A career in Sales would invariably come with the perk of Sales Commission. Business Dictionary defines Sales Commission as, “A certain amount of money in addition to his/her standard salary based on the number of sales obtained.” Thus Sales commission acts as motivation for sales employees.
The commission is only received after achieving the target set by the company which is agreed by employees along with the management. This sales commission is given in order to exceed expectations by the employees. An alternative term for Sales Commission is sales incentives, which is used by most organizations. Since sales are the ultimate revenue generator for the company, driving more sales would always be profitable and this is where the Sales Commission comes into the picture.
The rate of the commission is always fixed by the company and is often in terms of the percentage of the amount of product, for example, 6% of the unit price.
Types of Sales Commission
- Individual commission: When the salesperson achieves and exceeds targets and paid the commission only for himself, it is termed as Individual commission. In this case, the target is also given separately so that the commission payout is clear. Often in FMCG companies or capital equipment, the commission is kept separate for individual salespeople.
- Team commission: When the entire Sales team achieves and exceeds the targets, the team is given commission together which is then split individually. Teamwork is developed in this case and the targets are also distributed as ‘Pool targets.’
- Mixed Commission: To promote sales more aggressively, certain companies offer commissions both on the achievement of individual targets as well as team targets. The percentages are fixed and split between the two. This is a more effective way of promoting sales and the results are often good. Consumer durables fall in this category.
Payment of Sales commission
A company would have different terms of payment of Sales commission since this is what the Sales employees get over and above the regular Salary. One way of payment would be after exceeding the targets. Achieving the entire target doesn’t mean payment of commission. It is only after exceeding the target when people get paid the incentives. So in one case, the Sales team get paid after exceeding the targets while in other cases, the payment is made only after realization of payment from the end customer and fixed days or weeks are kept in between the realization of Sales and realization of payment. Few companies offer incentives not on exceeding the target but on a collection of payment.
Role of Sales Commission
1) Employee Motivation
Sales jobs are one of the hardest and laborious jobs. The sales person has to visit and revisit to get a new customer and make the sale. The job does not stop here but the Salesman also has to give after sales servicing, collect payment, maintain sales record and many other works to do. This requires, more often than not, monetary motivation. Sales Commission does the job.
2) Company profits
Sales is the only revenue generator for any company which takes care of expenses, salaries, commissions and other things including profits. For any organization to grow, it is important that the Sales base and sales team must be strong because the economy of the organization depends on sales.
3) Better Customer Service
Sales commission are a way to ensure that the quality of customer service is maintained. Companies often incentivize the customer service and pay them a commission for better customer service. Customer service is essential for regular sales.
4) Customer base
There are two parts of Sales. First is maintaining the Sale from an existing customer and building up new customers. While the former is easier to achieve, the latter is exceedingly difficult with increasing competition and price wars. Building up a customer base or conversion of a customer from a competition requires talent from a Salesman’s point-of-view. This talent should be rewarded aptly since that customer is going to generate continuous business for the company in the future.
Example of Sales commission (with types) would be
An insurance company would allocate the sales commission on the following basis:
- The insurance has term and premiums per year or month.
- The policy of company would be to pay the individual salesperson a commission of x amount on getting and exceeding 5 customers a month enrolled with the insurance plan.
- 5% of the premium would be paid to the salesman on achieving 5 customers a month. Every additional customer would pay an additional 3% that is (x%+3% of the premium of new customer excluding taxes)
- An additional 1% would be paid per customer if the customer renews the policy year on year and if the premium is paid on time.
- 5% commission will be paid once the entire team target is achieved and exceeded.
Policies like these promote sales aggressively and generate revenue for the organization and increase the turnover.
Advantages of Sales Commission
- Employee motivation: As discussed above, the sales commission motivate the sales team to perform better and achieve targets.
- Organizational profitability: Sales commission also ensures that a sale has happened thereby bringing a new source of income for the company thereby increasing monetary inflow and pushing the profit levels up.
- Pulling in more business: Sales commission motivates employees to hit the numbers thereby ensuring growth for the organization and pulling in more business. Increased sales translate to better economic stability of the company.
Disadvantages of Sales Commission:
- Competition: Increased competition would mean increased motivation for the salesperson which would translate in higher slabs of commission. This would mean increasing the price of the product which may not work well with customers and effectively hamper the sale of the product. The cycle continues and even deteriorates further if the salespersons leave the job.
- Unethical Sales: A higher commission sometimes invites unethical sales from the salespersons part. Dumping of the products in the market, sharing a small percent of commission with the customers in order for the sale to materialize are few of the common problems of Sales commission.
- Salesman-customer relations: Selling process often ensures that employee and customers meet and this develops relation amongst both of them. It is this relation that can be leveraged by the company to get sales. However, this acts as a double edged sword in the sense that if the salesman leaves the job and joins the competition, the relation shifts the customer from their products to competition product. Hence most of the companies encourage Science selling rather than getting sales on relation basis.
- Lack of commitment: When a business has a high turnover in a competitive market, performance from Salesman is often expected. However, achievement of 100% target and exceeding them may not be possible always by every salesperson. This causes a high employee turnover at ground level and stability of sales team is always uncertain. Either the company may pressurize or the salesperson may decide to leave if the competitor is offering better salary and commission.