Commission Plan: The Definitive Guide

This is a complete guide on Commission Plans.

In this new guide you’ll learn everything there is to Commission Planning including:

  • How to Calculate Commissions
  • The most effective Commission System
  • Examples
  • Lots more

If you want to motivate your employees and increase your revenue this guide is for you.

Let’s start right away.

Contents

Intro to Commission Plans

What is a Commission Plan?

A commission plan is a system that specifies how much your employees are paid depending on rules you specify.

Most often these rules depend on how much is sold by that employee, but they can depend on anything that results directly or indirectly in revenue.

Examples:

  • Sales: Quantity / Volume
  • Packing Boxes for Shipment
  • Creating Appointments

When to use Commissions

Maybe you are asking why I should pay my staff more since they already have a salary?

If the stuff done doesn’t affect the salary in an objective manner, chances are if you pay them a minimum they will work a minimum.

As soon as you start to have a clear plan for commissions so a team member can earn 500$ - 1000$ more per month they are willing to do the best job possible.

As long as you can measure the success of a team member you should use commissions.

The Costs of Commissions

With the right commission plan you only pay commissions for extra revenue. So all extra costs are more than covered by the profits.

If you want more success for your business you have to share it with your team.

This aligns the goals of your business with the goals of your employees.

Commission Planning 101

So where do we start?

First look at your business and how each person is creating value for the company.

Let's say you are a small store with a few employees. Each team member has to sell things customers need to achieve their goals and answer any questions they have.

The obvious thing is to pay them a small amount for each item they sell. Once you do this they will be way more motivated to actively ask customers if they need help and they will make sure the customer gets everything they need, even things customers didn’t know existed.

For this to work you need an objective system to measure how much they sell and what they sell. It’s especially effective if you have different commission rates for special items, like small items near the checkout.

The Best Commission Plan

The ideal commission plan is to pay everyone a base salary and if they do more work then expected for their salary you pay them a commission.

Why is the base salary important? Employees need a predictable and stable income they can rely on. They have bills to pay and need a certain amount to live comfortably. With no base salary the commissions turn from motivation to pressure, because they need to sell or they get into trouble.

Sometimes there are things out of their control and even the most motivated employee can’t sell more if there are no customers, because of a big event elsewhere. In tough months the business catches them with the base salary and is ready to appreciate hard work in months with high demand.

If you pay your staff a commission without requiring a minimum amount of sales volume, then you have to set a lower commission rate overall. It’s best to pay more commission after they hit a certain sales volume if they get a stable salary.

Creating a Plan

Most likely you are using a POS system already. Your POS system needs to record the following things:

  • Who made the sale
  • What item was sold
  • For how much was it sold
  • Work hours of all employees
  • Your inventory with all items and categories

Then you look at your data and note how much the average employee sells per work hour. You think about what items could be sold more like accessories for popular items. Or which ones do you want to promote or have a higher profit margin on.

Some stores have custom products with a higher profit margin than other items. If your team receives more commission on these items they will be motivated to promote it. Or it could be more expensive services like a stylists telling the customers that they also do wedding hair styles which lead to a booked appointment.

Common Mistakes

The biggest mistake is to create subjective goals. Like telling everyone they get a bonus if they sell a lot. Then they feel like the goal is out of reach or dependent on others.

One has to feel he can influence the progress by himself. It’s best if he can see his weekly progress to get a feeling how his work influences the success of the business and his payroll.

Creating Conflicting goals is also a common mistake. Like being able to give the customers a discount and also trying to sell more. You have to make it clear how the discounts are affecting their commission.

Another mistake is to try to manually calculate the commission, because you are spending valuable time for something that can be completely automated.

Commission Calculation

As mentioned it’s a bad idea to always manually calculate the commission, but it’s important that everyone on the team understands how the calculation works.

Transparency creates trust with the team and each team member knows what needs to be done to earn more money.

The first step is to set a commission rate and separate rates for special items or categories. The next step is to specify how much sales volume you expect from your team. The best way to do this is to see how much commission an employee would get per hour.

For example your average commission rate is 1% and the average employee would get 2$ per hour commission if they sell 200$ volume per hour. Then you expect them to earn 2$ commission per hour. You subtract this amount from the total commission they earned at the end of the month.

For example you have 2 employees and you calculate the commission for one week. With a single commission rate of 1$ and an expected commission of 2$ per hour.

Formula (Single Commission Rate): (Sales Volume) * (Commission Rate %) - (Expected Commission per Hour) * (Worked Hours) = Paid Commission

Bob:

  • Worked Hours: 40
  • Sales Volume: 20000$
  • Expected Commission: 40 * 2$ = 80$
  • Earned Commission: 20000$ * 0.01 = 200$
  • Paid Commission: 200$ - 80$ = 120$

John:

  • Worked Hours: 20
  • Sales Volume: 4000$
  • Expected Commission: 20 * 2$ = 40$
  • Earned Commission: 4000$ * 0.01 = 40$
  • Paid Commission: 40$ - 40$ = 0$

In the next chapter we look into more detailed examples.

Examples (with Charts)

Barber Shop

Let’s look into a more in depth example, like a barber shop.

Your barber shop has 4 employees. Everyone gets 70% commission on all services they do, but you also have a collection of products to offer. For all products they get 20% commission.

All of your employees worked 40 hours per week and made 3000$ revenue on average. Take a look at the chart how these rules affect your profits and the salary for the employees.

Barber Shop Commission Example Chart

Fishing Shop

A fishing shop is a great example of a specialized retail store.

Employees are not only at the checkout, but they also advise the customers on all kinds of fishing questions.

his example is different, because you have about 50% product costs and more costs to cover. So you could give employees about 5% commission. Again they only get commission if they sell more than they currently do without commission. So only if your business gets more profit the employee gets a share of that new profit.

For this example we specify the following:

  • 40 hours per week
  • Average of 10000$ monthly sales per employee
  • 5% commission
Fishing Shop Commission Example Chart

Automation

Of course it’s not practical to calculate the commission manually every week/month, that’s why we need automation.

As I already wrote in the Creating a Plan chapter your POS system needs to record the following things:

  • Who made the sale
  • What item was sold
  • For how much was it sold
  • Work hours of all employees
  • Your inventory with all items and categories

We have the following requirements for an automation system:

  • Create rules to taylor the commission to your business
  • Easy to setup
  • No overhead calculating commission
  • Everyone should be able to verify the calculated commission

Because no POS system checked all the marks I created CrewBonus. I can easily connect CrewBonus to any POS system, because they all offer some kind of API or export and they all collect the same data.

Just click on the chat bubble and tell me what system you are using to record your sales and I will connect it for free to CrewBonus. The message goes directly to me(Founder of CrewBonus).