The Guide to Sales Commission Structures
Your sales commission structure is one of the most important contributors in the success of your sales team — not to mention your bottom line.
There are a variety of different commission structures and compensation plans that may work for your sales organization. Each model offers something slightly different in terms of base salary, commission rate, and/or bonuses.
In this article, we’ll discuss the various compensation options available to you, and help you learn how to calculate the best fit for your company to incentivize your sales team and maximize your profitability.
Here’s what we’ll cover:
- Creating a Commission Program for Sales
- Types of Sales Commission Schemes
- How to Calculate Base Salary
- How to Calculate Sales Commissions
- What Is the Best Sales Commission Schedule?
Creating a Commission Program for Sales
Your commission plan is one of the most important things to consider as a sales leader or hiring manager. It can help you:
- Motivate individual sales reps to perform at their highest level
- Attract top-tier sales professionals to remain competitive in your field
- Fine-tune your sales process so that you can track various performance metrics and address any areas of weakness
A carefully designed sales compensation plan can be highly motivating to your sales team.
Ideally, it should encourage your sales representatives to work at a level or pace that’s challenging for them over the course of most of the month/year — but not so difficult that they feel like they can never meet their sales goals.
Benchmarks and sales goals should be high-reaching and help bolster the company’s financial needs, but they should also be attainable to your reps who work hard to meet them.
Less Turnover & Better Competitiveness
It’s no coincidence that companies with fantastic compensation structures have the highest retention rates.
In fact, most sales professionals who leave their company for anything other than “personal reasons” state that their decision came down to compensation.
Companies paying at the 75th percentile have 50% less turnover. For sales management, lower turnover means:
- Increased productivity
- Less money spent on attracting and onboarding new salespeople
- The ability to create concrete sales goals, which will ultimately lead to more long-term, predictable, and sustainable growth
The best sales commission structure for your company will be unique to your needs and goals, but having one that’s both lucrative and challenging is a great way to motivate and retain an elite sales force.
Streamline Your KPI-Tracking Process
A well-defined commission model will allow you to break down the sales process and evaluate which sales reps are top performers, and which reps may need more training.
Looking solely at total sales is an inaccurate picture of how a sales rep is performing. Check out how many factors actually go into making a sales rep successful (and even this is a relatively basic breakdown).
A clear sales commission structure will help you logically break down the various performance metrics of your team members and evaluate them accordingly.Lead your team to successTrack, analyze, and standardize what’s working
Types of Sales Commission Schemes
There are a wide variety of commission schemes that may meet the needs of your company.
While there are many models to choose from, don’t feel like you have to be locked into any one template. Keep in mind that most companies end up taking a hybrid approach, and will “mix and match” aspects from many of the following models as they’re best suited to their own sales teams.
Base Salary Plus Commission
In a base salary + commission model, a sales rep is paid a certain monthly or annual salary, regardless of how they perform. They also have the opportunity to earn a commission on each sale they make.
Usually, the base salary isn’t high enough to make a very comfortable living, so sales reps are incentivized to work hard to meet their commission goals. A base salary + commission is a good balance between financial security and financial incentive.
The sales process and customer satisfaction both benefit from this model, as well. Customers and salespeople can each retain their integrity throughout the process, because there isn’t as much at stake if the rep doesn’t close any one deal — they still have their base salary to fall back on.
With a commission-only model, sales reps are not paid a base salary. The only income they receive is generated directly from the number and value of the deals they close.
This model has its pros and cons. On the one hand, it can be attractive for some companies, especially those with shorter sales cycles and/or higher-value deals. It’s also favorable for cash-strapped startups — they only need to payout when new customers are acquired.
It can also be attractive to a specific type of salesperson. Because there’s no commission cap, the earning potential can get very high with this model.
On the other hand, this model can also be risky for sales reps. There’s no guarantee at the end of the day that they’ll make a living wage, and even the best sales reps run into unforeseen circumstances where deals are harder to close.
Commission-only models are also known for leading to higher turnover rates and poor morale. Because of this, most companies use them primarily for 1099 employees and independent contractors.
With a revenue commission model, sales reps are paid a commission that’s a percentage of the total amount a deal brings in.
For example, let’s say a sales rep closes a deal with a $5,000 price tag and is compensated with a 10% commission rate. The sales rep will earn $500 after closing this deal.
This model doesn’t take into account any of the other costs of closing the deal (marketing, customer support, etc.). In other words, it’s not about profit — it’s about bigger picture goals and overall money coming in.
This model works well for products and services that have a set price.
Gross Margin Commission
The flip side of revenue commission is gross margin commission.
