What You Need To Know About Sales Commissions

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If your business is sales-based, you may be wondering how to motivate your employees to increase their sales. Perhaps you’ve been thinking about introducing sales commission to help incentivise your employees so you can continue to grow your business, but you’re not sure where to begin.

Implementing a sales commission plan that suits your business needs and goals can be integral to ensuring your business grows.

What Is A Commission Payment?

A commission payment is an amount paid to an employee or contractor for a sale or introduction they make.

Regardless of how big or small your business is, commission payments can be a great tool you can use to incentivise your workers to make more sales and generate more income. Having highly driven workers can be greatly beneficial to the growth of your business, as they are motivated to develop long-term relationships with returning clients.

Implementing sales commission payments can also help you to monitor your worker’s performance, as it makes it easier to identify who your top salespeople are, as well as those that may require more support.

What Is A Commission Agreement?

A Commission Agreement should be used whenever you intend on paying your worker commission. It should clearly set out the terms and conditions of the relationship between you and your worker, including the expected term of the relationship and how compensation for work is to be earned and calculated.

Having a well-drafted Commission Agreement is vital in situations where you are paying someone commission, as it can help to prevent misunderstandings or disputes that may arise further down the track and ultimately protects your business interests.

A Commission Agreement typically includes clauses that deal with the following:

Rights and obligations of both parties
Prices of goods and services
Calculation of commission
Payment terms
Restraint of trade and confidentiality
Termination
Dispute resolution

Can I Pay Commission Only?

There are two main methods in which you can implement commission payments in your workplace:

Commission only
Commission is paid in addition to a base salary

If you want to pay your employees commission only, you will need to ensure that it is allowed under a modern award or registered agreement.

Choosing to pay commission only can be a useful option if you are a new business, as it can encourage employees to make more sales and generate more income, while removing the stress of paying them a salary.

Read more about the requirements you need to meet before you can pay your workers commission only here.

In contrast, the offer of commission as a bonus payment in addition to a base salary can strike a good balance between providing greater job security to your employees while still motivating them to make sales. The job stability provided by the base salary can also lead to higher rates of employee retention.

How Do I Calculate Fair Commission Rates?

An important consideration when implementing commission payments is how to calculate commission rates. Working out what a fair commission rate can sometimes be a difficult balancing task – too low and it may not have the intended effect of encouraging your employees to excel; too high and it can eat into your business profits.

Tip: Use your sales commission plan to help you achieve your business goals

Start by setting out your goals and expectations for your business and aim to keep your sales commission plan simple. If you can’t explain the plan in a few sentences, it’s probably too complex. Overly complicated sales commission plans could lead to confusion as to how it plays out practically.

Think about what your financial goals are for the business and what you need to get there. Once you work this out, you may want to ask yourself:

How many sales or contracts do you need to make to reach that goal?
How many clients will help you get there?
How many leads should your employees pursue each week to achieve that goal?

Tip: Work out the value of an employee’s role

It may help to think about the value an employee brings to your business and how involved they are in the sales process. Do they see the transaction from beginning to end or do they just provide a lead? If they have more responsibility during a sale, perhaps they should be rewarded with a higher commission rate.

Common Ways To Calculate Commission

Revenue Commission

Revenue commission is a popular method of calculating how much commission your sales representative will receive from a sale. Under this plan, a worker will receive a set percentage of any revenue generated in commission.

For example, let’s say Jake earns 10% commission on any sale he makes. This means that if Jake makes a $10,000 sale, he will receive $1,000 in commission payments.

The benefit of this structure is that it will generally involve a relatively straightforward calculation. However, its simplicity may end up eating into your business’ profits.

Margin Commission

The margin commission plan is another common commission structure. It operates in a similar way to revenue commission, but accounts for the costs associated with making the sale. Commission is calculated based on the margin between the revenue generated and expenses incurred.

Going back to our example with Jake, let’s say his $10,000 sale incurred $2,500 in expenses. Jake’s commission payment would be calculated as follows:

($10,000 sale – $2,500 expenses incurred) x 10% commission = $750

Although the margin commission structure can help to protect your business profits, it may also discourage employees from using discounts to close a deal and make your business less attractive to clients who are looking for competitive rates.

Tiered Commission

The tiered commission plan offers a more dynamic rate to calculate commission rates. The idea is that, the bigger the sale, the higher the commission rate.

For example, Jake earns a 5% commission on sales up to $10,000. For sales between $10,001-$15,000 he earns 7% commission, and so on.

While the tiered commission structure challenges your employees to make bigger sales, it also means that you will need to pay a more commission.

The Take Away…

Working out a fair commission rate is not always an easy task, so it’s important to take the time to get it right. Be flexible and creative with the ways in which you implement commission payments, as there is no one size fits all solution for every business.

It’s a good idea to keep track of how sales commission agreements and commission payments impact your business profits and employee performance, and to tweak them and make changes to ensure it suits your business needs.

Whatever agreement you land on, be sure to set it out in writing. This will help to establish the rights and obligations of both you and your employee, and minimise the risk of confusion or disagreements around how commission payments are calculated down the road.

Need Help?

If you would like some help with a Commission Agreement or if you have some general questions about introducing commission plans to your workplace, we have a team of friendly lawyers who are keen to chat. Shoot us an email at team@sprintlaw.com.au or call us on 1800 730 617 for a free, no-obligations consult.

Kayleigh Yap

Kayleigh is a graduate in Arts and Law from the University of New South Wales. With an interest in human rights and intellectual property law, she has experience working in communications and marketing for small businesses and not-for-profits.

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