Your sales rep commission structure will have a lot to do with how well your sales team performs (and what they focus on). Here’s a quick list of things we’ve found to be beneficial:
- TIE IN MARGINS
If you give your commission sales reps pricing flexibility, make sure their commissions are tied to margins. We pay a percentage of the gross profit (profits on a sale after COGS but before other expenses).
- BUILD IN A MARGIN GOAL-LINE
We have a “boost line” such that if the target margin is hit for the pay period (not on individual orders, that is too hard to keep track of) we pay a nice boost in commission. Like magic, since we’ve put that in place our sales reps generally hit the line and our margins are up!
- SHIPPING IS A COGS
Try to incentivize your sales team to help you minimize freight. Set your accounting system up so that shipping costs (especially emergency “red rush” shipments) are part of COGS.
- PAY ON COLLECTIONS
I made the mistake for many years of paying commissions when orders were invoiced not collected. Sales reps are much more helpful in collecting and there is a lot less credit and RGA back-charge mess to untangle if you pay upon collections instead.
- PAY MORE TO SELL OVERSTOCK
Incentivize to sell the right items, especially overstock. We move items into overstock by writing them off (“selling” them to a customer we’ve named “overstock”) for $0 and then we pay double commissions whenever a sales rep sells an item from overstock. That’s a huge pay boost that our sales reps are always looking to land.
Note: Every state is different so discuss this with your CPA. We’ve made sure to set things up so that we’re following all tax guidelines in how and when we write items off and then how we recapture income if we sell an item from our overstock.
- PAY EXTRA TO SELL FROM THE RIGHT SUPPLIERS
Build the comp structure so that sales reps make more money to sell from your target vendors. In our case, we get discounts and quotes from our best vendors plus better shipping and terms, so we pay more commission to sell from those vendors.
Also, be careful not to let just any vendor come in and offer spiffs. Spiffs should be reserved for vendors that you are trying to add volume with.
Jason Petersen owns Hansen Lighting Inc. a lighting company with multiple showrooms in Utah.
Jason acquired Hansen Lighting out of near-bankruptcy in 2004 and turned the company around by implementing outside-the-box systems and ideas. The company is now one of the fastest growing companies in America (#3087 on the Inc. 5000 Fastest Growing Companies list) and has been recognized as one of the most profitable privately-owned retailers in North America.
Jason is also the co-founder of XOLogic and Lit Living Inc.