Gross margin commission
Gross margin commission pays a rep a percentage of the profit on a sale rather than a percentage of its price: revenue minus the direct cost of what was sold, multiplied by the rate. It makes a discount expensive for the person granting it, and it requires cost data the sales team can see.
Give a rep fifteen points of discount authority and a revenue-based plan, and you have built a machine for giving away price. Every point of discount costs them a fraction of a percent of their own commission and costs the company the entire point. The arithmetic quietly tells the rep to close fast and cheap, and reps are very good at reading arithmetic.
Margin plans invert that. When commission is a share of profit, the discount comes out of a much smaller pool, so the rep feels it several times harder. Distribution, hardware resale, payments and agency businesses lean on margin plans for exactly this reason: their gross margins are thin enough that a revenue plan can pay commission on a deal the company lost money on.
The design work is entirely in the word cost, and it is more contested than the rate. Does cost mean the wholesale price of the unit, or does it carry shipping, support hours, hosting, an allocation of the implementation team? Each layer you add lowers every rep's pay. It also hands finance a lever over sales compensation that finance did not ask for and should not have, because a change to a cost allocation made for reporting reasons becomes a pay cut nobody announced.
The practical fix is to freeze the cost the deal was priced against on the day it closed, store it on the deal line, and calculate from that frozen figure afterwards, so that a re-run of a closed period returns the same answer it gave the first time.
One deal, priced twice, paid two ways
A product lists at $80,000 and costs the company $52,000. The revenue plan pays 8%. The margin plan pays 25%, calibrated so both pay roughly the same at list price. The rep then discounts 15% to close.
- Margin at list price: $80,000 revenue, $52,000 cost
- $28,000
- Revenue plan at list, 8% of $80,000
- $6,400
- Margin plan at list, 25% of $28,000
- $7,000
- Margin after a 15% discount, on $68,000 revenue
- $16,000
- Revenue plan discounted, 8% of $68,000
- $5,440
- Margin plan discounted, 25% of $16,000
- $4,000
- What the discount cost the rep, revenue plan against margin plan
- $960 against $3,000
The company gave up $12,000 of price under either plan. On the revenue plan the rep contributed $960 of that. On the margin plan they contributed $3,000, and they will think harder next time.
A margin plan pays a number the rep is not allowed to check
Most sales organisations will not show reps the cost of goods, which means the statement arrives with a figure derived from an input the rep cannot see and cannot verify. That is the precise condition under which reps start keeping their own spreadsheets. Either publish the cost per product line to the people paid on it, or show the margin used on each deal line of the statement so the rep can at least audit the arithmetic once the deal is closed. A margin plan run behind a curtain generates disputes that no amount of rate generosity will settle.
- How do you calculate gross margin commission?
- Subtract the direct cost of what was sold from the revenue on the deal to get gross margin, then multiply by the commission rate. An $80,000 sale of goods costing $52,000 produces $28,000 of gross margin, and a 25% rate on that pays $7,000. The whole calculation turns on which costs the plan counts as direct.
- Why do companies pay commission on margin instead of revenue?
- Because a revenue plan pays a rep almost as much for a heavily discounted deal as for a full-price one, so discounting is nearly free to the person doing it. Paying on margin makes every point of discount come out of a smaller pool, which raises the personal cost of a concession. It is most common where margins are thin and reps hold real pricing authority.
Nearby terms
The long form lives in the guides: Commission arithmetic.
Knowing the word is
the easy half
Commish pays gross margin commission the way your plan describes it, shows the arithmetic on every line, and traces each payment back to the deal that earned it.