How to Create an Effective Commission Plan

It may not be surprising, but compensation is one of the top three drivers for employee satisfaction. Employee commission pay can reward performance and motivate your employees, plus help drive sales. However, creating and implementing an effective commission plan requires careful planning and consideration. If this sounds like something you want to implement, we’ll walk you through the steps to create an effective commission plan.

The Importance of a Commission Plan

A commission plan can be a powerful tool for motivating your employees. This is often used with employees in sales roles, as it provides a direct financial incentive for achieving specific performance targets. When it’s used right, employee commission pay can help:

1. Increase sales: Aligning financial rewards with sales targets can encourage employees to sell more.

2. Boost morale: Performance-based compensation can make employees feel recognized and rewarded for their efforts, leading to higher job satisfaction.

3. Retain talent: A well-structured commission plan can help retain top performers by offering competitive compensation.

Types of Commission Plans

In order to be effective, commission plans need to function in a way that benefits your specific company and its unique workforce. There are several types of commission plans to choose from, each with a set of advantages and disadvantages. Understanding these can help you decide which structure is best for your business. Here are a few of the most common commission plans.

Straight Commission

A straight commission plan directly ties earnings to performance by paying employees a percentage of the sales they make.

The advantages include:

• Directly motivates sales

• Easy to understand and implement

The disadvantages include:

• Potentially unpredictable income

• May not work for all roles or industries

Salary Plus Commission

A salary plus commission plan combines a base salary with a commission on sales, providing employees with a stable income and incentivizing performance.

The advantages include:

• More financial stability

• May motivate employees to exceed base performance

The disadvantages include:

• Can be complex to manage

• Higher fixed costs for the employer

Tiered Commission

A tiered commission plan rewards high performers with higher earnings by increasing the commission rate as employees reach higher sales targets.

The advantages include:

• Effective motivation for top performers

• Encouragement for employees to push beyond initial targets

The disadvantages include:

• Errors in calculations due to complexity

• Potentially unhealthy competition among team members

Draw Against Commission

A draw against commission plan provides employees with an advance on future commissions to help ensure they have a steady income while building their sales pipeline.

The advantages include:

• A more stable income

• Support while new employees get started

The disadvantages include:

• Potential confusion for employees

• The need for careful tracking of advances and earnings

Steps to Create an Effective Commission Plan

If you’re ready to create a commission plan, there are several steps to take. 

1. Define Your Goals

First, clearly define what you want to achieve with your commission plan. Your goals might include increasing sales, improving customer retention, or boosting employee morale. Identify clear goals to help guide you through the design of your commission structure.

2. Analyze Your Sales Process

It’s also important to understand your sales process and the roles involved. Determine key activities and milestones that contribute to successful sales. Use this analysis to help you choose which activities should be incentivized and how to structure your commissions.

3. Select the Right Commission Structure

Using your goals and sales process as a guide, select the commission structure that best fits your needs. Consider the advantages and disadvantages of each type of plan and how they align with your business objectives.

It’s also helpful to consider a simpler commission plan. They’re easier for employees to understand and easier for you to manage. If you can, try to avoid overly complex structures that can cause confusion and reduce motivation.

4. Set Commission Rates and Targets

After selecting the structure, determine the commission rates and performance targets for your plan. Make sure the rates are competitive and aligned with industry standards. Your targets should be challenging but achievable to motivate employees effectively.

Performance reviews and training can also be built into the structure of your plan. Providing regular feedback helps employees understand their performance and how they can improve. You can plan for periodic check-ins to review progress, celebrate successes, and identify areas for improvement.

By providing ongoing training and support, you can help employees succeed. Training could include sales training, product knowledge sessions, and coaching. Investing in your employees’ development can lead to better performance and higher earnings over time.

5. Establish Clear Guidelines

Clearly outline how the commission plan works, including how commissions are calculated, when they’re paid, and any special conditions that apply. Transparency helps prevent misunderstandings and set employee expectations.

6. Communicate the Plan to Your Team

Once your commission plan is ready, transparency is crucial. Communicate the plan to your employees clearly and via multiple channels. Provide training and resources to help them understand the plan and how they can maximize their earnings. It’s important to encourage feedback from employees and then be open to making adjustments based on their input.

7. Monitor and Adjust the Plan

Review the performance of your commission plan on a regular basis, and make adjustments as needed. Keep tabs on sales data, employee feedback, and overall business performance to ensure the plan remains effective and aligned with your goals.

Take the time to understand your goals, analyze your sales process, and select the right structure. By doing so, you can develop an employee commission plan that motivates your employees and drives business success.

How Justworks Can Help

Paying your employees is a necessary part of running a business. But complicated payroll doesn’t have to be. With Justworks Payroll, you’ll have an easy-to-use platform that makes payments a breeze. With multi-state payroll and digital paystubs, it’s simple to pay employees. Custom pay schedules, multiple pay rates, and unlimited payroll runs allow you to customize payments for your team. Pair all that with built-in HR tools, expert support, and access to Time Tracking and you’ll be ready to keep growing your business and watch it thrive. Ready to get started? We’re ready to help!