or pay calculated
as a percentage of sales. For instance, a furniture salesperson might earn commissions
equaling 6 percent times the price of the furniture the person sells during
the period. Selling a $2,000 couch would add $120 to the salesperson’s commissions for the period. Commission rates vary tremendously
from one industry and company to another. Examples
reported include an average rate between 5.0
and 5.5 percent for real estate, 30 percent up to 90
percent of first year’s premiums on life insurance
(then dropping to as low as 4 percent in subsequent
years of the policy), and 20 to 30 percent of profits
for auto sales. 18
Some salespeople earn a commission in addition
to a base salary; others earn only commissions—a
pay arrangement called a straight commission plan.
Straight commissions are common among insurance
and real estate agents and car salespeople.
Other salespeople earn no commissions at all, but a
straight salary. Paying most or all of a salesperson’s
compensation in the form of salary frees the salesperson
to focus on developing customer goodwill.
Paying most or all of a salesperson’s compensation in the form of commissions encourages
the salesperson to focus on closing sales. In this way, differences in salespeople’s
compensation directly influence how they spend their time, how they treat customers,
and how much the organization sells.
The nature of salespeople’s compensation also affects the kinds of people who will
want to take and keep sales jobs with the organization. Hard-driving, ambitious, risktaking
salespeople might enjoy the potential rewards of a straight commission plan.
An organization that wants salespeople to concentrate on listening to customers and
building relationships might want to attract a different kind of salesperson by offering
more of the pay in the form of a salary. Basing part or all of a salesperson’s pay on
commissions assumes that the organization wants to attract people with some willingness
to take risks—probably a reasonable assumption about people whose job includes
talking to strangers and encouraging them to spend money.