimize the cost of employing sales folks who aren't performing. In a recession like this one, no one wants to fire people. We're friends with our employees! We want them to succeed in their jobs, and for both the company and them to profit as a result. But, if they're not performing, you can't be expected to sustain the costs of their employment indefinitely. Anyways, there are a whole slew of other problems associated with sales commissions. If you miscalculate commissions, or fail to pay them in a timely fashion, you will discourage your sales people. One way to avoid these problems is to use automation software. I use Nirvaha's commission software to deal with my commission calculations. They also make quote software and
    billing software. There's tons of software that gets this done out there, but this is the best I've been able to find.

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