Sales Commissions: A Complete Guide on How to Define and Structure Your Team's Pay

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Many marketing management professionals strive to generate more and more leads so that the sales team can convert them into closed deals and, consequently, revenue.

And this is all very well, but it is not the only important thing: it is also key to define sales commissions , as it is one of the main elements of motivation, which tells sellers that the more customers they bring to the business, the more money they will earn!

But what are the important points in defining this commission? teacher database And what are the main types of commissions that can be given to sellers in today's market?

To answer these and other questions, we have written this guide and we invite you to read it until the end.

What should be taken into account when setting up the sales commission model and process?
What are the types of sales commissions?
What should be taken into account when setting up the sales commission model and process?
To choose the commission model that will be applied in your company, you must make some considerations. Below we point out the main ones.

Company objectives
Before determining what type of commission you will offer to your salespeople, you need to establish what goals the company hopes to achieve in the short, medium and long term.

In this way, each salesperson will know that, beyond pursuing a commission, he or she must strive to achieve the objectives necessary for the business and that financial stability will depend on this, in addition to the delivery of greater and better incentives.

Rules
Next, you need to determine what the sales rules and commissions will be. This step is very important so that everyone is aligned and knows clearly how much they need to sell and how much they will earn from it .

Seasonality
If your business has periods where sales may increase or decrease, it's a good idea to consider these when determining your sales commission.

For example, during peak demand times, you may have a different commission scheme due to high sales volume, while you may increase incentives at historically challenging seasons to close deals.


Period between sale and payment
This point is of utmost importance for the financial health of the company. There are cases where the commission is paid to the seller at the time of the sale and others where it has to wait until the following month or wait for the purchase payment to reach the cash register first.

Knowing which of these models is most suitable is also an important part of the commission selection process.

What are the types of sales commissions?
We have compiled the main types of commissions for sales teams here so that you can choose the most suitable one for your business.

Commission for sales made
In this type of commission, sellers can receive a percentage of the value corresponding to each sale made .

Payment can be made at the time of sale, or at the end of the month, together with the salary.

This is an easy-to-understand type of commission. However, there are a few things you need to consider before setting up this commission pattern in your business.

For example: if your clients pay by credit card and you settle the commissions to your sellers at the time of the sale, you will be using money from your company's cash register, since that transaction has not yet been transformed into liquid assets.

Another example: if your product has a very high cost, the percentage determined for the commission can also be high and even unsustainable for your business finances.

Generally speaking, you need to ensure that after subtracting the commission, your profit margin remains ideal. This also demonstrates the importance of carefully reviewing your pricing strategy .

Commission and salary together
Companies that have a sales team and pay both fixed salaries and commissions usually adopt this model.

In this case, the commission can be fixed, that is, pre-established based on the value of each sale, or variable, since it changes according to the goals determined by the company.

Let's look at an example of a fixed commission. If an employee sells 10 products, he earns 5% commission. If he sells more, the commission percentage increases to a certain amount .

In the case of variable commissions, they increase or decrease according to the product price, the payment method and the credit period granted, among other factors.

The commission and sales scheme is highly recommended as it shows the worker that their work is important, and not just because of the sales they make each month.

In addition to closing deals, the sales team has many other responsibilities, such as:

sales record in CRM ;
sending emails with a commercial proposal ;
cold calling to generate new business opportunities, etc.
Pure Commission
Here, all the money the employee earns comes from commissions on completed sales .

This scheme can be applied as long as it is legal in the country in which the company operates. In Mexico, for example, if the salesperson works on a permanent basis for a company, he or she is entitled to a guaranteed minimum wage , in case he or she does not earn enough commissions.

The benefit of this sales commission model is that salespeople will strive to sell as much as they can. If they are successful, your business wins as well.

If not, your maximum expense will be one minimum wage for each, if applicable (as in Mexico).

However, if you choose this model, you must ensure that commission-only employees have all the tools and resources necessary to sell in high volumes. This requires investment in technology and training programs.

Billing commission
The billing commission is calculated based on what the company was able to bill in the previous month .

That is, the turnover is equivalent to the total amount sold and collected before costs are subtracted. So, if a business earned USD$ 10,000 in the month and the commission set for the sales team is 5%, the salespeople will receive a total of USD$ 500, which will be distributed among the entire group.

Profit Margin Commission
This commission model occurs when the seller receives a fixed percentage per sale, however, the commission calculation is based on the profit generated at the end of the month.

Gross profit is calculated using the difference between turnover and total business costs. For this reason, it is a more sustainable type of commission for the company, since the seller will receive profits on what has actually entered the company's cash register.

Let's say, for example, that your product costs $200, with a profit per sale of $100, and you have set a 10% commission on that net amount. This means that each employee who sells it will receive a commission of $10.

Commission per receipt
This is a commission model aimed at companies that make sales in installments and receive their value in installments. The advantage of this type is that it allows you to have more control over the money you receive, since the commissions are transferred to the sellers only after receiving the payment associated with the sale.

Staggered Commission
The tiered commission determines a progressive increase in the percentage to be paid to the seller. For example:

If you sell USD$ 500, you receive a 5% commission;
If you sell between USD$1,000 and USD$2000, your commission will be 10%;
and so on.
This is a model that encourages the sales team to get better and better, because the more they sell, the more they will get paid for it.

Placement fee
In this type of sales commission, a fixed amount is established as the commission that the employee will receive.

For example, a seller earns $5 in commission for each product sold. Although this is a fixed amount, it can encourage sellers to try to sell more to earn more money on the sales volume.

Limited Commission
Here, there is a limit to the commissions that each salesperson can earn. For example: if the company determines that USD$ 500 is the maximum limit that each employee receives in commissions, once that value is reached, nothing more is earned, even if the employee continues selling.

There are those who say that this type of commission is not the best for motivating the sales team , since salespeople can relax after reaching the limit, presenting poor performance.

Draw
In this type of commission, the seller receives an "advance" of money as a commission to begin selling the product or service.

The expectation is that your sales volume will allow you to exceed this initial commission, thus obtaining an additional amount at the end of the month.

Furthermore, if the seller does not reach the goal set by the business, he needs to return the money he borrowed.

While this model is good for beginning salespeople who are struggling to close sales, it can be demotivating for professionals who have more experience working with sales.

Residual commission
Residual commission is a type of commission whereby the seller continues to receive securities even after the sale is closed , as long as the customer remains active.

This model is not very common, but it can be applied to companies that work with subscription services, for example.

Therefore, on the condition that the client continues to pay for the service, the seller receives an additional percentage.

Commission by territory
For companies that work with clients in specific regions, territory commission can be a good way out. After all, it allows sales teams to focus on increasing the number of clients in a given region, and it also encourages teamwork, since all salespeople are paid for sales in the region, and not individually.

These are the main types of sales commissions that are most prevalent in sales teams. If you are about to choose one for your team, we recommend a thorough analysis of it to make the right decision.