How To Find The Right Sales Commission Structure

A sales commission structure is more than just a paycheck detail. It drives a sales team to go the extra mile, to think outside the box, and to close that deal.

Let’s get real.

We’ve all known or have seen how a poorly thought-out sales commission structure can demotivate a team. But when it’s done right?

It clearly shows each sales rep what actions lead to bigger payouts, and how their individual efforts contribute to the overall sales goals of the team. This transparency and alignment motivate reps to go the extra mile and collaborate effectively

In this blog, I’m going to share with you the nitty-gritty of setting up a sales commission structure that works. No fluff, no jargon, just practical advice from one sales leader to another. (I have taken help from Lancelot D’Souza, our CMO and a veteran sales leader with over 20+ years of experience managing global sales teams)

We’ll also look at various sales commission structures with practical examples, their use cases and lot more.

So, let’s start with the basics.

What is a sales commission structure?

A sales commission structure is a practical blueprint that outlines how your sales reps earn their pay. It’s a mix of fixed and variable components, often tied to individual, team, or company-wide sales targets.

This structure serves as a motivational tool, driving sales performance in line with business objectives. It’s like a pulse that keeps your sales team moving forward.

Why do you need an effective sales commission structure?

Below are some of the reasons why you need an effective sales commission structure in your organization.

Motivation and performance

An effective sales commission structure is a powerful motivator for your sales team. It creates a clear link between effort and reward, encouraging your reps to strive for better performance. When your team sees that their hard work directly impacts their earnings, it drives them to push harder, reach higher, and achieve more.

Alignment with business goals

Your sales commission structure is a strategic tool that aligns the efforts of your sales team with your business goals. By tying commission to key performance indicators (KPIs), you can guide your team’s focus towards the activities that matter most to your business.

Fairness and transparency

A well-designed sales commission structure ensures that every member of your team is rewarded equitably for their contribution. This can boost morale, careate a positive work environment, and reduce conflicts within your team.

Retention and recruitment

An attractive and competitive sales commission structure can help you retain your top performers and attract new talent. Your commission structure can be a deciding factor for a rep considering multiple job offers. By offering a compelling commission structure, you can secure the best talent for your team.

Encourages healthy competition

A well-structured sales commission plan can create a healthy sense of competition among your sales reps. When they see their peers achieving higher commissions, it can motivate them to improve their own performance.

Flexibility to adapt

Sales commission structures offer the flexibility to adapt to changing business needs. For instance, if you’re launching a new product, you can tweak the commission structure to incentivize sales reps to focus on selling that product.

Rewarding skill over luck

By structuring your commissions based on measurable KPIs, you ensure that skill and effort are rewarded over luck. This can lead to a more skilled and professional sales team.

Customer satisfaction and retention

When your sales team is motivated and working towards clear, achievable goals, it can lead to better customer service and, ultimately, higher customer satisfaction and retention.

However, even a great sales commission structure should be regularly reviewed and updated to ensure it continues to drive the right behaviors and outcomes.

How to implement a sales commission structure for your team?

Implementing a sales commission structure is like setting the stage for a performance. The better the stage, the better the performance.

Here’s how you can set the stage right:

1. Understand your business goals

What are your annual sales goals? These goals are your guiding light, showing you where you want to go and how your sales team can help get you there.

For instance, if your goal is to increase market share, your commission structure should incentivize behaviors that contribute to this goal.

2. Know your sales cycle

Consider the length and complexity of your sales cycle. It can greatly influence your sales commission structure.

For instance, if you have a long sales cycle, you might want to consider a draw against the commission structure to provide your reps with a steady income while they work on closing deals. (More about ‘Draw against commission structure’ in the next section)

3. Consider your team’s motivation

Different people are motivated by different things. Some reps might be driven by the prospect of a big commission check, while others might value stability and prefer a higher base salary. Understanding what motivates your team can help you design a commission structure that keeps them engaged and motivated.

4. Review budget and revenue goals

Your commission structure should be sustainable and aligned with your budget and revenue goals.

5. Check KPIs for sales

Key Performance Indicators (KPIs) are like your compass, guiding your sales team towards the right behaviors and outcomes. Your commission structure should align with these KPIs.

