There are many different types of commissions and many different ways commissions can be calculated. This is a general discussion on some variables in the medical sales industry. Setting commission compensation for independent medical sales representatives can be tricky. To create a compensation package that's fair to both parties, consider what it is you are actually paying for, what expectations there are for the sales reps, how much time is invested by both parties and are the rewards fair and equitable to both parties? Are both parties, equally, putting a "little skin in the game?"
Estimates reflect the average cost for rep on salary, at $50,000/year, can ultimately cost the company $150,000 annually. Recognizing this value and rewarding the independent representatives can bring powerful sales results. Be sure to provide the tools they need to succeed - One should not consider aligning independent sales representatives without knowledge (or first doing extensive research) of the independent rep industry, particularly in medical sales.
Professional and top performing independent reps recognize this, only seeking products they feel they will succeed with. Independent reps are willing to put additional efforts for viable products with compensation rewards.
Building the High Impact Sales Force with Independent Medical Sales Representatives: An Investment You Can't Afford Not to Make provides insight to the potential $3M in hiring costs for companies hiring 20 direct salary reps.
Commission Only - Compensation Payments are completely on sales results only.
Independent Reps on commission only - Commission Only Compensation is for those reps with SOLID sales capabilities and proven skills to close sales. For top performing Manufacturer Reps, commission only opportunities often provide very attractive compensation deals, since their income potential is entirely in their control as a result of closing sales. For many sales reps that have not experienced commission only compensation - this can be a risky area to enter - if sales aren't closed commission isn't paid. Commission only compensation for independent manufacturer reps is usually the HIGHEST commission percentage package offered.
Commission Only plus Bonus - Compensation Payments are completely on sales results only. Added bonus if performance meets or exceeds specific goals which are mutually acceptable to both parties. Goals and bonus payment periods may be structured product specifically. This is one of MedCepts Favorites.
Residual Commission - Residual commission can be a salesperson’s dream, because as long as their accounts are generating revenue, the independent sales representative continues to receive a commission. Key thoughts to consider would be the requirement of continued efforts by the Independent Sales Representatives and the average term for company to maintain accounts established. Some negotiations may include terms for the independent sales reps to continue receiving residual commissions even after the rep is no longer with the company. Many manufacturers are reluctant to offer this type of extended compensation deal, while many utilize this with lower compensation potential during the onset of building business.
Variable commission or tier level commission - Keep it simple. Look carefully at the goals of the company. Commission Payment structure may be based on "New Business" with the highest focus or commission payment on new accounts established for a specified period with commission percentage decreasing as the company maintains the account. This is another one of MedCepts Favorites
Base plus commission - Base pay or a base salary type of compensation agreements can vary. Commission structure typically is lower for negotiations that include a Base plus Commission compensation structures. Regardless of the sales closed a base payment is provided. There are many variables when a Base pay plus commission is implemented.
Base plus commission plus Bonus - pre-determined base amount that is not impacted by performance, sales closed or quotas met. Added bonus if performance meets or exceeds specific goals which are mutually acceptable to both parties. Goals and bonus payment periods may be structured product specifically.
Draws - This may be set up as a draw against commission earned. This draw is deducted from earned commissions. If sales don’t cover the draw money could be owed to the company, which can often be paid back later during a more prosperous period. However, if there are several poor performance periods, the independent manufacturer rep on commission only could run into problems as they continue to run in the negative - carefully review clauses placing a limit on the liability regarding payback.
***Note: "Base pay", monthly allowance, stipend, draw or any other payment structure can range across the board. Companies should carefully evaluate their situation from the IRS standpoint to identify an employee versus an independent contractor. There are many situations where an "Employee" may become an independent contractor or an Independent may transition to an "Employee" status. Be sure to communicate closely with your own tax and legal advisors / consultants. MedCepts does not provide legal or tax consultative advice.
IMPORTANT: This information is merely presented as a General Discussion. MedCepts recommends you consult your legal advisor before entering into any agreement. MedCepts is not a legal advisor and never has any intention of offering legal advice. Help me today is almost always cheaper than a fix me tomorrow. To those seeking to "save" money by dispensing with sales agreements with creative commission compensation structuring, without the advice of legal counsel, beware that the cost of such "savings", should disputes arise, will likely be far more expensive than having done it "right" in the first place.