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Sales Commissions for Manufacturing

Manufacturers sales rep commission rates: How to calculate?

Key Takeaways
  • Sales commission is performance-based compensation paid to a sales rep in any industry.
  • Top manufacturing sales commission plans are base salary plus commission, straight commission plan, gross margin commission, and territory volume commission.
  • The effective commission structure will attract top sales talent and create a healthy competitive environment.

As per ReHunter, most sales representatives in the manufacturing industry get commission rates between 7% and 15%. 

Also, note that companies that utilize incentive programs with correct rewards experience a 79% success rate in achieving their goals. 

However, as per a report, the average turnover rate is increasing dramatically, 35% in B2B sales.

The reason underlines the negligence in determining the right sales commission structure and its calculation.

Adopting a fair sales commission for your manufacturing business can help you attract top talents, sustain them for longer and meet your desired sales goals. 

This blog covers the true knowledge on how to pay sales reps correctly with the four best manufacturing sales commission plans and choosing the ideal one!  

What is a manufacturing sales commission plan? 

A manufacturing sales commission is a compensation structure outlining how much a sales rep should get paid based on their performance. 

This commission structure compromises a percentage based on the rep’s performance and efforts.  

It varies depending on factors such as the deal type, value, size, etc. Further, it also considers the experience and seniority of an employee.

Sales commissions motivate reps to contribute to the company’s revenue goals. 

When you adopt the proper manufacturing sales commission structure, you’ll experience perks like: 

  • Highest retention rates of sales reps: The right sales commission plan drives reps to give their best and perform better. This, in turn, results in higher turnovers and a retention rate. 
  • Increased productivity: A smartly designed manufacturing sales commission plan yields the best results. It encourages your sales representatives to produce more results and achieve set revenue goals. 
  • Improved sales performance: A well-structured sales commission that aligns with sales goals and offers reps good incentives motivates them to bring more business.

Apart from these, there are other benefits like increased revenues, a healthy competitive environment, constant motivation to perform better among your sales teams, and many more.  

Hope you’re clear about how important a sales commission is to achieve your set sales goals. Moving on to various manufacturing sales commission structures to choose from.

Key factors that influence your manufacturers sales rep commission 

The manufacturing industry follows a B2B sales model, and below are certain factors that affect your sales commission rate largely. Let’s study them one by one. 

  • Company revenue goals: It should be aligned with your manufacturing business revenue goals. 
  • Product and market competition: It should be competitive with your competitive manufacturers so that you can attract and retain the top sales talent.
  • Sales cycle and order size: Consider your sales cycle length and order size while choosing a commission plan, as this will help you better assign with your sales goals and company objectives.
  • Sales territories: It should be tailored to all your territories so sales reps get a fair reward for their efforts, and this also avoids a sense of conflict among the sales reps working in the same regions.
  • Sales rep performance: Your commission plans should include a fair reward for the top achievers and motivate underperforming sales reps.  

Once you’re clear with the above details, you can start by determining an ideal sales commission plan that aligns with your business goals. 

Which is an ideal manufacturing sales commission plan to adopt? 

I have handpicked the ideal manufacturing sales commission plans aligning with your revenue goals.

Sales commission type Pros Cons 
Base salary plus commission Guaranteed income expense and motivates professionals.  Minimal base salary and difficulty in employee retention. 
Straight commission plan Unlimited earning potential motivates sales reps to perform better. Economical commission type for companies. Unpredictable expense for the company and no fixed payment.  
Gross margin commission Provide flexibility for adjusting pricing and focuses on a better understanding of product profitability. Misalignment with revenue goals as the focus is on each sale over total revenue.  
Territory volume commission  It encourages territory ownership and accountability.  Scope of scalability when planning to capture new territories for sales. Higher possibility of territorial conflicts if two or more reps are assigned a single territory.   It also limits profitability as reps need to close a deal to meet the target even if the profit margin is less. 

1. Base salary plus commission 

In this, a base salary plus a performance-based commission is given to the sales reps.

Base pay offers financial stability. Further, the commission motivates you to perform better.

This way, you can give a commission depending on the sales reps’ performance. Hence this commission structure stabilizes the manufacturing business and the employee. 

This builds the driving force in your reps to generate more sales and receive a higher commission payout. 

It also allows the management to balance their fixed and variable costs. In addition, the plan offers consistent compensation for the reps, along with costs aligning with revenue goals. 

You can use this structure to attract top sales talent to the team.  

It is ideal for sales reps working for business organizations and government agencies.  

  • Formula to calculate base salary plus commission: 

Total Compensation = Base Salary + (Commission Rate x Sales)

Here’s an example that helps you better understand the calculation.

Base Salary + Commission example
  • When to use base salary plus commission structure? 

