How to Calculate Commission: 11 Steps with Pictures

There’s no exact science to pinning that figure down, but referencing average commission rates for your industry can be a solid starting point. So, it can be tempting to start sharing sales commission details one-on-one once your how to calculate commission plan is ready. The longer they’re with your company, the more personalized their role will become. Many organizations also have a diverse range of products, channels, and locations, and that can also impact sales positions.

Review budget and revenue goals.

Call this model the closest thing to a “happy medium” when paying sales employees. The base plus commission approach involves paying workers a minimum salary and additional payments for each subsequent sale. The total sales revenue generated by selling the product is $40,000. Businesses with a large sales team cannot define these regulations and carry them out manually.

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In some cases, commissions may be reduced when discounts are granted, making salespeople less likely to provide discounts to make a sale. In others, salespeople might gain commissions based on repeat customers, motivating them to retain customers. The terms, commission structures, and best practices listed here serve as a primer on some of the more common ways employers compensate sales employees. Payroll administrators processing commissions should remember that these payments, similar to bonuses, are considered “supplemental wages” by tax authorities.

Base salary + commission

In some roles, the commission makes up most of your pay, making your income highly erratic and reliant on your performance. The following are the formulas to use when calculating commission and commission rates. With a 3.25% commission rate on a \$12500 sale, the commission is \$406.25. The commission for an \$800 sale at a 3% commission rate is, therefore, \$24. Leticia will receive a \$150 commission from a \$2500 cruise booking fee at a 6% commission rate. On a personal point, I recommend rewarding sales reps sooner to get to overachievement faster.

Types of popular sales commission structures

They often work across a variety of industries and media, including advertising agencies, radio, television, and Internet publishing. Advertising sales agents often have strict quotas and receive a commission for meeting or exceeding them. This strategy guarantees some income to sales reps as they ramp up in a new territory or role. At the same time, the recoverable aspect of this commission can be confusing.

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Next is when your sales team will start to see commissions in their paychecks. For some businesses, the commission period matches the pay period. But others award reps for the prior period or create a custom schedule based on details in the commission agreement. As a salesperson, it’s valuable to know what types of commission plans are available and what salary and commission rates you should look for from an employer. Evaluate what your competitors are doing against each commission structure I shared above to see if it’s viable for your business. If your sales cycle tends to be longer and your sales team has a lower risk tolerance, then straight commission might not be the right choice.

Your sales team should have full commission timeline transparency, including the exact date when the plan begins, when it ends, and when they will be paid. Identify the specific sales behaviors you want to incentivize, like closing high-value deals or nurturing long-term relationships. Ensure everyone on the sales team understands what the endgame is for total alignment. Answering these questions helps you get a better picture of your competition and internal operations. With this knowledge, you’ll be able to set and adjust commission rates and structures for the highest benefit to your organization.

• On one hand, salespeople can build a breadth of solid, productive income streams over time.
• The payment periods for incentives and commissions don’t have to align.
• This is true of commissions in the world of real estate, retail sales, and business to business alike.
• Certainly, some types of commission structures are more attractive than others and can give your company an advantage when attracting and retaining the best sellers.
• You must define specific rules such as commission can be availed by only lead owners to avoid any confusion with the team.
• It also helps businesses expand to new geos and scale faster in unexplored regions.

Type of Business

Read our free Definitive Guide to Payroll to learn more about how these payments are taxed. As a compensation model, straight commission can be polarizing. While it may make sense for high-yield sales roles like real estate, it’s an unforgiving model in industries where the buying process can extend over several months.

Sales Commission Agreement Template from PandaDoc

Incentives can be offered for a shorter time, such as closing ‘x’ number of deals within a week. This structure is best for businesses that build long-term relationships with clients, like ad agencies or consulting firms. But according to 2022 SHRM research, only 61% of employees feel that their compensation is fair for their role. This makes transparency in compensation more important than ever.