6. Review your sales commission proposal with stakeholders

Before you roll out your commission plan, review it with all stakeholders. This includes not just your sales team but also other departments that might be impacted by it.

7. Time your sales commission properly

Decide when you want to start offering sales commissions to your team. This could be at the start of a new quarter, a new financial year, or any other milestone that makes sense for your business.

8. Develop an Initial commission plan

Now, it’s time to put pen to paper and draft your initial commission plan. Remember, this is just a starting point. It’s okay if it’s not perfect right off the bat.

9. Regular reviews and adjustments

The market changes, your business evolves, and your sales commission structure should too. Regular reviews and adjustments keep your structure relevant and effective. Be open to feedback from your reps and be prepared to make adjustments as needed.

Top 9 sales commission structures with examples and use-cases

In this section, we’ll look at the best sales commission structures with examples on when you can use at what context for your team.

#1 Straight Commission Structure

This is the easiest and simplest sales commission structure used in sales teams. In this commission structure, a sales rep can earn a percentage of revenue, he/she generates from selling a product or service of a company.

Only the best of the sales reps apply to work under this commission structure. Because their earnings are directly tied to uncapped commission, sales reps can earn as much as they want based on their performance.

Since, there is no base salary involved in this commission model, sales reps function as independent contractors or freelancers allowing them flexibility and accountability.

Network marketing to direct marketing is a pure example that runs on this commission model.

Total Earnings = Sale value x commission rate

Example: Consider a B2B software sales rep, John, who works solely on a straight commission model. For every enterprise software license he sells, priced at $10,000, he earns a 10% commission. So, if John closes a deal with a company for 10 licenses, he earns a $10,000 commission from that single sale.

Use case of this model: The straight commission model usually works the best in high-stakes, high-reward sales environments. It’s a go-to choice when your sales team is seasoned, and the product or service they’re selling carries a hefty price tag. Overall, this model fits great when you’re aiming for aggressive growth or trying to establish a strong foothold in a competitive market.

#2 Base Salary + Commission Structure

The base salary plus commission model is a very common approach to sales compensation, offering the best of both worlds. In this sales commission structure, sales reps receive a fixed base salary, providing them with a steady income regardless of sales performance. This base salary is then supplemented with a commission that’s earned based on the sales they make.

Usually, the ratio of base salary plus commission model is usually kept around 6:4, where the sales rep earn 60% in base salary and earns 40% of his total compensation in commission.

This commission fuels the reps to perform better and stay loyal to the company. It can also help them overcome underperformance.

Total Earnings = Base Salary + (Sales x Commission %)

Example: Imagine you’re a sales rep named Alex at a tech company. You have a base salary of $40,000 a year. On top of this, you earn a 10% commission on all your sales. So, if you close a deal worth $100,000, you pocket an extra $10,000 in commission. Your total earnings for the year? A cool $50,000!

Use case of this model: This model is particularly effective in industries where the sales cycle can be longer or more complex. The base salary ensures that sales reps are compensated for their time and effort, even when sales are slow or difficult to close. The commission component, on the other hand, provides an incentive for reps to close deals and exceed their sales targets.

#3 Draw Against Commission Structure

A Draw Against Commission model is a sales commission structure where sales reps receive a pre-set amount of money, known as a ‘draw’, at the start of each pay period. This draw is essentially an advance against future commissions.

If a sales rep’s commission for a period is less than the draw, the difference is carried over as a ‘debt’ to the next period.

This model provides a safety net for sales reps, ensuring they have a steady income during slow sales periods. It offers the stability of a regular paycheck while still incentivizing high performance.

However, it’s important to note that if a rep consistently fails to earn enough commission to cover the draw, it may indicate a need for additional training or support. This model, therefore, also serves as a valuable feedback mechanism for sales performance.

Total earnings = Draw + (Commission Earned – Draw)

Example: Imagine you’re a sales rep named Sam, and your company follows a Draw Against Commission structure. You receive a monthly draw of $3000. In a particular month, you close deals that earn you a commission of $2500. Since your commission is less than the draw, you still receive the $3000, but you now have a ‘debt’ of $500. This $500 will be subtracted from your commission in the next month.

Use case of this model: This model is particularly beneficial in industries with fluctuating sales cycles or for new sales reps who are still building their client base.