This commission structure is required for a manufacturing business to balance stability and performance-based incentive.  

Thus, it is suitable for small and mid-sized manufacturing businesses with the budget to hire dedicated sales reps.

This structure attracts and retains top talented individuals who need both – base pay for their work and incentives.

2. Straight commission plan 

As the name indicates, this manufacturing sales commission plan focuses on paying only commissions

It motivates your sales reps to hunt and close more businesses as their income depends upon the deals they close.  

As management, you don’t have to bear the overhead expense of the base pay. 

Also, you have high control over variable costs to be adjusted per the company’s financial performance.  

It ensures your reps build better customer relationships and exceptional service and support.   

As the pay is based on every new client your reps bring, this structure helps you get new clients and deals in the bucket.   

Moreover, this also minimizes the financial risk for your manufacturing business. 

This commission structure is ideal for companies that need more reliable access to capital—for example, start-ups or companies in their survival stage.  

However, you must ensure you set the right commission pay, or you’ll have to bear a high employee turndown.   

  • Formula to calculate straight commission structure: 

Income = Total Sales x Commission Rate

See the example below that shows the calculation of straight sales commission: 

Straight Commission Example
  • When to use a straight commission structure? 

The straight commission structure is best suited for the manufacturing industry, as it has a sales cycle where every individual effort impact deal closures. 

And this is where this structure makes sense. When you have reps willing to give their best, you hire and pay them on the results generated. 

This structure encourages manufacturing reps to proactively pursue leads, negotiate effectively, and maximize revenue generation. 

3. Gross margin commission structure 

This manufacturing sales commission model is quite popular among manufacturing sales reps. 

This structure incentivizes sales reps to focus on selling high-margin products as their commission depends on the gross revenue generated. 

That is, you reward the employees with a profitable amount, which also lets them predict their compensation. 

This motivates your reps to make more profits as their income depends on the same. 

By using this method, you’ll realize that your reps will avoid offering discounts and practice upselling. 

Moreover, this commission will be profitable for your company as more high-margin products are sold. 

Here you calculate the commission on the difference between the selling price and the cost of goods sold. 

  • The formula goes as follows: 

Gross Margin = Total Sale Price – Cost  

Gross Margin x Commission Percentage = Total Commission 

The below example can be helpful to understand it better:

Gross Margin Commission Example
  • When to use gross margin commission structure? 

This commission structure is best to adopt when the manufacturing goal is to maintain profitability. 

It is suitable when you have a high-margin product or customized solution. This structure ensures bottom-line profitability while encouraging reps to perform better. 

It promotes strategic selling and cost-consciousness.  

4. Territory volume commission  

This commission model is a great choice if you want to increase the sales of a particular location.  

In this model, the commission generated from a specific location is divided between all the salespeople.  

Your business operates and exists at multiple locations. This team-based commission structure motivates reps to perform collectively.

Further, it is a great pay model to increase the sales of a particular sales structure.

This model enables effective team building and lets you scale your business in new regions.

However, the biggest demerit is that it affects the team negatively; all reps get an equal portion of the commission even if they close more.

So, you need to execute this strategy cautiously.

  • The calculation goes simple: 

Let’s suppose the total commission generated by a middle east team with eight teammates is $10000. Then the commission will be $1000 for each.

Here’s another example to better understand: 

Territory volume commission
  • When to use territory volume commission 

This structure is best for manufacturers having business at national and international levels. When you have a business spread at different locations, using this commission structure effectively scales it. 

This is all about types of sales commission plans; I hope this was helpful.

Manufacturing businesses mostly prefer these four commission structures. However, many other types of commission structures exist, such as tiered and residual commissions.

How to calculate manufacturing sales commission in 5 simple steps 

Determining the fair commission rate is crucial for the manufacturers. Hence, I’ve mentioned five simple steps to help you calculate manufacturing commission: 

Step 1: Decide your ideal commission structure  

Start with deciding an ideal commission structure when calculating the manufacturing sales commission.

This involves understanding the type of commission structure along with its benefits and drawbacks.  

It also includes knowing the rate, percentage of commission, and influencing factors.

Moreover, consider additional factors like quotas and bonuses to adopt the right commission sales structure. 

Step 2: Gather sales data for a defined period 

The next step is to collect sales data for the said period. This means ensuring the data’s accuracy and completeness, further organizing and categorizing it appropriately.  

Adopt relevant tools and platforms to do so; for example, you can use CRM with a sales intelligence platform that will help you get a deeper insight into your sales success or failure.

You can calculate accurate commission payouts by diligently capturing this sales information. 

Usually, commissions are paid monthly or quarterly. When seeking an average, it is advisable to compare different year periods.

