A sales commission structure is a system that outlines how a company compensates its sales reps for the sales they make. It also helps motivate sales professionals to maintain or improve their overall performance. Commissions can be paid out weekly, biweekly, or monthly. The first step in developing a sales compensation plan is choosing the type of commission structure that fits your company’s sales culture, industry, and maturity level.
In this article, we define 10 commission structures and provide common examples with commission calculators.
Pro tip: Customer relationship management (CRM) software like Salesforce provides tools for tracking sales rep performance to calculate sales commissions. It also seamlessly integrates with apps that let you track and pay commissions from within your CRM system.
1. Base Rate Only (Flat Salary)
This is the simplest sales commission structure because sales reps earn a standard hourly rate or fixed salary instead of commissions. It is the baseline pay in exchange for carrying out the bare minimum functions expected of their position. This structure often does not motivate reps to do their best because they receive the same amount regardless of their sales figure.
We can say that this structure compensates not only the rep, but also the other teammates who are part of the selling process. For instance, the software engineers are the ones who improve the product to make it easier for sales reps to sell them. In other cases, sales reps only take orders and there are desk staff who process and ship out the orders.
The base rate only structure works best for small companies with no budget for sales incentives, or for those with high-volume inbound sales models. Here, reps focus more on customer service rather than closing deals. They are evaluated based on their effectiveness in answering questions rather than closing deals. Examples of these companies are cable services or phone service providers.
How to calculate base rate only commission:
There is no need to calculate here because there is no commission paid. For example, inbound sales reps who sell premium television channels are paid a fixed salary of $1,250 per week.
2. Straight Commission
In the straight commission model, reps do not receive a base salary and only get paid if they make sales. This structure generally offers higher commissions than other commission plans in this list, making it ideal for high-performing reps. The downside of this model is the absence of the element of financial stability for reps, especially during periods when they have a hard time closing deals.
This is a typical commission structure for sales that works best for startups and companies that employ independent contractors. It allows them to save money on expenses such as hiring, taxes, and employee benefits. However, this structure often leads to higher turnover because it puts a lot of pressure on its sales reps.
How to calculate straight commission:
To calculate a straight commission, you multiply the sales by the commission rate. For example, Anna earns a 40% commission for every sale she closes. If she sells 25 units of products at $1,000 each, her total sales amount to $25,000 dollars. Multiply the total sales by 40% (or 0.40) to get the resulting commission of $10,000.
3. Base Salary Plus Commission
With this structure, reps receive commissions on each sale, in addition to a fixed hourly rate or annual salary. This is one of the most commonly used commission structures for sales reps because it strikes a good balance between sales rep effort and sales incentive. Reps receive base pay regardless of their performance but are also motivated to work harder to earn higher commissions. The standard ratio of salary to commission is 60:40.
How to calculate base rate plus commission:
To calculate base rate plus commission, take the base salary and add the total commission to it. Determine the commission by multiplying the sales by the commission rate. For example, Brian is paid a base salary of $500 per month plus 10% commission. Last month, his total sales were $20,000. Multiply 10% (or 0.10) by $20,000 to get a commission of $2,000. Add $500 and $2,000 to get a total pay of $2,500.
4. Tiered Commission
The tiered commission model allows sales reps to earn increased commission rates as they meet certain quotas and continue to close more deals than expected. For example, a sales rep receives a 5% commission rate for hitting a sales target of $1,000. Once they start hitting a $10,000 sales target, the commission rate increases to 10%.
Sales Target | Commission Rate | Total Commission |
|---|---|---|
$1,000 | 5% | $50 |
$10,000 | 10% | $1,000 |
$25,000 | 12% | $3,000 |
$50,000 | 14% | $7,000 |
$75,000 | 16% | $12,000 |
This structure is ideal for companies with salespeople who consistently hit their quota. It also provides companies with a commission structure that rewards top sellers and penalizes poor performers at the same time. Reps are pushed to work harder to boost their income potential. Lower performers, on the other hand, only earn a portion of their commissions if they do not hit their quota for a certain sales period.
How to calculate tiered commission:
To calculate tiered commission, multiply the sales by the commission rate. Let’s use the table above as a reference for this example. If Carrie sells $10,500 worth of products for the month, her commission is 10%. Multiply $10,500 by 10% (or 0.10) to get $1,050. If her sales are $26,000, her commission rate is 12%. This means that her total earnings for that month are $3,150.
5. Revenue Commission
The revenue commission model allows sales reps to earn a set commission each time they close a deal. It should be used with caution because it can harm company profits. It does not take into account the other costs associated with sales operations, such as marketing and customer support. This is ideal for field sales companies that sell products with fixed price points and are focused on growing market shares or territories.
How to calculate revenue commission:
To calculate revenue commission, multiply the sale price by the commission rate. For example, Dan works for a car company that gives him a 3% commission for every car he sells. He just sold a vehicle for $25,000. Multiply $25,000 by 3% (or 0.03) to get a total revenue commission of $750.