With this model, commission is paid based on the profit a deal brings in for the company. Let’s look at the same example we used above — a sales rep closes a $5,000 deal at a 10% commission rate.
Before the rep can determine their commission here, they also need to know how much it cost the company to close the deal. If the company spent $700 on marketing and $300 on customer support, the deal is actually bringing in $4,000 in profit. In that case, the rep’s commission would be $400.
Here’s another example:
This compensation structure incentivizes reps to push higher ticket items, and discourages them from offering discounts.
Draw Against Commission
The draw against the commission model is slightly complicated. There is an aspect of guaranteed pay, but also holds sales reps accountable and incentivizes them to work hard for their commission.
A draw against commission is a kind of advanced payment that a rep receives to hedge their own performance. For example, a rep may be promised a $5,000 draw at the beginning of the month — this is the max they’re entitled to outside of commission. At the end of the month, the rep calculates that they’ve earned $3000 in commission. In that case, the rep would keep their $3,000 commission and $2,000 of the draw. The remainder of the draw goes back to the company.
In some cases, the draw is more of a loan than a payment, and will need to be paid back in its entirety.
This structure is good for companies in periods of growth or uncertainty. It can also be effective in getting new sales reps off the ground.
With a tiered commission model, sales reps can earn higher commission rates as they meet certain quotas.
For example, a sales rep may receive an 8% commission rate until they close 100 deals. After the 100th deal, they then start earning an 11% commission rate. This can also be arranged based on dollar amount.
This compensation structure is great for top performers and sales reps who are highly motivated. It encourages reps to work upsells and new product offerings.
Although uncommon, some companies also have tiered commissions for the downside. That is, a company can reduce a commission rate if a rep doesn’t meet their quota.
The tiered commission model is great for maintaining employee motivation over time.
Multiplier commission can get complicated. It’s the most customized of the standard “templates,” but hammering out the details can be worth it — this model is highly motivating to many sales reps.
With multiplier commission, a sales rep is compensated based on their performance against several KPIs. They start with a standard commission rate, but the commission rate is then multiplied by a predetermined factor based on key performance metrics.
This can be a really effective way to target and refine specific seller behaviors, and motivate your reps to fine-tune their sales techniques throughout the process.
Base Pay Only
A base pay-only model is uncommon in the sales role, but still worth reviewing.
The definition is pretty simple: base pay only means reps are only paid a standard salary, and not compensated any extra for the deals they close.
As you can imagine, this model isn’t particularly motivating — why work overtime to close that six-figure deal if you’re not going to be rewarded for it? That being said, it can sometimes work well for companies who get most of their business from inbound marketing. In these cases, sales reps are a bit more hands-off, and usually take more of a customer-management role than a sales rep one.
With residual commission, a sales rep will earn a certain percentage of commission if their customer continues to bring money into the company after the initial deal is closed. For example, if a customer renews their contract after the original one expires, the sales rep who closed the deal will get a commission when they re-sign.
A residual commission rate is typically lower than a standard one, but can still represent a lucrative passive income opportunity for sales reps.Always hit your numberData that helps you sell smarter, right in your Outlook or Gmail inbox
How to Calculate Base Salary
Base salary is the compensation offered on a fixed schedule that doesn’t include commission, bonuses, or other incentives. It can be reflected as an hourly, monthly, or yearly figure.
Determining the Base Pay You Should Offer to Employees
The Bureau of Labor Statistics is a great place to start when figuring out how much base pay to offer your salespeople. There are industry-wide benchmarks that will help give you a good starting place.
The amount you ultimately offer will depend on a variety of internal and external factors. Consider some of the following as you develop a base salary range for your sales team:
- Stay ahead of the pack: Your base pay is one way to stay competitive with others in your field. You can attract and retain the highest-quality talent with a respectable base pay, because it shows that you’re willing to pay for both time and expertise.
- Think about availability: Are qualified sales reps readily available in your area? Looking at the demand for and availability of sales talent in your field will help you determine how high of a base salary you should offer.
- Consider background and experience: You can also offer a range of base pay that is dependent on qualifications. Think about the benchmarks for different tiers of sales reps (i.e. Bachelor’s degree; more than X years in sales; etc.) and go from there.
Determining Your Base Pay As a Sales Rep
If you’re a sales rep trying to determine how much of your paycheck is made up of your base pay, it can be slightly complicated. Each company itemizes their pay stubs differently, so make sure you ask your HR department for clarification on any of these steps if you’re unsure.
1. Look at your pay stub to find gross total pay — this is how much you’re paid before deductions like Social Security and insurance benefits are taken out.
