What is uncapped commission?
Many sales representatives earn commission on any revenue they generate for a company to motivate them to sell well and reward their hard work. As an employer, you can choose to pay your reps a commission-only salary (straight commission) or pay commission on top of a basic salary.
Uncapped commission means that you don’t limit how much revenue your reps can earn commission on per month, quarter or year. For example, say you decide to pay a 10% commission rate on all sales. You’d continue paying your employees that rate regardless of how much they sell, which means there’s technically no limit to how much they can earn.
Graduated commission
Some companies pay uncapped graduated commission instead of paying a fixed rate on all sales. Generally, this means that the commission rate increases at a particular sales milestone. For example, you could choose to pay your reps a 10% commission rate on the first $500k of revenue and increase the rate to 12% on the next $500k.
Gross profit commission
Gross profit commission is an alternative to paying commission based on sales revenue. You’ll only pay commission onthe gross profit, reducing the value eligible for commission for each sale. However, gross profit commission rates are usually significantly higher than those based on revenue.
Capped vs. uncapped commission
Some employers pay capped commission, limiting how much revenue their sales representatives can earn commission on. For example, your company could decide to cap commission at $500k per quarter, meaning your reps earn 0% commission on anything they sell once they hit the $500k milestone.
Some companies choose to cap commission to avoid overpaying their reps and maximize the organization’s profit from sales. However, there are several advantages to rewarding your employees with uncapped commission.
Advantages of uncapped commission
Paying uncapped commissions could seem like an expensive strategy at first glance. However, a well-planned uncapped commission structure could benefit your organization and increase your profits in the following ways.
Increased motivation to sell
Capping commission often leaves sales representatives unmotivated to put their efforts into selling once they meet the cut-off point. Therefore, paying uncapped commission could encourage your reps to continue searching out new prospects and building relationships with clients to maximize their earnings.
Higher revenue
Generally, motivated sales representatives sell more. Paying uncapped commission usually results in higher profits because you’ll only pay your reps a percentage of every deal they close. Therefore, you’ll never spend more on commission payments than you earn per sale.
Improved retention and recruitment
Uncapped commission is a common compensation structure, and it’s reasonably likely that at least some of your competitors are paying their reps for every sale. Capping commission could make it harder to retain employees, as successful reps may start looking for a better commission structure elsewhere.
Limiting your representatives’ commission earnings could also make it harder to recruit new talent. Uncapped commission is often a basic expectation, especially for experienced job seekers. Sales reps may accept a job with another company offering uncapped earnings unless you offer a truly stellar basic salary and benefits package.
Enhanced performance and behavior
Companies often use uncapped commission to promote a competitive workplace culture, encouraging representatives to close sales as quickly as possible. On the other side of the coin, capping your commission rates could encourage your employees to drag out the sales process in an attempt to roll the sale over into the next quarter so that they earn commission on it.
Disadvantages of uncapped commission
Despite the many advantages, it’s also important to be aware of the potential pitfalls of paying uncapped commission. While uncapped commission may make sense for your company, understanding the potential negative impacts on your employees, workplace culture and bottom line can help you create more robust processes.
Budgeting issues
Paying uncapped commission can cause cash flow issues if you sell products or services on credit or if payments take a while to process. For example, you could end up with discrepancies if you pay commission to your sales reps immediately and your client then fails to pay the company.
Problematic sales tactics
Generous uncapped commission rates can encourage employees to sell aggressively to maximize their earnings. Aggressive selling can be a particular problem if you pay your sales representatives straight commission because they rely on making sales to pay their bills.
Hard-selling techniques could be effective with certain clients, but they could be offputting to others. Furthermore, it could create a negative impression of your company’s values and culture.
Paying your sales representatives a relatively comfortable basic salary and paying commission on top could reduce the motivation to employ aggressive sales tactics at the expense of your company’s image. It’s also worth considering what commission rate will motivate your reps without encouraging overzealous selling.
Unpredictable earnings
No commission model is 100% predictable, but employees could experience problems meeting their financial obligations if they get used to earning high amounts of uncapped commission and then go through a quieter spell. Employees on an entirely commission-based salary are at a higher risk of experiencing financial instability than those on a basic salary plus commission. New employees could also find themselves in financial difficulty while they work to establish relationships and client networks.
Offering your employees a stable income could benefit your business because reps may decide to leave the company if they can’t meet their financial obligations. Therefore, paying a relatively comfortable base salary and lower uncapped commission percentages may be better than offering sky-high rates on a commission-only basis.
Over-competitive culture
While paying generous uncapped commission could be a great motivator, it could also discourage teamwork by pitting representatives against each other to secure sales. Healthy competition can be a good thing, but an overly competitive workplace could increase pressure and stress for employees and make it harder for new team members to find their feet. You could try mitigating this risk by considering the workplace behaviors you wish to promote and finding ways to reward qualities like teamwork and mentorship.
FAQs
What is an uncapped bonus?
The term uncapped bonus often means the same as uncapped commission. However, some employers use it to describe a milestone bonus. For example, a company may choose to pay its sales representatives a fixed bonus when they hit certain revenue milestones. Uncapped commission differs from a milestone bonus because representatives receive commission as a revenue or profit percentage for every sale.
Are commission caps normal?
Both capped and uncapped commission structures are relatively common. However, many sales representatives prefer to work for companies offering uncapped commission, so implementing a commission cap may make it harder to hire and retain salespeople.
What is a 100% commission structure?
100% commission doesn’t mean you pay your reps 100% commission on every sale. It’s a synonym for a straight commission compensation structure. Therefore, sales representatives on a 100% commission contract don’t receive a base salary and rely on commission for their entire income.