6. Gross Margin Commission
The gross margin commission plan is similar to the revenue commission model. The difference between the two is that here, sales reps earn their commissions on profit instead of revenue. This model discourages reps from offering big discounts to customers to close deals because doing so would reduce their income. Rather, it pushes them to sell products with the highest profit margins.
How to calculate gross margin commission:
To calculate gross margin commission, first determine the gross margin by subtracting the expenses from the total sale price. Then, multiply the gross margin by the commission rate.
For example, Edna is selling a $100,000 car with a $60,000 production cost and earns 5% in gross margin commission. We subtract $60,000 from $100,000 to get a gross margin of $40,000. Then, multiply $40,000 by 5% (or 0.05). Her gross margin commission from the car sale is $2,000.
7. Residual Commission
This sales representative commission structure is best for companies with a recurring business or subscription model, like software as a service (SaaS) companies and advertising firms. It pays out sales commissions as long as accounts are generating revenue. This is one of the benefits of retaining customers and having repeat purchases. The residual commission rate is usually lower than other different commission structures.
How to calculate residual commission:
To calculate residual commission, multiply the customer’s payment by the commission percentage. For instance, Frank closes an insurance account with a company that pays $3,000 in monthly premiums. He receives a 5% commission from every payment. Multiply $3,000 by 5% (0.05) to get a residual commission of $150 every month.
8. Draw Against Commission
The draw against commission plan helps newly hired sales reps acclimate to their new role without losing income. Here, reps earn a salary (or draw) every month for a specified period of time regardless of their sales performance. However, in some cases, they must eventually repay the initial compensation using future commissions. It basically works like a zero-interest loan from the company you work for.
There are two types of draws under this compensation structure:
- Recoverable draw: A payout that a company expects to gain back when reps earn sales commissions.
- Non-recoverable draw: A fully guaranteed commission stipend that the sales rep is not expected to pay back to the company.
If the draw is $2,000 per month, a sales rep is expected to earn at least $2,000 monthly to cover the draw. If the rep earns only $1,700 for the month, they owe the company $300. This debt rolls over to the next commission payout period.
While this compensation plan is a good fit for new reps, it could be difficult to execute and integrate into your sales management process. This is because of the complication added by the tracking of earnings and debts of each rep. Plus, sales reps who run into a series of bad cycles could end up in debt with the company.
How to calculate commission draw:
To calculate a commission draw, subtract the draw from the total commission earned. For example, Gina is eligible for a $3,000 draw every month and she earned $4,000. Since she hit the quota, there’s no commission draw from her next payout. If she earns only $2,800, subtract that amount from $3,000 to get $200 in commission draw. This amount will be deducted from her next payout.
9. Territory Volume Commission
This compensation plan best suits field sales teams and sales departments that rely on teamwork to close deals. Here, commissions are divided equally among the team members from a specific sales territory, team, or department. The disadvantage of this structure is that top performers receive the same amount in commissions as non-top performers.
How to calculate territory volume commission:
To calculate the territory volume commission for each sales rep, multiply the total sales by the commission percentage. Then, divide the result by the number of salespeople in the team.
For example, Harry, Ina, and John are assigned to the same region and earn 10% in territory volume commission. Last month, they each sold $50,000, $65,000, and $35,000 worth of products, respectively, achieving a total sales volume of $150,000. Multiply the result by 10% (or 0.10) to get $15,000. Then, divide this amount by three. Each rep earns a territory volume commission of $5,000.
10. Multiplier Commission Plan
The multiplier commission is a customized compensation strategy that incorporates elements of both revenue commission and tiered commission structures. It starts with a basic revenue commission structure that is then multiplied by a predetermined percentage factor based on their individual performance. Using the figures in the table below as example, reps who earn 77% of their quota earn 4.5% in commission.
Percentage of Quota | Multiplying Factor | Resulting % of Deal Payout |
|---|---|---|
0% to 75% | 80% | 4% |
76% to 85% | 90% | 4.5% |
86% to 90% | 100% | 5% |
In addition to just achieving their quota, other factors that can be included in evaluations are upsells, add-ons, and complementary products. This plan is more complicated than others in this list, but it allows sales managers to evaluate a rep’s performance against several key performance indicators (KPIs). However, the variable nature of commissions could create uncertainty in reps and affect retention.
How to calculate multiplier commission:
To calculate the multiplier commission, determine the percentage of quota the rep achieved. Multiply the total sales by the resulting percentage based on the percentage of quota. Let’s use the figures in the table above for this example. Imagine Kate sold $100,000 worth of products and this figure is 80% of her quota. Multiply $100,000 by 4.5% to get $4,500 in commission.
Bottom Line
Creating the right commission structure for your team is essential to encourage reps to reach their quota and contribute revenue to your business. Choosing the wrong structure could result in a high turnover rate or low company sales. We’ve provided a list of the most common compensation structures, calculators, and best commission plan practices. These tools will help you find and build the structure that works best for your business.
