Sales people are the group that are most likely paid on some commission structure. Within the idea of commission for sales are many ways that companies pay sales people. Most new sales people will start on salary with the goal of taking them to commission in 6 months or less. Regardless of how you chose to pay your sales people you are paying them a percentage of your income. When you pay commission for sales it should always be on the net and not the gross. If that percentage is over 6% then you are paying them too much for their performance.
Approaches to Commission Sales
Salary plus Commission: This approach does not produce much better results in overall sales than a straight salary approach. The commission part is usually focused on some area that the sales group needs to improve in such as warranty sales. But it rarely has the intended affect because it is not a big enough plus or minus to get the sales group to change their performance.
Straight Commission: This is the simplest and easiest to do and therefore is easier for everyone to track and pay. However, straight commission usually fails in producing the “value added” work that a modern-day facility needs to be profitable. Sales people on this commission structure may produce good results for in-stock sales, but not for the other revenue streams that are available and needed.
Independent Commission: This approach usually has a different percent for each revenue stream. Example:
• In Stock – 6%
• Out of Stock – 15% of net brokered/aftermarket/remanufactured
• Warranty – 15% of net warranty
• Freight – 10% of net
• Core Deposit 10% of gross
This approach is fairly common in the industry, but in many cases, it doesn’t get the intended effect of more sales. When we talk to companies who have this type of commission structure what we find many times is that management thinks their sales group understands how they make money. However, when we talked to the sales group they can’t tell us how they get paid. It may look simple, but many people don’t understand percentages. What happens is that most sales people on this type of commission focus on in-stock sales and maybe brokered sales, but not much on the other revenue streams. They can still make a reasonable wage, but just selling what the owner is buying.
Blended or Holistic Commission: In this commission structure performance in any one revenue stream has a positive or negative impact on the all other revenue streams. It also is stated with a numerical sales goal in each area. The sales person does not need to compute any percentages. They just need to hit the stated number. Example:
• Hit all 5 goals – 5% for total net sales
• Hit 4 goals – 4.75% net sales
• Hit three goals – 4.5% net sales
• Hit two goals – 4.25%
• Hit one goal – 4%
• Hit no goals – your fired
Not selling enough warranties or collecting enough freight would cost the sales person a half percent on their overall net sales. Example:
• $80,000 net sales
- 5% = $4,000
- 4.5% = $3600
• Impact of $400 in commission.
When setting the goals you will need to set numerical goals that increases your sales person performance, but also goals that are not out of reach. The goals will have to be individualized to each sales persons strengths and weaknesses. Out-of-stock sales will have a numerical goal plus an expectation of percentage net profit on those transactions. We would also tell the sales group that the goals are subject to change as they grow in sales and as the company grows in sales.
Robert Counts Chad Counts Johnny Logel
Robert Counts, robert@countsbusinessconsulting.com; 512-693-6915
Chad Counts, crcounts@countsbusinessconsulting.com; 512-963-4626