Businesses pay commissions to sales reps based on the amount of sales they generate. This is a common form of compensation intended to motivate high levels of production. The amounts you pay will vary greatly based on whether you use the net revenue or gross revenue approach to compute commissions.
Gross sales are often referred to as top-line revenue on an income statement. It is the total amount of sales generated, or that you have receipts for, during a given period. If a salesperson generated $100,000 in gross sales transactions in a given month, that means he completed transactions with that amount of revenue received. If you pay 4 percent commission on the gross revenue, he would receive $4,000.
Salespeople prefer the gross revenue commission approach because they get the highest possible commission that way. For your business, it means you pay out more than you would with a net revenue approach. If your focus is to process as many sales transactions as possible, this approach makes sense. If you deal with a significant amount of returns or uncollected revenue items, a net approach may make more sense.
Net revenue more accurately depicts the money you end up collecting from sales transactions. Over the course of time, sales organizations often deal with product returns, order cancellations and unpaid debt. Deducting these items from gross revenue leaves net revenue. If your net revenue on the $100,000 in sales is $90,000, the salesperson's commission is $3,600 under the net revenue commission model.
Returns, cancellations and bad debt write-offs are realities of business. If you want to compensate sales reps for the money they ultimately generate, this approach makes sense. Otherwise, you pay commissions on some products that get returned. This approach is more common in organizations where sales reps have some responsibilities to ensure order completion or to collect on accounts. In fact, this commission approach may motivate their diligence in getting payments and ensuring customer satisfaction. The central drawback is salespeople would prefer the gross revenue commission. Plus, if you encourage sales reps to get more involved in post-sale activities, they have less time to create new sales.