#4 Tiered Commission Structure

In a tiered commission structure, the sales rep is incentivized to push beyond their comfort zone and aim for higher sales targets. It’s like a game where each level up brings better rewards. Essentially, a sales rep’s commission increases as soon as he manages to achieve a certain sales quota or revenue limit.

This model motivates reps to continually improve their sales skills and strategies, as the financial rewards for excellence are significant. At the same time, it provides a safety net, ensuring that reps still earn a commission even if they don’t reach the higher tiers.

However, it’s important to set realistic and achievable tiers to keep your sales team motivated and prevent frustration. Regular reviews and adjustments can help ensure the tiered commission structure remains fair and effective.

Total earnings = Base salary + (Sales tier x Commission Rate)

Example: A sales rep, Susan, earns a 5% commission on the first $10,000 of sales, 7% on sales from $10,001 to $20,000, and 10% on sales above $20,000. So, if she makes $25,000 in sales, they’d earn $500 for the first tier, $700 for the second tier, and $500 for the third tier, totaling $1,700 in commission.

Use case of this model: This structure is particularly effective in industries where the sales process is complex and requires significant effort, such as real estate, enterprise software sales, or high-end retail. It encourages sales reps to strive for larger deals and higher sales volumes, as their commission rate increases with each tier they surpass.

#5 Territory Volume Commission Structure

In this sales commission structure, each sales rep is assigned a specific geographic territory and their commission is calculated based on the total sales volume within that area. So, the commission of sales reps depends on the sales volume of particular territory and the total commission is usually then split among all the sales reps managing that particular territory.

This structure is designed to incentivize reps to maximize sales across all accounts in their territory rather than focusing on just a few high-value accounts.

This structure encourages comprehensive coverage of the territory and equal attention to all customers, regardless of their individual purchase volumes.

However, it’s crucial to ensure that territories are balanced in terms of sales potential to prevent disputes among the sales team and to maintain a fair and motivating compensation system. Regular reviews and adjustments of the territories might be necessary based on market changes and sales data.

Total earnings = Base Salary + (Total sales x Commission % divided by No. of Sales reps)

Example: Consider a sales rep, Jones in the pharmaceutical industry with a territory volume commission structure. If he achieves $1.5 million in sales in his assigned territory, he would earn a 2% commission on the first $1 million ($20,000), and a 3% commission on the next $500,000 ($15,000). So, their total commission would be $35,000.

Use case of this model: This model is particularly effective in industries with a large number of potential customers spread across a specific geographic area, such as pharmaceuticals, wholesale distribution, or manufacturing. It’s ideal when sales reps need to manage a broad customer base within their assigned territory, encouraging them to maximize sales across all accounts rather than focusing on a few high-value ones.

#6 Residual commission structure

In a residual commission plan, sales reps earn ongoing commission for a sale as long as the customer continues to purchase the product or service. This is common in industries with recurring revenue models, such as insurance, SaaS or subscription-based services.

In a nutshell, as long as the sales rep retains the customer, he can enjoy continuous commission from the revenue the business makes. This incentivizes reps to not only close deals, but also to maintain strong relationships with their customers to ensure customer retention and recurring revenue.

It’s a win-win for both the sales rep and the company, promoting long-term customer relationships and steady revenue streams.

Total earnings = Base* Salary + (Sales value x Commission %)

Please note that sometimes, companies offer residual plans without a base salary. In that case, the rep only earns the commission part mentioned above.

Example: Consider, Balaji a sales rep in the software industry selling a monthly subscription service. If Balaji closes a deal for a $100 monthly subscription, he might earn a 20% commission ($20) on the initial sale, and then continue to earn a 10% commission ($10) every month as long as the customer remains subscribed.

Use case of this model: This sales commission structure is very effective in industries with recurring revenue models, such as software-as-a-service (SaaS), insurance, or telecommunications. Agencies and consulting firms run on this model as well.

#7 Gross Margin Commission Structure

A Gross Margin Commission Structure is a sales compensation model where the commission is based on the gross margin of the sale rather than the total sales volume. This means that the sales rep’s commission is calculated as a percentage of the profit made from the sale, after deducting the cost of goods sold (COGS).

This structure incentivizes reps to sell higher-margin products or negotiate higher selling prices, as their commission is directly tied to the profitability of each sale.

