At its core, an organization’s sales commission structure determines how much each individual sale will be worth to its salespeople. Sales leaders need to consider factors like how much budget they can allocate to commissions, how much they will pay for different levels of sales output, base salaries of employees, and any potential bonuses or incentives they will offer.
In this post, we’ll discuss the benefits and drawbacks of offering straight commission plans to your sales team.
Types Of Commission Plans
While a straight commission plan may work for some businesses, it’s important to understand that many other types of commission plans are available. These include:
1. Base Salary Plus Commission Plan: This type of plan includes a base salary along with commission payments for reaching sales goals. This can provide stability for employees while still incentivizing them to perform well.
2. Tiered Commission Plan: A tiered commission plan sets different commission rates for reaching different sales goals. For example, an employee may earn a 10% commission rate for reaching $10,000 in sales and a 15% commission rate for reaching $20,000 in sales.
3. Profit-Sharing Plan: With a profit-sharing plan, employees receive a percentage of the company’s profits based on their performance. This type of plan can motivate employees to work towards the success of the company as a whole.
4. Team-Based Commission Plan: A team-based commission plan rewards the entire team for reaching sales goals. This type of plan encourages collaboration and teamwork.
5. Relative Commission Plan: In a relative commission plan, a rep’s commission depends on how much of a set quota they achieve. Reps receive this compensation on top of their base salary, so it gives them more security than straight commissions.
6. Absolute Commission Plan: An absolute commission plan pays based on some financial metric or specific accomplishment, and it can be stated as: “For every _____, we’ll pay you $_____. For it to be absolute, it has to have the “do this, get that” attribute.
7. Straight-Line Commission Plan: This type of commission plan works best only if the sales reps are committed to doing whatever it takes to sell their entire quota. If they only sell 75% of their quota, they’ll only receive 75% of their commissions, and if they are content with that amount, it will be hard to incentivize them to work harder to hit the 100% sales target in a straight-line commission plan.
8. Territory Volume Commission Plan: Used most often when sales teams work together with other reps to service clients and prospects in defined geographic areas. The territory volume commission is then split equally between all the reps in that territory.
9. Recoverable Draw Against Commission Plan: Paid as a draw against future commission earnings, a recoverable draw against commission is often used to help a new or first-time sales rep “get up to speed” in their role.
10. Non-Recoverable Draw Against Commission Plan: Also called a guaranteed commission plan is one that an employer “cannot or will not recover.” Any employee who earns less than the draw amount during a month’s span will still be paid the difference in the draw amount.
11. Residual Commission Plan: Residual commission plans offer payment over time due to a long-term sales contract. This allows the company to make residual payments as they come into the business and allows account managers to have a predictable income stream.
It’s important to consider all of these options before deciding on the right commission plan for your business model. Each type of plan has its own set of pros and cons, so it’s important to weigh them carefully.
In addition, it’s important to regularly evaluate your commission plan’s effectiveness and make necessary adjustments. This will help ensure that you motivate your employees in the best way possible and achieve your sales goals.
Straight Commission Plans
A straight commission plan is a compensation model where an employee’s earnings are based solely on their sales performance. In other words, their salary is tied directly to the amount of sales they generate. This type of plan is commonly used in industries where sales are the primary focus, such as real estate, insurance, and retail.
Unlike other types of compensation plans, such as salary or hourly pay, employees on a straight commission plan can earn significantly more money if they sell more. However, this also means that their earnings are not guaranteed, and they could earn very little or nothing if they are unable to make sales.
Straight commission plans typically provide employees with a base commission rate, which is a percentage of the sale price. This base rate can vary depending on the industry, product sold, and company policies. Additionally, some straight commission plans offer tiered commission rates, where employees can earn a higher percentage of commission once they reach certain sales goals.
While straight commission plans can be highly motivating for employees who are driven to earn more money, they can also be risky for companies who rely on consistent sales to stay profitable. As such, it’s important to carefully consider the pros and cons of this compensation model before implementing it in your business.
Pros Of Straight Commission Plans
Straight commission plans are becoming more and more popular with businesses, especially those with sales teams. This type of commission structure can offer several advantages over other types of commission plans. Here are a few pros of a straight commission plan that you should consider before implementing one for your sales force:
First and foremost, straight commission plans allow for unlimited earning potential. Since the commission is based on sales, your sales team can earn as much as they sell. This can be incredibly motivating for your sales team, especially for those who are driven by the potential to earn more money.
Another pro of a straight commission plan is that it provides full disclosure of potential earnings. Unlike other types of commission plans, where salespeople may not know exactly how much they stand to earn, a straight commission plan offers complete transparency. Salespeople can easily calculate their potential earnings based on their sales performance.
Straight commission plans also offer a natural community marketing approach. Your sales team is incentivized to sell your products or services to as many people as possible, which can help increase brand awareness and customer loyalty.
From an economic standpoint, straight commission plans can be more beneficial for companies, as what they pay out is tied to the revenue they’ve received. This means that companies are not paying a fixed amount to their salespeople but rather paying them based on the amount of sales they generate. This can be more cost-effective in the long run.
Additionally, straight commission plans can be very flexible, which can be a huge advantage in industries where sales are seasonal or fluctuate throughout the year. For example, if sales are slow during the summer months, the sales team can focus on other tasks or take time off without being a drain on the company’s resources.
