How to Calculate Sales Commission & Maximize Your Earnings

Sales commissions are your way to keep your sales team motivated!

Time and again, organizations have utilized sales commissions and incentive compensation management to enhance the productivity of their sales force. Implementing effective incentive compensation management systems holds the potential to drive the growth and success of the organization, while simultaneously ensuring employee satisfaction.  please add this keyword

If sales commissions have such a crucial part in your business operations, then isn't that something that requires your attention as well? 

In this article, you will gain insights into the sales compensation plan, including an understanding of what sales commission entails, its various types, factors that influence sales compensation, and guidelines on calculating sales commission.

So scroll down to know about sales commissions and its calculations to maximize your earnings. 

What is a Sales Commission?

Sales commission is the variable pay that the salesforce receives as a reward for the target they achieve. It serves as a tool to derive positive behavior and keep the sales team focused and motivated in their work, while a sales commission tool simplifies the process of determining and distributing these rewards accurately.

Types of Sales Commissions

Depending on the organization and their policies, salesforce commissions are calculated in various ways. These include: 

• Straight Commission

When the salesperson has no fixed or base income and is paid only in commission for each sale they make, it is called a straight commission. 

• Graduated Commission

When sales commission increases with sales volume it is called graduated commission. For example: under a graduated commission a salesperson can be paid 10% commission for their first $1000 sales, 20% for $2000 sales, and so forth.

• Revenue Commission

Revenue commission is calculated as a percentage of the sales the salesperson made for the company. For example, when a salesperson makes a car sale of $20000, they can receive a 5% commission, that is $1000 as an incentive. 

• Gross Profit Commission

The gross profit commissions are calculated as a percentage of the gross profit made on the sale. Here the commission can vary from each sale depending on the profit made of each sale.

Factors that Influence Sales Commission

• Commission Basis

Commission is dependent on company policy, revenue target, territory, and many other factors. Hence it solely depends on the organization in deciding how to calculate and manage their incentive program, including important aspects like objection handling techniques. Commission rate, commission overrides, commission splits, and commission period are some of the key factors to consider.

• Commission Rate

Commission rate is the percentage of sales that the salesperson will receive upon finalizing a deal. Depending on the organizational policy, the salesforce receives either a fixed percentage or variable pay for the sales they closed. Understanding and optimizing sales commission rates is crucial for ensuring salespeople are motivated and adequately compensated for their efforts. 

• Commission Overrides

Override commissions are the rewards sales managers receive for successfully managing, motivating, and overachieving the sales quota, often contributing significantly to their On Target Earnings (OTE). It serves as a good motivation tool to make the sales team strive beyond their sales targets.

• Commission Splits

Most often closing a sale is a team effort with more than one working towards the same goal. In such situations, the commission is split between the salespeople who worked towards fulfilling the sales. 

• Commission Period

A salesperson gets paid their commission in a period of time. It can be monthly, quarterly, or yearly depending on the company policy.

Remember your sales commission is also prone to clawback. A Clawback sales commission is when your paid sales commission is recovered under certain circumstances.

Read more about it at Understanding Commission Clawbacks: Benefits and Drawbacks.  

How to Calculate Sales Commission

As mentioned above, incentive management is centered on each organization. But most companies follow a standard procedure in calculating their commission to ensure integrity and transparency. 

Here is how to calculate commission. 

• Determine the Commission Period

Depending on the company policy and incentive program, the commission period of an organization can be monthly, quarterly, or yearly. Hence, it's important to determine the commission period to further set the sales quotas and targets for the coming year. Additionally, proper deferred commissions accounting practices should be implemented to accurately track and manage commission payments over time. 

• Calculate the Commission Base

Organizations must also be clear as to what is the base revenue that the salesperson must close to be eligible for commission. Most companies provide commissions under clauses. For example, a company can set their commission plan with a base revenue of $10000. Closing a deal worth $10000 will earn the salesperson their reward of commission, and it's essential to regularly review and analyze the sales commission report to ensure transparency and alignment with business objectives. 

• Calculate the Payable Commission

Companies often set a commission base as well as a commission rate to calculate their payable commission, and this process becomes even more streamlined with the aid of a Sales Mix Calculator. The commission base is the minimum revenue the salesperson must bring to be eligible for commission. While a commission rate is the percentage of the sales revenue that they will receive as a commission.

Sales x commission rate= Payable commission 

$10000x 10%= $1000.

In the above example, a salesperson earns a commission of $1000.

• Apply Any Commission Variables

Most organizations follow a mixed commission model, where on achieving certain milestones they are rewarded in addition to their payable commission. For example, if the sales quota is $1000 and the salesperson achieved $2000, the company does apply a higher commission rate for the overachieving. In such cases, the use of a gross sales calculator can streamline the process of determining the correct commission amount to be paid.

For example, the salesperson will receive a 10% commission of $1000 plus an extra amount of commission for the additional $1000 revenue.

• Apply Tiered Commission Rates

While calculating commission, organizations can also divide the commission rate into various tiers. For example, when the salesforce makes a revenue between $1000 and $2000 they receive 10% commission, between $2000 and $3000 the commission rate is 12%, and so forth. 

• Calculate Any Overrides

Organizations are flexible towards calculating commissions especially when they overachieve their sales quota. A 10% commission rate for a particular sale can override 15% when they make a significant achievement like 50 or 75 percent. 

• Deduct Returns

Commissions are prone to claw back as well. When the lead qualification for which the salesperson received their commission can be taken back in the event of not closing the deal. Such calculations also need to be closely watched by companies during sales commission calculations. 

• Split Commissions

Organizations also must be clear while deciding how to split commission when two or more participated in closing a deal. Clarity and transparency are crucial in finding how to calculate commission in such situations as it can easily fall into disputes, especially in a straight commission plan where the structure is solely based on individual sales performance. 

Hence bringing standardization in calculating commissions is crucial for the integrity of the organization and the smooth functioning of its operations. 

Takeaway

Organizations are constantly thinking about cracking the question of how to calculate sales commission, how to find commission rates, and resolving the tediousness of sales commission calculators. 

These are questions that require quick solutions as it affects the smooth functioning of the organization as well as keeping their sales force motivated and competent. The simplest and cost-effective way organizations can achieve this goal is through automation.

Kennect is a digital solution that focuses on incentive compensation management and sales performance management. By automating your incentive compensation plans, Kennect supports you in creating transparency and achieving operational efficiency.

For more information, Book A Demo today!