Know-How Exchange : Career/Training

Depends on what you negotiate. I prefer the gross method because companies have a way of adding in "special" costs that reduce the net....like a new car for the boss.

Michael

Matt,

I've seen it done both ways. Most reps prefer to have it calculated on gross for obvious reasons. However, a comp plan can influence behaviors. If a company has a problem with reps "giving away the farm," a comp plan that is based off of profits can make sense.

That said, your last comment about the "extra costs" being added in is troubling. I've never seen a company apply the overhead costs to individual sales.

I've heard sales rep turnover is roughly 30% every year. Obviously that varies by industry, but companies are always looking for good reps to replace the ones that aren't performing.

If you aren't happy with where you are, I would recommend getting your resume together and at least looking to see what else is out there.

Good luck!

Melissa

If you are an independant agency - seperate company who covers an area for the manufacturer - it is almost always based on top line sales.

If you are an employee of the company, then the commission plan can vary. In the world of wholesale distribution, the commission plans are based on gross margin (which is the difference between buy and sell cost). And, in some instances, commissions are only paid on accounts which pay their bills in a reasonable amount of time.

I would really hesitate to ever sell based on profits (which should not be confused with gross margin explained above). Here is the reason why, typically sales people have very little control of factors such as corporate overhead and employee pay.

Dear Matt

Remuneration via commission depends on a whole raft of company policies and the formula will vary depending on whether you receive a retainer, a basic salary or get paid entirely on commission. It is also affected by the gross margin on the products you sell, how you calculate gross margin and how the expense overheads of marketing and sales management are costed.

It is also worth noting that many companies do not like to reveal their operating margins and their marketing spend, on the assumption that these figures would be of use to a competitor and of even more use to a sales rep that is negotiating a better package.

Certainly, paying a percentage of the gross revenue on a sale can actually reward weak negotiation and it is worthwhile remembering that any discount offered by a rep to secure a sale comes off the bottom line for the company, not just off the headline figures. Ultimately this could result in weak sales people winning large orders which lose their employer money – you can go bust doing that! Paying commission on a gross figure must go hand in hand with a well managed discounting policy which must be enforced on pain of dismissal.

If margins are made public, then it is still possible to remunerate on the sales value – as I used to do when managing 15 sales people and 120 independent distributors. If they wanted to discount price to win an order, I would calculate the lost margin and insist that the pain was shared equally between the rep and the company.

In answer to your question about what expenses can be included in a commission payment, the easiest method is to take the cost of making something, ex-factory or if you are a distributor, the price at which you buy in goods to be sold. Whatever margin is then left is then used to pay for sales and marketing activities and one of these costs of sale is the commission payable. The maths is quite basic, but a simple spreadsheet with some simple VB rules (To accommodate different commission points) should be able to factor in all the variables so that both reps and employer are appropriately remunerated.

Best wishes

Steve Alker
Xspirt

does it really matter? If you are earning over $100,000 a year, and the business is ethical, and you are having fun, and the company is a joy to work with, then why should you complain about the way commissions are calculated? On the other hand, if you can not earn enough money to pay your bills, and the people you work for are jerks, and you can make more money by working for a competitor, would it make sense to stay just because the company has a reasonable commission plan?

If you are not happy about the amount of money you're making, one option would be to complain about the structure of the commission plan. But it would probably be better for you to focus on increasing your sales, and to keep your eyes out for a more lucrative position.

Good luck.

Matt,

As Steve mentioned, commission based on sales allows for "giving away the store" to make the sale. If you have price negotiation power, then based on profit makes you look twice before OK'ing a huge price reduction. You reap what you sow. However, if you don't have price negotiation ability, them what's the difference? You think they arrived at 10% profit and would then make it 10% sales??? They are paying you dollars not percents - what they think you'll take, possibly considering what's competitive, but maybe not. If they changed it, as you suggest to a percentage of sales, I guarantee they would change the percentage. Suppose the product margin is 50%. A product is $100 and profit (defined as net profit - after all the lights and heat are paid) is $50. You make $5. Now, they change to a percentage of sales. I would BET you that the percentage would change to 5%. So on a $100 product, you make...$5. OK. Let's make it profit based without overhead. On that $100 product, the profit not including cost of overhead items is $80. They will pay your commission based on that. I'm saying the rate would be 6.25% - for a commission of (drum roll)...$5.

I can see why you'd want your commission to based on SALES - and oh my the way, at the same rate. YOU make more! Hey, I'd like to make more. How 'bout you to mail me $100 for this answer! Don't you think that's fair? You can find my address my profile. I take cash, check, charge, or Paypal.

The dollar value of commission you're going to get is what it is. You want more money, go sell more. Or if you are an independent rep, go rep another company that gives you more dollars for the same or less effort. If they don't pay you enough, you can spend your time on other companies' products/services who make it more worth your while. If you are a "company" employee, go down the street to sell for another company. They lose an experienced sales person and maybe the book of business you developed - because you'd take it with you. That's where YOU have the power.

I hope this helps.

Wayde