Sales commission structures play a crucial role in your ability to increase sales and drive growth.
Incentivizing retail sales associates with a commission based on their sales is by far the most effective way to keep sales reps productive.
And with the retail industry still reeling from the knock-on effects of the pandemic, maximizing sales is more important than ever before.
The mass exodus of employees leaving their current job, or the “Great Resignation,” as experts call it, is not making things easier.
Gartner reports that every departing employee costs businesses nearly USD 19,000.
The only way to attract and retain great talent in a highly-competitive market is to offer competitive pay.
If you are trying to figure out where to begin and how to create revenue-driven commission structures, we have got you covered. Here’s everything you need to know about paying commissions to retail employees.
Table of Contents
What is a retail commission structure?
Typically, retail business operators structure sales compensation around two main parts—fixed and variable pay.
The commission structure is a part of the variable pay. Commissions are a certain percentage of the sales attributed to the sales reps. Operators calculate retail commissions on gross profit, revenue, or a predefined quota, along with other factors such as the nature of the business or the level of skill required to close the sale.
Let's look at how commission-based pay helps drive sales performance.
How retail commissions drive more sales
- Motivate employees
- Reward employees based on performance
- Attract top talent
“The way your employees feel is the way your customers will feel. And if your employees don’t feel valued, neither will your customers.”
Here are some of the key benefits of paying your retail employees based on commissions.
A commission-based structure motivates retail sales associates to go the extra mile and meet or exceed their sales targets. Employees will be inclined to sell more and increase their earnings, leading to improved sales and business growth. Commissions are also known to incentivize excellent customer service.
💡 PRO TIP: Try using apps to upsell and cross-sell more effectively. Apps like Marsello and Frequently Bought Together integrate with Shopify POS and recommend products to store staff based on what they’ve added to a customer’s cart, making it easier than ever to suggest relevant products, increase basket sizes and order value.
Reward employees based on performance
According to Gallup’s State of the Global Workplace: 2022 Report, nearly 44% of employees experienced high daily stress levels in 2021. Keep your top performers in the game by recognizing and rewarding their efforts. Compensation and rewards boost their morale and make them more invested in increasing sales and driving business for the company.
Track staff performance with Shopify
Only Shopify POS gives you granular insights in staff sales data. View easy-to-understand staff reports and get insights into their average order value, items per transaction, total sales, and more.
Attract top talent
Regularly rewarding your best employees with a well-defined retail commission structure will also attract the top talent in the industry. High-performing sales reps will be flocking to your company to earn additional money.
Drawbacks of commission-based pay
- Complicates payroll
- Negative competition among employees
- Discourages employee growth
Implementing a commission-based pay structure is an excellent decision for your retail business. However, there are some downsides you should understand before making the switch.
Commissions add significant complexity to your payroll process. Calculating the commissions due, based on the items sold by each sales rep and predetermined percentages, can be quite tedious, especially when you opt for a tiered retail commission structure.
Shopify POS can help alleviate some of the complexity of retail commissions. It easily integrates your online and retail store data to track commissions earned per item or transaction.
Negative competition among employees
Another drawback is that unhealthy competition might set in between sales reps. As a result, they become overly focused on earning higher commissions and employ aggressive sales tactics.
“Unhealthy competition will trickle down to the customer experience, and it will have the opposite results of what is desired.”
Discourages employee growth
With employees vying to earn more commissions, both personal and company growth in the workplace take a backseat, since all the staff will care about is hitting targets. Make sure you encourage sales reps to look beyond their targets, hone other retail skills, and take on new roles.
5 types of retail commission structures
- Fixed commission
- Variable commission
- Residual commission
- Split or team-based commission
- Marginal or profit-sharing commission
Designing a retail sales commission structure is a balancing act. Pay too much, and you’ll eat into your profits. On the flip side, paying too little means risking losing your best sales reps.
Identify what works well in your line of business before you decide to go ahead with any of the five types of retail commission structures given below.
A fixed commission is the most basic commission structure. Fixed commissions work best for retail businesses offering high-value services and luxury goods.
Fixed commissions are straightforward to calculate—retail commission rates are based on either a fixed percentage model or a lump sum model. The sales rep will get a fixed percentage of every sale they make.
Under the lump sum model, however, the sales rep will get a lump sum amount per sale. This commission structure can lead to a net business loss if you’re not careful to measure the exact profitability of each item. This problem becomes worse if you’re paying commissions on staples or low-margin products.
The fixed commission acts as a great motivator. Sales reps will know exactly how much they stand to earn with each sale they make.
Variable commissions follow a tiered model and can encourage sales reps to hit higher targets. The commission set is higher for each new tier of sales.