It’s particularly effective in industries where there’s a significant difference in the profitability of different products or services, such as manufacturing or retail.

Total earnings = Base salary + (Gross Margin x Commission %)

Where, Gross margin = Total sale value – Cost of production

Example: Let’s say a rep sells a product for $200 and the COGS is $50, the gross margin is $150. If the commission rate is 10%, the rep would earn $15 in commission.

Use case of this model: The model is best suited for industries where there’s a significant difference in the profitability of products or services, such as manufacturing, retail, or wholesale distribution.

#8 Revenue Commission Structure

A Revenue Commission Structure is a sales compensation model where the commission is based on the total revenue generated from the sales. In this sales commission structure, sales reps earn a fixed percentage of the total sales revenue they bring in. This structure is straightforward and easy to understand, making it widely used across various industries.

For instance, a car salesperson might earn a fixed percentage of the selling price of each car they sell, encouraging them to sell more cars to increase their commission.

Total earnings = Base salary + (Sales value x commission %)

Example: If a rep sells $10,000 worth of products and the commission rate is 5%, they would earn $500 in commission.

Use case of this model: The Revenue Commission Structure is widely used in industries where sales are straightforward and the focus is on volume, such as retail or consumer goods. It’s ideal when the company’s goal is to drive sales volume, as it directly incentivizes reps to increase their total sales.

#9 Base Pay Only Commission

This is ideally not a real commission structure in true sense, but it’s widely used across companies. In this model, sales reps only receive an annual salary as a form of compensation and are not paid any commission for the sales they generate.

So, effectively there is no commission for upselling or cross selling products or services to the customers.

This model provides financial stability but doesn’t directly incentivize higher sales volume or profitability.

Total earnings = Only base pay; as they don’t receive commission

Example: A sales rep might receive a fixed salary, say $60,000 per year, regardless of the number of sales they make or their performance.

Use case of this model: This compensation model is rarely used in modern sales. For the consulting industry and software sales, still companies pay sales reps under this model to build strong relationships with clients over a long period of time rather than to make quick sales. Also, start-ups that survive on inbound leads often opt for this model.

How to choose the right sales commission structure for your team?

Choosing the right sales commission structure significantly impacts your team’s performance and sales goals.

Here are some crucial aspects you should consider before applying any sales commission compensation model:

Step #1 Figure out your company goals and objectives

The first and foremost step in crafting an effective sales commission structure is to have a clear understanding of your organizational goals and priorities.

– What are the key results you’re striving for in numbers?

– How can you motivate your sales reps to align their efforts with these objectives?

For instance, is your strategic focus on geographical expansion and capturing new markets? Or are you more interested in acquiring a select group of high-value accounts?

Is it a priority to cut costs in the current financial climate? Or are you looking to cultivate a collaborative culture among your sales reps?

Having a strong understanding of your organizational goals and priorities is essential as it helps you select a sales commission structure that not only incentivizes your sales reps but also aligns seamlessly with your business objectives, thereby driving overall organizational success.

Step #2 Compare with industry standard commission rates

Choosing your sales commission structure is just part of the equation. Equally important is determining the appropriate commission rates. If your rates aren’t competitive enough, you risk losing your sales reps to other organizations offering better compensation for the same effort.

Now the question is “How do you set the right rate for your team?”

The answer lies in understanding your industry.

Investigate what your competitors are offering their sales reps. Can you match their rates? Even better, can you surpass them? If you can offer more attractive compensation than other companies in your industry, you’ll have a competitive edge in attracting and retaining top talent.

To gather insights on pay rates and incentives in your industry, consider leveraging benchmark databases that provide years of relevant data. These resources can offer invaluable insights into industry standards, helping you set competitive and fair commission rates.

Step #3 Tailor compensation to roles and responsibilities

When it comes to building a robust sales team, understanding the unique contributions of each member is key.

Take a moment to consider the diverse landscape of roles within your team. For example, sales managers and sales representatives each play distinct parts in the sales process. Their responsibilities diverge significantly, with managers often steering strategy and coaching while representatives are on the front lines, engaging with clients and closing sales.

It’s clear that a one-size-fits-all approach to compensation can overlook these differences. That’s why it’s essential to develop tailored compensation structures that reflect the specific duties and contributions of each role. This ensures that every team member feels valued and motivated.