This way, you allow fair compensation based on their performance. Also, it is vital to note that commission can also vary based on company policy.  

For instance, a company may delay commission until they receive a full payment from the customer.  

This policy may lead to a potential delay of several weeks.

This may sound cruel and harsh for reps but imagine if the outstanding amount is in six-figure dollars and you need to pay many thousands to reps.

Click to know the average sales commission rates by industry.

Step 3: Calculate gross sales  

Once you collect the data, it’s time to calculate gross sales. It includes identifying the sales type, such as product or service sales.   

Then consider the period during which the sales are made. Total sales for the specific period help you to calculate the commission accurately.  

Consider the adjustments while calculating, as any return or adjustments can affect the final figure.  

Step 4: Determine the base commission rate with accounting additional factors 

Calculation of the base commission mainly involves multiplying the total sales figure by the designated commission rate.  

It includes adjusting any tiered commission rate based on a predetermined threshold. However, considering the maximum or minimum threshold ensures justice.  

Further, accounting for additional factors involves incorporating quota or target-based adjustments to incentivize performance. 

One of the ways to reward exceptional achievement is through performance bonuses. Remember to account for deductions or chargebacks to guarantee accurate commission.  

Once you have these numbers figured out, it’s easy to establish a comprehensive and equitable commission base. 

Step 5: Calculating the final commission  

The last step is to calculate the actual commission. This involves adding all the adjustments, periods, and other crucial factors accounted for previously. 

It’s essential to ensure the accuracy and consistency of a fair payout. 

Lastly, remember to communicate the commission details with your sales reps. And if required, resolve their doubts. 

A more inclined rate toward your or the reps’ side will lead to unfavorable results, so please avoid it!

Sales leaders must leverage the sales commission calculator to get a fair rate to grow a sales team of top talents. 

Overall, a well-structured manufacturing sales commission plan is a win-win situation for the manufacturing business and its sales reps.   

Ready to Optimize Your Sales Commission Plan?

Ready to Optimize Your Sales Commission Plan?

Calculate and discover the profitable commission structure for your manufacturing business with Salesmate's free sales commission calculator tool.

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Conclusion 

In conclusion, manufacturing sales commission plans are an excellent motivator for sales reps. It is also an essential tool for manufacturing companies.   

When appropriately designed, these plans can increase productivity, higher retention rates, and concrete sales goals.

However, deciding a fair manufacturing sales commission rate balances various factors. Therefore, you need to start by researching market pay rates.

This includes knowing your competitor’s pay rate, market conditions, and other external factors that affect your compensation rate.  

Further, deciding the rate also depends upon the sales process. 

If your sales process is lengthy, closing deals take a lot of time and effort, and the product or service value is high, then the commission rate has to be high.  

The commission rate can be low when the situation is vice versa.  

Lastly, you must consider the employee’s background while deciding the sales commission rate. This includes the rep’s education, experience, and track record.  

Frequently asked questions

What is the average sales commission manufacturing rate for independent sales reps? 

The average sales commission manufacturing rate is $63,000. Regarding percentages, the average sales commission manufacturing rate is around 20-40%.

Is sales commission manufacturing overhead expense? 

Manufacturing costs include all the prices that are incurred to finish the product. This includes expenses like labor, raw materials, equipment, shipping, and so on.   

And sales take place after this process. Hence, the sales commission isn’t a part of the sales commission manufacturing overhead.

Is sales commission cost for manufacturing?

The simple answer is- No. This is because sales commission does not contribute to producing the final product. Hence, the sales commission isn’t a fixed manufacturing cost.

What is the difference between a manufacturer’s sales rep and a distributor?

The main differentiator between a manufacturer’s sales representative and a distributor is that distributors buy and sell goods while representatives act as sales agents.

What are the average sales commission rates for a manufacturer’s rep?

While the manufacturing commission ranges between 7 to 40%, its average rate is 15%.

What is a typical sales commission rate?

The typical manufacturing sales commission rate is 7-15% of the net sales.

Is 15% a good commission? 

Yes. It is a good commission rate as most sales reps have to work for 7% or even less.

Is sales commission a manufacturing cost?

Yes. Sales commission is a direct manufacturing cost.

What is the average b2b sales commission?

The average B2B sales commission is 10%.

How to calculate manufacturing commission as an independent sales rep?

First, you must understand the commission plan and rate. Then determine the sales made during a specific period of time. Next, deduct any applicable expenses if needed. Lastly, calculate by multiplying the commission rate by the net sales.

Dhanashree Pal

Dhanashree has been into writing since her teens. She believes writing is the best way to express and explain everything happening in this world. Reading and imagining are something she can do for hours. Enthusiastic about exploring new places and food. Young and hopeful of becoming better with every passing day.

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