This scheme is excellent for attracting and retaining high-performing sales reps who love a good challenge. Your sales team is motivated to sell even more with higher commission rates in higher tiers. For instance, if 2% is the commission rate for the first ten units sold, for the next tier of ten units, the commission rate might be fixed higher at 5%, and so on.
Despite the advantages, you might run into trouble when you have a sales rep exceeding expectations and performing exceptionally well. Avoid structuring your commissions in a lopsided manner, or else you could end up facing losses when your team achieves higher tiers of commissions.
A residual commission is ideal if you employ third-party salespeople for your retail business. Every time a sales rep brings in a new client, they will be paid a fixed sum of money for the referral.
The sales rep will also be paid a residual commission for every subsequent purchase made by the client. This structure best suits high-end luxury brands that rely on personal connections to build their customer base.
Residual commissions usually become a smaller percentage as you offer your sales reps a long-term passive income.
Split or team-based commission
The team-based commission structure allows retailers to split commissions among the team members. This model brings the entire team together to work toward shared goals. Top performers are motivated to help the other team members to level up their performance and drive more sales.
Marginal or profit-sharing commission
This retail commission structure is one where the retailer splits the profit margin between the company and the sales reps based on a predetermined percentage. The percentage may vary from product to product, making it an ideal model for retail businesses with a large variety of products.
The marginal commission requires operators to calculate profit for every product sold, making payroll calculations complex.
Nevertheless, the marginal commission is a popular commission structure among retailers, as it helps them identify their most profitable products.
How to create a profitable retail commission structure
- Choose the appropriate commission structure
- Set realistic targets
- Track employee performance
- Create safety nets and guardrails for commissioned employees
- Consider tax implications
- Review POS data regularly
To reap maximum benefits from your retail commission structure, try not to minimize commissions and save money. Instead, design the commission structure to maximize productivity and sales.
Let’s go over a few steps to create an ideal retail commission structure.
1. Choose the appropriate commission structure
Not all commission structures work for every company. You need to identify a structure that works for your line of business and the customer base you serve. It is also essential to consider your estimated revenue and current profit margins.
Commission structure can vary depending on the type of products sold. To make the most out of the commission structure, opt for one that rewards your employees and ensures that you drive greater revenue.
2. Set realistic targets
Make sure you are not setting unattainable goals for your sales reps when planning the commission structure. Instead, establish realistic sales targets that will motivate your sales team.
For example, you might want your team to hit $7000/week during an off-season, but during the holiday season you can set targets of $25,000/week. Realistic targets ensure that your sales team stays motivated and doesn’t burn out.
💡 PRO TIP: Only Shopify POS unifies your online and retail store data into one back office–customer data, inventory, sales, and more. View easy to understand reports to spot trends faster, capitalize on opportunities, and jumpstart your brand’s growth.
3. Track employee performance
Retail commission structures can be great for improving employee performance and identifying your best-performing sales reps. Not only that, by tracking employee performance you will be able to nail down the sales mechanisms and commission structures that work best for your company to reach its goals.
4. Create safety nets and guardrails for commissioned employees
Ensure that you are not leaving your retail commission rates open-ended. It helps to place a cap on the commissions that your sales reps can earn, and to add clearly-defined terms and conditions to your sales contracts. This will help you avoid suffering a financial loss at the expense of rewarding your employees.
💡 PRO TIP: With Shopify POS, you can assign different roles and permissions and set boundaries on what store staff can do in your POS system without manager approval—like changing a product’s price or applying a custom discount to a sale.
5. Consider tax implications
It’s essential to consider the tax implications of the commissions you pay. Various federal and state laws govern commission-based pay across industries. To avoid penalties, ensure that you take proper legal guidance and abide by the rules and regulations that apply to your business.
6. Review POS data regularly
It’s crucial to monitor and upgrade the performance of your commission structure from time to time. Your retail POS system will provide in-depth analytics, helping you identify common trends and arrive at actionable data to improve your commission structure.
💡 PRO TIP: Analyze your POS data in tandem with your ecommerce data to be more cost effective with your inventory, measure your store’s impact on online sales, repeat purchases, lifetime value, and more.
Implement commission-based pay at your retail store
Retail commissions are one of the best ways to maximize sales. The right commission structure can ensure that your sales reps are productive in bringing in more revenue for the store, which in turn assures the store’s continued growth. Keep your commissions competitive and review them periodically.
Turn store traffic into sales
With Shopify’s mobile POS, you can serve customers anywhere in your store and banish lineups at the checkout counter. Use any smartphone or tablet to process returns and exchanges, accept payments, and check out customers wherever they are.