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Paying Employees on Commission

written by: •edited by: Michele McDonough•updated: 5/19/2011

Does you business call for paying employees on commission? If so, what sales commission plan should you use? Jean Scheid takes a look at sales commission pay plans and how they work.

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    Developing Sales Commission Plans

    Toontown Planning Commission by Han Shot First 

    Are you in the sales business? Do you plan to pay your employees commission? Is one sales commission plan better than another? These are all good questions and finding the right commission plan is essential in keeping your employees happy and long-term.

    Commission pay plans are usually based on two factors, employee performance, and a percentage of what they have sold. It is possible to over-reward and pay out a percentage that is too high so what are the best sales commission pay plans?

    When developing a commission-based pay plan, think of these factors:

    • It should be simple - If your commission plan has so many tiers to achieve and wording your sales team doesn't understand, it's useless to the employee.
    • Goals - Are the goals you set unreachable? If they are, re-look at these goals.
    • Focus with teams - Decide if team focus is better than individual. This doesn't work for all commission-based pay plans, but works well in a tight sales competitive businesses like car sales.
    • It should be flexible - Never try and keep the same plan year after year, or even month after month. If sales people or teams are achieving goals time after time, they are making your business money so you can change the commission pay plan to reflect that.

    Now that you know what key items should be part of your commission pay plan, which plan is best?

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    Decide on Your Commission Pay Plan

    Commission pay plans are usually structured in one of the following ways:

    1. Low Commission and High Salary - This type of commission plan is effective for in-house sale personnel, or people who make cold contacts. Offering a higher salary so they can actually make a living and a low commission on cold calls that turn into sales is often preferable for cold-calling in-house sales. See this article for more on sales bonus programs of this type.
    2. Sales by Individuals - Simply put, sales people who sell from walk-ins at the company, pull in customers and focus on the sale itself should be paid a percentage of each sale.
    3. Territorial Sales - If you have a company that sends your sales people to assigned territories, base your commission plan on volume in each territory. If you try this, make sure you understand who your customers are and don't send your sales team to areas where competitors rule.
    4. Sharing in the Profits - This type of commission pay plan works well with sales managers. Skip individual sales commissions and pay them on the bottom line profits each month. Effective sales managers will do well with this plan if they are good at motivating and training their sales teams.
    5. Hitting the Mark - Some commission pay plans are goal oriented. You may decide that if a sales person sells up to five products they get a certain percentage, a higher percentage will apply if ten products are sold. An even higher percentage will be the option if they hit twenty products sold and so on.

    As the business owner, you will need to decide which type of pay plan works best for your type of business. Talk to other business owners who pay on commission and ask what types of plans work for them. Ask your sales team for input on what types of plans they think will work best for their lifestyle.

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    Common Commission Pay Plan Rules

    Every business owner who utilizes a commission-based pay plan will need to consider these rules:

    • Slow months - Even if your team or sales person is the best there is, you will have slow months. Keep in mind that it is impossible for your employees to live without money, so offer draws on their commissions during slow months. Draws are dollars given to your sales team and are not taxed. When they do receive their next commission pay check, the draw is taxed along with their commission and then the draw is taken out of their net pay.
    • Keep promises - No matter what types of commission pay plan you decide upon, keep your promise or you will lose good employees. Retail sales jobs are easy to get and you want to retain your best employees.
    • Offer benefits - Even if you can't afford health care in today's economy, offer other benefits, like company cars, gasoline allowances, and retirement plans. If you can, do offer health care that is affordable to your sales personnel and the company.
    • Employee advances - Try to avoid this and go the draw route instead. It's amazing how employee advances can accrue and if you do it for one employee, others will expect the same.
    • Keep it in writing - No matter what commission pay plan you utilize, put it in writing and have the employee sign it.

    Your best bet if you plan to pay your employees on commissions is to network with business owners who do the same. Often, other business owners may have ideas you haven't thought of that will work best for your company. Do some research and get employee input. Next combine your research with employee input to develop the best plan. Remember, commission pay plans can always be re-evaluated and changed to benefit both the employee and your business.

Sales Commissions and Pay Plan Rules and Tips

Looking for information on sales commission plans or want to know the legalities of a sales compensation commission plan? This series offers up all you need to know including how to calculate sales commissions in Excel.
  1. Paying Employees on Commission
  2. Importance of Clear Definitions in a Sales Compensation Commission Plan
  3. Need a Template for a Sales Commission Plan?
  4. Proven Sales Techniques for Exhibitions & Trade Shows
  5. Top 10 Cold Calling Sales Techniques