Welcome to our exclusive series of personal – and business – wealth management insights from Ajay Wasserman, Founder and CEO of the Fio Group. He is an expert business and wealth consultant to business owners and entrepreneurs helping them to create long-term sustainable wealth.
In this article, I would like to talk to you about commission (also known as remuneration) structures for sales staff.
Are you meeting sales’ staff expectations?
Sales can be a cutthroat industry. You’ll likely have months when you struggle to turn a profit and purple-patch months when you exceed income expectations. In an industry known for being volatile, your sales staff are the ones who are there for you. They need to believe and be motivated to sell your product. However, if the company is struggling, and they have expectations that you cannot meet, naturally, they will be demotivated. A feasible way to tackle this problem is to re-evaluate remuneration structures.
Different types of remuneration structures you should consider
If you do not have a lot of capital available in your business, one of the easiest ways to get your product and service out into the market is by hiring commission-only sales staff. This structure means that you won’t need to spend much capital to run the sales team, except for perhaps a business card and a company profile. You don’t have to reimburse fuel, vehicle, cell phone or any other expenses.
You will only need to pay the sales team member the commission on the product or service sale. It helps with cash flow because payment occurs after you have already received payment from the client; the money is already in your bank account. This is the easiest way to create a considerable sales force with zero capital expenditure. The difficulty with this structure is that people with a lot of experience and high-profile networks in the industry are rarely going to work on a commission-only basis.
Salespersons take on risk by opting for a commission-only structure; they don’t have a base salary to fall back on should they fall on financially challenging times. So, the reality is companies that offer 100% commission may experience higher staff turnover. To mitigate a high turnover rate, it may be worth investing in training programmes for junior employees to reassure them they will learn new skills and become well versed in the industry.
Base salary + commission
Employees receive a base salary as well as earn a certain percentage of commission on all their sales. The main reason businesses use this structure is that it motivates employees to make more lucrative sales because their commission will be significantly higher. This is a perfect example of a rewards performance incentive.
While this is far more motivating than a commission-only remuneration structure, there are cons that some businesses may want to avoid. E.g. It is pretty complex to administer this type of structure because payroll must manage the salary and commission aspects of payment. According to Chron, “Salesmen can become confused about how their pay is calculated, especially if more than one type of commission is offered. Some companies offer multiple commission percentages for multiple product and service categories instead of one commission rate across the board.”
Net revenue commission
This is easy to calculate and understand the remuneration structure. It’s commonly used at life insurance companies. The salesperson receives a percentage of the premium of every policy that they sell. The premium offered for any policy is usually non-negotiable, and so the salesperson knows precisely how much they will be paid.
Gross margin commission
This is generally a favoured remuneration structure for companies dealing with items and/or services with negotiable prices.
Gross margin is a percentage; it is total sales less the cost of goods divided by revenues. E.g. If your salesperson generates R100,000 in sales but R60,000 spent on the cost of goods that they sold, the gross margin is calculated as follows: (R100,000 – R60,000) ÷ R100,000 = 40%.
The gross margin is 40%, and the commission will be calculated on this margin. The commission percentage will change should the gross margin adjust.
A tiered commission structure is used to motivate employees to reach specific sales targets. In a nutshell, tiered commissions pay a flat commission rate until a salesperson hits a certain Rand amount in sales. Once the target is met, the rate increases to encourage them to maintain and aim to exceed his/her performance level. This is definitely an appealing structure, but it does put a lot of pressure on the salesperson to perform. They fail to perform, or there is a drop in the market, preventing them from reaching the necessary milestones; they won’t benefit from this remuneration structure.
The above mentioned are five common remuneration structures for sales staff, but there are many more. So, how do you know which structure is the best fit for your business? The best sales remuneration structure is the one that will drive your salespeople to perform optimally.
There is a myriad of aspects that need to be considered. Your industry plays a significant role in the rates. It would be best to consider your sales cycle and your existing employees’ strengths and weaknesses. It’s not a simple decision, so it’s recommended that you speak to a wealth management professional who will advise you once they’ve examined your business holistically.