Moreover, straight commission plans are shown to increase sales. The more a salesperson earns, the more motivated they are to continue selling. This results in increased sales and revenue for your company.
One of the main advantages of a straight commission plan is that it incentivizes salespeople to perform to the best of their abilities. Since their earnings are directly tied to their sales results, they are more likely to put in the effort required to make as many sales as possible. This can result in a highly motivated and driven sales team, which can be a huge asset to any business.
Overall, there are many advantages to using a straight commission plan for your sales force. However, it is important to consider the potential drawbacks carefully before deciding. Keep reading to learn about some of the cons of a straight commission plan.
Cons Of Straight Commission Plans
One of the most significant drawbacks of a straight commission plan is that salespeople only get paid when sales are confirmed. This means that if a potential client decides to back out of a deal, the salesperson won’t earn any commission on their efforts. This can be demotivating for salespeople, and it can take time to build a reliable client base that can consistently generate commission income.
Another issue with straight commission plans is that salespeople may experience fluctuations in monthly earnings. In some months, sales may be booming, and commission earnings may be significant. However, other months may be slower, resulting in less commission income for salespeople. This can be challenging for salespeople who need to make a consistent income to support themselves and their families.
Straight commission plans can also lead to overly aggressive sales tactics, as salespeople may feel that their livelihoods are at stake with every potential sale. This toxic independence can cause issues in team dynamics and even result in negative customer experiences. Furthermore, companies will still incur agency costs, even when sales don’t get made.
It’s also essential to consider that not all salespeople have the necessary skill sets to succeed under a straight commission plan. This can lead to high turnover rates and can ultimately cost the company more in the long run. Additionally, straight commission plans can result in unpredictable expenses for the company, as commission payments can be complicated to calculate and can fluctuate from month to month.
Finally, salespeople under straight commission plans may spend too much time servicing clients rather than seeking new sales opportunities. This can lead to neglect of selling harder-to-sell products, resulting in higher fixed sales costs for the company.
While straight commission plans can be an effective way to incentivize salespeople, it’s important to consider the potential drawbacks and weigh them against the potential benefits before deciding whether this compensation structure is right for your business.
Beware Of Small-Minded Thinking
Ultimately, whether a straight commission plan is right for your business model depends on a variety of factors, including your industry, the type of sales positions you have, and the personalities and motivations of your sales team. It’s important to consider all types of commission plans before making a decision and to tailor your plan to fit the unique needs of your business and sales team.
Unfortunately, some business owners succumb to small-minded thinking, viewing commission payouts as a drain on the bottom line. They may feel reluctant to pay large commissions, worried that their salespeople will become too comfortable or will not be motivated to continue bringing in new business. But this kind of mindset can be incredibly detrimental to the success of the business in the long run.
Rather than seeing commissions as a cost to be minimized, employers should view them as an investment in their sales team. A commission-based compensation plan incentivizes salespeople to perform at their highest level, bringing in more business and helping the company to grow and thrive. By compensating top-performing salespeople with larger commissions, businesses can motivate their entire sales force to strive for success.
In fact, businesses that choose not to pay large commissions may struggle to attract and retain top talent. In highly competitive industries, top salespeople are in high demand and often choose to work for companies offering attractive compensation packages. By refusing to pay large commissions, businesses may miss out on the best candidates for their sales team.
In the end, a commission-based compensation plan is one of the most effective ways to motivate a sales team and drive business growth. By focusing on the long-term benefits of large commission payouts, businesses can create a culture of success and attract the top talent they need to thrive.
When it comes to designing and implementing an effective sales incentive plan, partnering with us can make all the difference. Here are some ways we can help:
Low payout minimums and customer service levels: At Level 6, we understand that different businesses have different budgets. That’s why we offer low payout minimums and flexible customer service levels to fit every budget.
Expert collaboration: Our team of incentive experts will work closely with you to design and develop an incentive program that aligns with your business goals and motivates your sales team to perform at their best.
Customizable solutions: Every facet of our incentive programs is customizable, so you can create a plan that’s tailored to your unique needs and preferences.
Client-focused approach: Our team was recruited from the client side, so we always put our clients’ needs first. We’re committed to delivering exceptional service and results.
Proven track record: We’re proud to say that we’ve never lost a client project to another provider. Our incentive programs are tried and tested, and they work.
Advanced technology: Our state-of-the-art technology and streamlined processes can help you reduce management fees by 30% or more while also increasing efficiency and accuracy.
Generous out clauses: Each agreement with Level 6 includes generous out clauses for clients, so you can rest assured that you’re making the right decision for your business.
If you’re considering a straight commission plan or any other type of sales incentive program, don’t hesitate to reach out to Level 6. We’d love to hear from you and explore how we can help you drive sales and boost revenue.
Claudine is the Chief Relationship Officer at Level 6. She holds a master’s degree in industrial/organizational psychology. Her experience includes working as a certified conflict mediator for the United States Postal Service, a human performance analyst for Accenture, an Academic Dean, and a College Director. She is currently an adjunct Professor of Psychology at Southern New Hampshire University. With over 20 years of experience, she joined Level 6 to guide clients seeking effective ways to change behavior and, ultimately, their bottom line.