Commission Structure Variables for Independent Manufacturer Representatives (Independent Sales Contractors) in Medical Sales
There are many different types of commissions and many different ways commissions can be calculated. A good compensation plan includes creativity. There are many compensation variables in the medical sales industry, especially commission structure variables. Setting commission compensation for independent medical sales representatives can be tricky. Compensation on results, or performance compensation, is utilized in unlimited variable compensation plans. Commission variables offer a strong compensation plan. Be creative with Commission variables and recognize there are numerous ways of utilizing commission in a compensation plan. A single compensation plan may also include multiple Commission variables. Performance compensation may be based completely on an array of creative commission variables.
To create a compensation plan that’s fair to both parties consider what it is you are actually paying for. Secondly, consider what expectations there are for the sales reps. Additionally, consider how much time is invested by both parties. Finally, be sure the rewards are fair and equitable to both parties. In other words, are both parties, equally, putting a “little skin in the game?”
Important Factors to Consider when structuring Commission
compensation for Independent Sales Representatives
Manufacturers and Suppliers – Avoid minimizing the value of Independent Sales Reps by offering valuable compensation rewards for sales closed.
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.
Independent Manufacturer Reps should not expect “mailbox” money, aka easy money.
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 – Independent Reps on commission only –
Compensation Payments are completely on sales results only, in other words, exclusive to performance compensation. Get creative to motivate with Commission Compensation for Independent Reps. 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. Basically, a commission only compensation plan for independent reps is for successful sales professionals. Admittedly, for many sales reps that have not experienced commission only compensation, commission only compensation is a risky area to enter. The point is, if sales are not closed commission is not paid. This is clearly entirely performance compensation.
Commission Only plus Bonus –
Compensation Payments are completely on sales results only in a commission only plus bonus compensation plan. An added bonus if performance meets or exceeds specific goals which are mutually acceptable to both parties can make a creative compensation plan. 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. In this situation, as long as accounts are generating revenue the independent sales representative continues to receive a commission. Key thoughts to consider would be any requirement of continued efforts by the Independent Sales Representatives. Additionally, be creative regarding the term for residual commission. Some companies may include terms for the independent sales reps to continue receiving residual commissions even after the rep is no longer with the company. This is particularly true for commission only compensation. Some manufacturers are reluctant to offer this type of extended compensation deal. On the other hand, many companies utilize this as an incentive.
Variable commission or tier level commission –
Keep it simple but be creative with a compensation plan. Look carefully at the goals of the company. Commission Payment structure may be based on New Business. Often, the commission for new accounts established is higher and may last for a specified period. Thereafter, Higher commission percentage decreases as the company maintains the account. Commission variables may be designed based on tier levels, performance compensation. This is another one of MedCepts Favorites
Base plus commission as a compensation plan –
Base pay or a base salary type of compensation plan can vary. Commission structure typically is lower for negotiations that include a Base plus Commission compensation structure. Regardless of the sales closed a base payment is provided. Most importantly, be creative with the inclusion of a commission compensation plan.
Base plus commission plus Bonus – Bonuses as a part of a performance compensation plan
Commission, plus a bonus, is powerful in a compensation plan to motivate for increased performance. Moreover, set realistic goals for the bonus in a compensation plan. Bonuses are often performance compensation based on meeting or exceeding goals. There are numerous commission variables entering into this type of compensation plan.
Draws as a compensation plan
Draw against commission earned. In this situation, several poor performance periods the independent rep will run in the negative. Generally speaking, agreements with the inclusion of a draw will need very careful review. In this situation, consider clauses for a compensation plan to include placing a limit on the liability regarding payback. This is not a preferred compensation clause in its entirety. However, there are specific cases where a similar clause can be beneficial to the company. Sales reps will need to review any type of “Draw” carefully.
***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. Additionally, often 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.