It is a huge stumbling block for many business owners, how to determine what the right commission rate should be for a particular job. The objective is the employee should be able to earn an appropriate income with an opportunity to earn well beyond if performance is exceptional and the business gets the most revenue possible and does not overpay the employee unless its earned.
Many business owners throw up their hands in despair over this issue exclaiming “I have no idea how to figure this out” so they don’t.
The worst thing you can possibly do is have a sales force paid by salary and not earn by commissions. Do not even consider this, as there is no good reason for it. Such a plan is guaranteed to yield the lowest possible result at the highest possible cost. Paying salespeople less they the going “market rate” is folly, paying them more but based on sales is a win win. Paying every employee based on their productivity is the best and only way to go.
Here are some thoughts that may make it a bit easier for you to create a meaningful commission rate that works for both employee and the company.
All sales people should be on commission. However it is frequently done with a base pay to support cash flow during dry spells, times when sales are scarce, which can happen.
First, the base pay should be bare subsistence and just enough to hold someone together, as well as giving the appearance that the company is investing in the salesperson and that the salesperson is in fact an employee not an independent contractor in business for himself. Thus $18,000., $24,000., $36,000., are good base salaries.
This base pay entitles you to require certain cooperation that is slightly outside of direct selling but within an employee/employer relationship such as training others, paperwork requirements, responding to complaints, attending sales meetings etc.
Determine what the high end earning potential should be such as $78,000, $98,000, $150,000. whatever you deem reasonably possible but high and create a commission rate based on a 3-7% percentage of gross sales that will potentially yield that range of result. Commission should not be paid on shipping costs or taxes but should only be the net invoice.
If its a high invoice product the commission can be lower, if low the opposite may be true unless the gross sales are large then again lower the rate to yield the appropriate results.
You should also look hard at your profit percentages and based on how profitable the pricing is, you may have to adjust the commissions up or down.
Make certain you pay commissions at least monthly, not quarterly, and let the sales force ripple with energy and commitment. Presumably the salespeople will achieve greater productivity, more new sales and higher invoice sales based on their desire to earn more commissions. It works amazingly well. Most important is to make a significant part of the paycheck the commission so the employee gets it, that he is working for success not for hours spent and is rewarded for success not time.
You can require minimum sales volume, the draw, amd the sales projections will be reached and the company will run well with adequate cash and profitability.
If its a production worker, or a sales manager, we are considering or any other job other then direct sales, the salary should be higher and the percentage lower and it should be based on their particular part of the business, thus find a way to measure productivity within their department and then peg their commission rate to that key indicator.
It could be production figures or whatever is most relevant and easily measurable and applicable to that persons job if possible.
When at a loss, peg the commission rate to either production, sales volume, profitability or other business ratios that make sense to everyone.
The best business model has everyone on commission based on profitability, gross revenue or production goals, and thus the whole work force will pull together to achieve the overall goal…success for the company and thus success for themselves. That’s the goal, not individual performance but the whole team pulling together to achieve company goals.
This works, gone are the days were everyone earns a paycheck based on hours…Forget this, it must be based on productivity. Its a great thing if everyone earns more then industry standards as long as its based on success.
Try it, it works, however once you commit to it, you cannot go back and there is a transition period that may be difficult. It may cause established employees to leave and new people will enter and this too is OK.
Think about it and then do it, It is the best thing you can do to increase revenues and profit… simultaneously. Call for help 413-549-2966
