Sales Commission Definition: What is a Sales Commission?
The term “sales commission” is one that shows up pretty consistently in the sales landscape, and it’s something all sales professionals should be familiar with. A sales commission is the additional compensation provided to a sales professional based on specific factors, like a measurement of that individual’s performance or their ability to achieve their sales goals.
Unlike a base salary, sales representatives can receive fluctuating higher or lower commissions depending on their performance, or the conditions of the market.
Sales Commission Definition:
A sales commission is an additional cash injection given on top of a salesperson’s base salary when they achieve a specific professional goal.
Usually, companies offer their salespeople a “sales commission” to help motivate the team to sell more products. Sales commissions motivate representatives by letting them know they can earn significantly more money if they achieve specific goals.
Sales commissions can also help to encourage specific behaviors, like spending more time selling products instead of managing existing accounts.
Factors that may influence a typical sales commission include:
- Business goals: Sales commissions can help to encourage employees to achieve specific targets, like increasing total revenue, or improving profitability. In some industries, sales commissions are paid based on the completion of specific actions, like setting up an appointment or qualifying a lead.
- Incentive plans: Some companies use incentive plans to explain how commissions might be awarded to professionals. These plans dictate how performance is going to be measured in accordance with business goals.
- Organizations will usually create individual sales incentive plans for each sales position.
- Quotas: Quotas are a target dollar amount of sales that representatives have to reach within a specific period of time, such as per quarter or month. If set incorrectly, these quotas can be problematic, as they can often increase stress levels and negatively affect morale.
- Reward models: The reward model for sales commissions can take one of two approaches, bonuses, or percentages. Percentages are based on the total revenue or profit achieved by the individual receiving the commission, like 5% of every sale. Bonuses are usually paid either as a fixed cash amount or as a percentage of salary.
- Tiered commission: Many incentive plans will include more than one level of attainment or multiple quota levels. Tiered commission plans will usually allow employees to earn more from their commissions the more they accomplish. For instance, they might get 2% of profits under 30k and 5% of profits between 30 and 50k.
Managing Sales Commissions
Managing sales commissions requires a careful strategy on behalf of the business. Most plans will involve specific legal terms and conditions that participants need to accept to enroll in the plan. These terms and conditions cover topics like general eligibility, leaves of absence, and even terminations. Incentive plans can also specify caps that will prevent the company from paying too much on a commission basis.
When starting a job with a commission-based payment schedule, sales professionals will need to ensure they understand the full terms and conditions of their role going in. For instance, sales experts may need to ask about things like:
- Payment schedules: While commissions are commonly included as part of a sales reps’ paycheck, they may also be delivered according to different schedules, based on various factors. Knowing when commissions will be paid is often important for sales professionals.
- Commission reporting: Knowing exactly how and when they’ll need to report details for commissions will be crucial for sales reps to ensure they’re getting the right recognition for their work. Companies will have specific rules to follow in this regard.
- Impact on base wages: Sometimes, the base wages of a sales position might be lower because the commission opportunities are higher. This is something professionals will need to be aware of when considering taking a new role
Are Sales Jobs with Commission a Good Thing?
For companies, sales jobs with commission can be an excellent way to attract additional talent and improve the overall motivation of a team. Commissions can drive better results from employees, and help brands to achieve their goals faster.
For sales professionals, commissions are an excellent way to increase your potential income, by achieving specific goals related to your role. A commission could help you to earn a lot more.