Note: Many pay stubs will not separately itemize your commission amount. If your pay stub does not have a separate line item for commission, reach out to your HR department to ask how much commission is included in your gross pay for this pay period. Then, subtract that number from the gross pay indicated on your paystub. This will give you the base salary gross pay.
2. Determine how often you’re paid. Most companies pay their sales reps on one of the following schedules:
- Weekly – you’ll receive a paycheck 52 times per year
- Biweekly – you’ll receive a paycheck 26 times per year
- Monthly – you’ll receive a paycheck 12 times per year
3. Multiply your gross total pay (base salary only) from your pay stub by the number of payments you receive in a year. This number will represent your annual base salary.
How to Calculate Sales Commissions
Once base pay is determined, the rate of commission can be calculated, too.
In most cases, fixed pay ( base salary) represents about 60% of total pay. That means that 40% will come from commission, provided sales targets are met or exceeded.
Determining an Appropriate Commission Rate for Sales Reps
If you’re a hiring manager or HR professional, it can be challenging to determine a fair commission rate to pay your employees.
Just like base pay, commission rate can be influenced by:
- How much commission your competition pays their reps
- Whether sales reps in your field are readily available
- The experience your sales reps bring with them
You might also consider looking more closely at individual reps’ track records. This background goes a bit beyond the basics like education or years of experience; instead, look carefully at their KPIs from previous jobs. Do they have a history of smashing sales quotas? You may want to compensate them accordingly with a higher general commission rate, or a really enticing tiered plan.
There is a balance to strike between making the plans personalized and custom-fit to your needs, but also keeping them simple. The best commission plan structure is the one that’s clearly laid out and easy to understand.
Calculating Your Commission Rate as an Employee
No matter how hard HR employees work to make commission plans clear and straightforward, they can still get complex in a hurry. As a sales rep, it’s vitally important that you understand how and when you’re paid commission. Most times this information will be laid out in your contract, but it’s always good to verify through your paycheck.
As always, when in doubt, talk to your HR department. They should be able to walk you through any questions or discrepancies.
1. Determine your commission period
The commission period is usually the same length of time as your pay period. For example, if you’re paid on a monthly basis, it’s likely that your commission period is also a month.
That being said, take note: many companies compensate sales reps for the previous commission period. Your July paycheck may represent your July base salary + your June commission. Ask HR if it’s not clear on your pay stub.
2. Calculate your commission base
Your commission base is how much you’ve done in sales (in dollar amounts) over the commission period. If you closed $86,000 worth of deals in July, that is your commission base. It’s the figure your accounting department will use to calculate the amount they pay you in commission.
3. Multiply commission rate x commission base
We’re describing this step in a deceptively simple manner, so take care when you calculate.
For simple commission structures, like base pay + a flat commission rate over time, the calculation is straightforward. If you do $86,000 in sales at a flat 8% commission:
0.08 [commission rate] x 86,000 [commission base] = $6,880 in commission
However, the commission rate x commission base formula may need to be applied several times over if you’re on a tiered commission plan or have any commission multipliers.
Let’s say, for example, your sales quota is $70,000. You receive an 8% commission until you hit that quota, and then 11% commission on sales after that. In that case, you would break the formula down into two parts:
0.08 [commission rate for sales quota] x 70,000 [quota commission base] = $5,600
0.11 [commission rate for exceeding sales quote] x 16,000 [commission base that exceeded quota] = $1,760
This sales rep’s total commission would be $7,360.
Again, when in doubt — talk to HR. It’s their job to walk you through all of these various components in your compensation structure.
What Is the Best Sales Commission Schedule?
Chances are high that at least one of the commission schedules we’ve outlined here will meet many of the needs of your company.
However, most decision-makers come to find that no one model is a perfect fit. Many companies instead choose to mix and match various aspects of the different models to more closely meet their budgeting and employee needs.
Here are some questions to consider as you build your own compensation plan:
- What are our company’s long-term and short-term goals? Consider financial goals, retention goals, and team morale.
- What is our company’s budget?
- How long is the average sales cycle? A shorter sales cycle may indicate a lower commission rate to account for the sheer volume of deals closed.
- Are there any other benefits, bonuses, or incentives we can offer? Things like gas reimbursement, gym memberships, or travel points can offset an otherwise average commission rate.
- What is the average revenue or profit per sale?
- How “high touch” are our sales? Some sales strategies require less interaction from salespeople, and some require heavy support. Consider how much time and effort your reps put into each deal and compensate accordingly.
Finding the right commission structure can take time, and some trial and error. Software like Yesware can help you track the many moving pieces of tracking and evaluating employee performance to ensure they’re being compensated appropriately.
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