Typically, a sales representative earns a base salary plus commissions. While compensation structures differ by company, with some offering bonuses, increased commission rates for achieving goals and other incentives, all companies pay either capped or uncapped commissions. Uncapped commissions are often preferable, because they offer unlimited earning potential.
Uncapped Vs. Capped Commissions
An uncapped commission is exactly as the name implies: There is no cap on how much a sales representative can earn in any given period. Typically, base salaries in an uncapped commission plan are much lower than those of a capped plan, since the expectation is that you will earn the bulk of your pay through commissions. A capped commission, on the other hand, usually has a much higher base salary, but places limits on how much one can earn in commissions. Once you reach the cap, you cannot earn any more commissions regardless of how much you sell. Often, capped commissions include additional earning opportunities, including stock options, a percentage of company ownership or a year-end bonus based on overall company performance. These perks generally aren’t available, or are much smaller, when offered by companies with uncapped commissions.
The Benefit of Uncapped Commissions
Most businesses opt for an uncapped commission structure for the simple reason that it provides greater incentive for the sales staff to perform at a higher level. For example, if you earn $100,000 on $1 million in sales, and that is all you can earn – even if you make $2 million in sales – there's no incentive to sell more. Whereas, when a company pays a commission for all sales, there is more incentive for you to sell as much as possible, helping the company grow and reach its goals while you earn more. Often, when a company has a cap on commissions, salespeople will defer sales into the next calendar period to maximize their earnings; after all, no one wants to work for free. This can have a detrimental effect on the business, leading to missed targets and lower revenues, as well as frustrated or disappointed customers who aren’t receiving the best level of service possible.
The Effect of Commissions on Company Culture
A company’s commission structure does have a significant effect on the overall culture of the organization. When commissions are uncapped, the atmosphere tends to be more competitive, with a greater emphasis on performance and meeting sales goals. Salespeople who cannot meet sales goals not only have lower earnings, but typically don’t last long in the company. A company with capped commissions, especially one with competitive base salaries, on the other hand, may have a much less competitive environment. The focus tends to be on building relationships and servicing existing customers to encourage them to buy more, rather than aggressively seeking new business.