Entering the world of sales means that you will also be entering the world of commission. Having a salary that is partially or wholly linked to a commission means that your job performance is directly linked to your paycheck. That means as an employee, you have more control over your earning potential.
Depending on your contract, it may even be possible to earn an uncapped amount based on how good of a salesperson you are, and how successful you are at executing your employer’s sales goals.
However, key to earning money on a commission structure is knowing and understanding the different commission structures. Finding the right commission plan for you involves knowing your strengths and weaknesses, assessing your long-term work ethic, and carefully negotiating a contract that will best suit your style and compensation needs.
The following are the most common commission structures in sales, and each structure’s pros and cons.
1. Straight Salary:
With this compensation method, the amount of money that can be earned per year is determined up front. An employee’s pay cannot be changed unless the contract is re-negotiated.
Pros: Your salary is in no way impacted by your sales performance, and you can rely on having a certain amount of money in the bank every month.
Cons: There is no incentive to excel, and it is easy to become complacent about your job. A great salesperson may also realize he/she could earn more with a commission-based structure.
2. Salary Plus Bonus:
This is one of the most reliable pay structures in the sales world. An employee who agrees to this method of compensation will receive a pre-determined salary each pay period. At specific interval(s), an employee will also receive an additional bonus if performance hits or exceeds earning goals.
Pros: Pay is not impacted by performance.
Cons: Earnings are somewhat capped. A talented employee who is successful in completing sales may earn less with this structure than with a commission-based structure
3. Base Plus Commission / Salary Plus Commission:
This is the most common form of compensation in sales. With this structure, a salesperson will receive a pre-determined and fixed annual base salary. Commission earned is based on the number of completed sales.
Pros: You’re always guaranteed a steady stream of income from your base salary.
Cons: The commission rate will probably be lower than the commission rate tied to a salary that is straight commission.
4. Straight Commission:
Straight commission means there is no base salary. An employee earns a percentage of each sale, but this is the only way to make money.
Pros: The amount of income you earn is entirely in your control.
Cons: Pay is not tied to hours worked. If you cannot close sales, you will not earn any money.
5. Variable Commission:
Variable commission is similar to straight commission. However, the rate of commission goes up and down depending on whether sales goals have been exceeded and by how much.
Pros: You will be motivated to perform to your potential, since the better your performance is, the more money you earn. In other words, rewards are directly linked to performance.
Cons: There is sometimes an emphasis on quantity over quality, meaning that customer satisfaction may not be a priority for your employer. It is also hard to determine how much your commission will be before the end of an earning period.
6. Draw Against Commission:
This salary plan is completely based on commission. At the start of each pay period, an employee is advanced a specific amount of money, known as a “pre-determined draw.” This draw is then deducted from your commission at the end of each pay period.
After paying back the draw, the employee keeps the rest of the money.
Pros: A draw gives you money to start with and build upon.
Cons: If you cannot earn more than your draw in a pay period, you will owe money to your employer (which often can be paid back in a later, more profitable, pay period.) However, if you have several bad periods, you may soon run into significant debts.
7. Residual Commission:
As long as an account is generating revenue for the employer, the employee will continue to receive commission on that account every pay period. Over a period of time, this will become a steady income that can be relied upon.
Pros: An employee will reap the benefits of a referral for an extended period of time, and the money can quickly add up. As your base of sales grow, your residual commissions will also increase.
Cons: Losing an account can drastically decrease your salary. Working on residual commission means an employee must take the time to develop great communication skills in order to build and keep long-lasting relationships with account managers.