I think that the answer to that depends on the company. A lot depends on how
the profit margin is set up. If the sales commission is calculated in to
come up with a firm or minimum selling price, then calculating commission on
sales doesn't hurt anything. But if price is a variable based on cost, then
a fixed commission on sales could put the company in the red.
Let's take an automobile dealership and one car.
Car costs $1000 and their target profit is 33%, so the windshield sticker says
$1330
Meanwhile, the deal for the salesmen is 10% of sales.
Along comes a sharp customer, salesman has a bad day, sales were down
anyhow, so he lets the car go for $1050. Ok - it cost us $1000, so we made
$50 on it. Oops - now we have to pay 10% commission on SALES, so we own the
salesman $105, which means the dealership just lost $55 on the sale.
But if the potential commission was calculated into the lowest sell price to
begin with, then not a problem as long as the rules are followed. Example,
same $1000 car, same 10% of sales deal for salesmen, but now the calculated
cost of the vehicle is at $1111.11 - no one is allowed to sell the car for
less than that, since that is roughly the breakeven point (I know the
$1111.11 doesn't quite look right, but if you take 10% of that and subtract
it from $1111.11 you end up with the $1000 cost left over). And a smart car
dealer would set it up that way, and a really sharp one would calculate
amount for profit on this, thus actually making some profit from the
commission itself.
Hope this helps.
I doubt that there is a "right" or "wrong" way to set it up. You just have
to make sure that your selling price is always enough to pay whatever
commission you set up under whatever method and that paying commission never
puts the sale in the red.
The safest thing for the company to do is accurately calculate costs and pay
commission on 'net profit'. This serves 2 purposes, makes sure that as long
as you make some profit, you don't have money-losing sales. Makes the
salesmen tough to deal with because they realize their money is directly tied
to how much above cost they sell the item for.
It's also a way for the really sharp car dealerships to never pay a dime in
commission - I know some bookkeepers that could prove a loss on the sale of
sand that cost $10/pound to buy and was selling for $1000/pound. These
places generally have a high turn-around rate for their sales staff.
"k-leo" wrote:
> oops... JLatham...
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