Step #4 Analyze employee turnover rates to refine commission structures

Employee turnover rates can be a revealing indicator of the health of your commission structure. It’s a metric that whispers tales of satisfaction or signals alarms of discontent. If you’re noticing a revolving door in your sales department, it’s time to pause and reflect: Is your commission plan truly aligned with the expectations and needs of your sales force?

A high turnover rate often points to a disconnect between what your sales reps desire and what they receive. It could be a sign that your compensation isn’t competitive, or perhaps it’s lacking the stability that base salaries provide.

Step #5 Consider the sales productivity of your team

Check on the sales productivity of your team and monitor them carefully. In every organization, top performers and low performers exist. So, to push both of these groups opt for a sales commission structure that motivates and rewards both. A tiered commission structure can be a great model to implement.

Also, take care of the non-monetary incentives like recognition, skill development, and exciting experiences to keep your team engaged and on top of their game.

Step #6 Blast from the past

Sounds funny but it’s actually true.

If in the past some old sales commission structure has worked for you in increasing the sales team’s engagement, performance and overall productivity, you should take a look at that model.

Also, take opinions from your sales reps on what works best for them. As mentioned earlier, everyone has different driving factors. Consider that and do some research for your team.

Step #7 Try the OTE compensation model

As a final step, you may consider implementing On-Target Earnings (OTE) simulations for your team.

For those who don’t know, OTE is the total compensation a sales rep can expect to make in a year if they hit their sales quota. In other words, it’s the combined amount of their base salary and the commission they’d earn by achieving their targets.

Try to find OTE compensation numbers that your business can sustain. Also, make sure it’s competitive enough in the market to attract and retain your sales reps.

Finally, there’s no one-size-fits-all approach to sales commission structures set-up. The best plan for your organization will depend on various factors, including your industry, sales team size, and company goals. The key is to design a commission structure that motivates your sales team, drives performance, and aligns with your organizational objectives.

It’s about creating a win-win situation where both the sales reps and the company benefit.

Final thoughts on sales commission structures

A sales commission structure is like a multifaceted puzzle where each piece – from base pay to bonuses – must interlock seamlessly to create a motivating and equitable system.

Consider these commission structures more than just compensation models; they are the blueprint for ambition, the roadmap to excellence.

The right sales commission structure is a catalyst, transforming sales targets into milestones of achievement and fostering a thriving environment where every team member is propelled toward peak performance.

Finally choose a sales commission structure that resonates with your team’s spirit, and you’ll not only witness the transformation of numbers but also the growth of individuals into a formidable, united force.

Frequently Asked Questions (F.A.Q)

Q. What is a typical sales commission structure?

A typical sales commission structure is usually a base salary with commission percentage. Usually, the compensation is kept consisting 60% base salary with 40% in commission as a general practice in sales roles. It can vary depending on the nature of the industry, company growth stage.

Q. How is sales commission calculated?

Sales commission is calculated based on the total sales value multiplied by commission percentage. The calculation may vary depending on what type of commission it is.

Q. How to set up a sales commission structure?

1. Understand your business goals 2. Know your sales cycle 3. Consider what motivates your sales team 4. Review your budget and revenue goals 5. Check relevant KPIs for sales 6. Review your sales commission proposal with stakeholders 7. Time your sales commission properly 8. Develop an Initial commission plan 9. Regularly review and adjust your sales commission plan

Q. Is 10% a good commission?

Whether 10% commission is good depends on several factors. It can be attractive for high-value products or in industries with larger average deals. However, for low-value items or where sales volume is key, it might be less motivating. Consider the industry standard and what income level you need to achieve.

Q. What is a 50/50 split in sales?

A 50/50 split in sales typically refers to two different scenarios:

Commission Structure: In sales compensation plans, a 50/50 split often means the total On-Target Earnings (OTE) is divided equally between base salary and commission. So, if a salesperson’s OTE is $100,000, they would earn $50,000 as base salary and the remaining $50,000 would come from commissions on their sales.

Sharing Revenue: It could also mean literally splitting the sales proceeds in half between two parties. This could be between a salesperson and the company they work for, or between two different businesses involved in a sale.