What is a commission estimator?
A commission estimator is a tool that calculates an amount or percentage of the total commissions earned by an employee. It helps businesses evaluate the total incentive a team member should receive and reflect the amount in their payroll.
Many businesses use sales compensation software to automate accounting and administration of commissions and incentive plans based on several customizable rules, such as employee role, tenure, or sale type. It enables companies to gain a comprehensive view of the number of deals closed and forecasted revenue.
Commission estimators work for both complex and simple commission calculations. Sales commissions are usually calculated based on a specific percentage of the product’s total value. However, the calculation logic can differ across organizations or even between departments within one organization. Sales compensation software helps businesses incorporate customized logic into their commission calculating process and keeps salespeople motivated with accurate and timely incentives.
Commissions depend on various factors, such as the type of product or service, potential buyers, the number of salespeople involved. Sales compensation software allows businesses to attribute the right commission to the right people involved in closing a deal. It helps companies estimate revenue inflow by subtracting the commission and other costs from the product or service’s purchase price.
Types of commission structure
There are different types of commission structures organizations use to incentivize their sales professionals.
Base salary plus commission
Base salary plus commission is a common structure used by organizations. According to this structure, a professional receives their basic salary in addition to an incentive based on their sales performance. This motivates salespeople to improve their sales performance.
Base salary plus commission estimation formula:
Total commission = total sales revenue brought in by a salesperson x commission rate
Draw against commission
The commission draw structure is based on advance payments that help new hires ramp up their sales performance, without losing commission. There is normally a learning curve for new hires. During this time, the draw against commission structure allows salespeople to draw commission in advance and build up sales numbers later.
If a salesperson misses out on earning commission they withdrew or moved out of the company, they’ll have to return the drawn amount to the employer.
Draw against commission estimation formula:
Total commission = commission owed - draw amount
Gross margin commission
In a gross margin commission structure, salespeople’s commission is based on a percentage of the profit. It considers expenses that were incurred in selling a product, encouraging salespeople to upsell and increase their commissions.
Gross margin commission estimation formula:
Total commission = commission rate x (selling price - costs)
Residual commission
The residual commission structure incentivizes salespeople as their accounts or clients continue to generate revenue. It can be based on a percentage of monthly recurring revenue or repeat payments made by clients. It motivates professionals to maintain good relationships with their clients to retain them.
Residual commission estimation formula:
Total commission = commission rate x payment
Straight commission
In a straight commission structure, salespeople don’t have a base salary and instead, their entire income comes from commissions. Since there are no base salaries, commissions are generally high to attract the best salespeople who work for a company as independent contractors.
Straight commission estimation formula:
Total commission (or total income) = commission rate x sales
Revenue commission
Businesses focused on meeting revenue goals use the revenue commission model to set commission rates. Total commissions are calculated based on the percentage of revenue generated by a company.
Revenue commission estimation formula:
Total commission = sales revenue x commission rate
Territory volume commission
In a territory volume commission structure, salespeople define rates for their region. The commission is split equally among all professionals based on the total sales in a specific area. Teams that work in effective collaboration and coordination earn a higher commission for themselves with this structure.
Territory volume commission estimation formula:
Total commission per person = total sales in a region x commission rate) ÷ number of salespeople
Key elements in commission calculations
There are a few key elements that play a significant role in calculating and paying commissions.
These factors typically include:
- Commission rate: A fixed percentage or amount associated with a specific sale. For example, a commission rate can be 5% of sales or $40 per sale.
- Commission basis: Commission can be based on total sale amount, gross profit, or net profit. Businesses prefer to adopt profit-based commission calculation when there is a distinct difference between profit margins of different products or services.
- Splits: When more than one professional is involved in closing a deal, the commission might split amongst the group. Managers may also share the commission of salespeople working under their guidance.
- Overrides: In some situations commission rate may change based on a variety of factors. For example, a commission rate can retroactively increase from 5% to 10% if a sales rep hits their quarterly sales targets.
- Delays: There can be delays in commission payments as they are calculated using sales figures of the previous month, and it may take time to accumulate the data.
Benefits of using an automated commission estimator
Traditionally businesses used spreadsheets to keep track of sales and commissions earned by their sales agents. Although it’s manageable, this method can cause errors and is time consuming. Modern businesses prefer using automated commission estimators to calculate sales commission for the following reasons:
- Error reduction: Commission estimators help prevent human and commission calculation errors
- Quick estimation: Using an automated estimator tool saves time otherwise spent manually calculating sales incentives
- Easy administration: Automated commission estimators include complex calculation logic and can easily carry out the estimation process
- Clear communication: These tools manage data involved in commission calculations and provide complete commission statements, ensuring transparency.
- Efficient tracking: Estimators can effectively track sales numbers, bonuses, and commission with reporting capabilities and identify the best sales performers.
- Enhanced productivity: An automated estimator allows salespeople to focus on increasing their sales numbers rather than spending time and effort on accounting closed deals and commissions earned.
