Your company's sales commission structure is vital to its success.
Choose the right structure and you'll attract top-level talent who work hard for your organization, while closing deals at a consistent clip. Choose the wrong structure and your best sellers will eventually leave you for more profitable pastures.
In this article, we'll explain what a sales commission structure is, lay out 10 of the most popular commission structures available to sales teams, and offer some guidance on how to choose the right structure for your team.
We have a lot to get to, so let’s dive in…
What is a sales commission structure?
A sales commission structure outlines how companies compensate their sales reps for performance.
Many commission structures feature base salaries to give reps a sense of stability when it comes to their personal finances. Others prioritize high commission rates to motivate reps to work harder and achieve more.
Any structure you choose for your company will directly impact your reps' earning potential, so make sure to design it so that commission benchmarks are achievable and sufficiently rewarding.
10 most common sales commission structures
Before we explain how to choose the right sales commission structure for your company, let's look at a few of the most popular ones available to B2B sales teams:
1. Base rate only
Base rate only is probably the simplest sales commission structure. Why? Because sales reps don't earn commissions. Instead, they're only paid a standard hourly rate or annual salary.
To be honest, this commission structure isn't used very often because it doesn't encourage sales reps to go above and beyond. Why work harder or think outside the box when you don't receive any kind of monetary benefit for doing so? There's no incentive to thrive.
However, this commission structure may work for small, cash-strapped companies that can't afford expensive incentives, or for high volume inbound sales models with short sales cycles, where the salesperson is more of an order-taker.
These kinds of sellers are really more like customer support reps anyway. Rather than focusing on closing deals, their goal is to simply answer prospect questions and guide them to the products and services that fit their needs. As such, a base rate only structure could work.
The base rate only structure in action
Mike works for Company XYZ. He's paid an annual salary of $65,000, which translates to $1,250 a week—even if he doesn't produce any sales for his organization.
2. Straight commission
Straight commission is the opposite of base rate only. Reps don't receive any hourly wage or salary. They only make money if they make sales.
Because of this, the commissions on every sale are generally higher than with other commission structures. This allows reps to make an incredible amount of money, provided they have the talent and resources to close many of the deals that come their way.
Straight commission can be beneficial for companies, too. Commission-only reps are usually considered independent contractors, which means companies can save money on taxes, benefits packages, and other expenses they must pay when employing in-house reps.
But it's not all rainbows and unicorns.
Many sellers don't enjoy straight commission because it puts too much pressure on them. They'd rather earn smaller commissions, but have the safety net of a base salary. Because of this, companies that use a straight commission structure often experience higher sales rep turnover.
The straight commission structure in action
Mike works for Company XYZ. He isn't paid a base salary, but earns a 40% commission on every sale he makes. At the end of the year, Mike sells 25 products at $1,000 each, 20 products at $5,000 each, and 15 products at $10,000 each. This results in annual earnings of $110k.
3. Base salary + commission
Base salary + commission is exactly what it sounds like. Reps are paid commissions on each sale, in addition to a set hourly wage or annual salary.
This is one of the most common sales commission structures because it puts an equal amount of responsibility on sales reps and the companies that employ them.
Companies invest in reps, regardless of their performance, via the rep's base salary. And reps are incentivized to work harder via the commissions available to them.
There really isn't a downside to this sales commission structure, which is why it's so popular.
The base salary + commission structure in action
Mike works for Company XYZ. He's paid a base salary of 30k a year, plus a 10% commission on every sale he makes. At the end of the year, Mike sells 1MM worth of products for his company. This means Mike makes $130k ($30k base salary + $100k in commissions.)
4. Tiered commission
If your reps need extra motivation, try implementing a tiered commission structure.
With this compensation plan, reps earn higher commissions after closing a specific number of deals, generating a certain amount of revenue, or hitting some other kind of milestone.
Imagine how much harder your reps will work when they realize they can boost their income by 10%, 20%, or even 30% if they simply make a few more sales than they currently do.
Note: you can use the tiered commission structure to penalize poor performance, just as you can use it to reward top sellers. For example, if a rep only hits 70% of their quota for the month, they might only earn 70% of their commissions. Ouch!
The tiered commission structure in action
Mike works for Company XYZ. He earns a 10% commission for everything he sells between $0 and $100k. Once he passes this threshold, his commission percentage jumps to 15%. If Mike generates $300k in revenue for his company, his commission percentage jumps again to 25%. At the end of the year, Mike generates 400k in revenue, which means he makes $100k.
5. Revenue commission
If your company deploys a revenue commission structure, your reps will earn a set commission every time they close a deal. This is a popular model for outside sales teams and/or companies that sell products and services with varying price points.
The revenue commission structure can harm company profits, though, so it must be used with caution. We only recommend this structure to organizations whose goal is to grow market share or enter new territories, rather than to boost profitability.
The revenue commission structure in action
Mike works for Company XYZ. He earns a $500 commission on every sale he makes. At the end of the year, Mike sells 1,000 products at $5,000 each, 750 products at $7,500 each, and 250 products at $10,000 each. With 2,000 total sales at $500 commission apiece, Mike ends the year with $100k in compensation.
6. Gross margin commission
The gross margin commission structure is similar to the revenue commission structure we just described. The difference is reps earn commissions on profit rather than revenue.
If, for example, Mike sold a $1,000 product to a customer, but racked up $400 in expenses to complete the transaction, he'd only earn commissions on the $600 in profit.
This sales commission structure is great for companies because it makes sure every sale supports the company's bottom line. It also discourages reps from offering major discounts to close deals. Doing so would reduce the money they make.
Gross margin commission structures often encourage reps to sell products with the highest profit margins, as well, because it's the easiest way for reps to increase their income. Win!
The gross margin commission structure in action
Mike works for Company XYZ. He earns a 12% commission on every sale he makes. At the end of the year, Mike sells 1,000 products at $1,000 each resulting in $1MM for his company. Unfortunately, it cost Mike's company $300k for him to make those sales. So Mike earns his 12% commission on $700k, which translates to $84k.
7. Residual commission
The residual commission structure is perfect for SaaS companies, agencies, consultancy firms, and any other organization that has recurring business or subscription models.
This is because this commission structure pays reps commissions for as long as their accounts continue to generate revenue. In other words, sales reps are rewarded for retaining customers and developing repeat business.
The residual commission structure in action
Mike works for Company XYZ. He just landed a new client who agreed to pay Mike's company $1,000 a month in exchange for a certain set of services. Mike earns a 10% commission on every sale he makes, which means Mike will take home $100 for every month that this new client remains a customer of Mike's company.
8. Draw against commission
It takes new sales reps 9.1 months to become fully productive. The draw against commission structure helps new hires earn a consistent sum while they're still learning the ropes.
Here's how it works: Sales reps receive a certain amount of guaranteed pay every month—even if their sales numbers don't warrant it. But, reps must eventually repay that initial compensation off of future commissions.
Think of it like an advance on a book or record deal. The salesperson gets enough money upfront to sustain them, but that advance is paid back out of future profits.
Like we said, this compensation plan is ideal for new hires. But it's often difficult to execute because tracking earnings and debts can be complicated.
The residual commission structure in action
Mike works for Company XYZ. As such, he is eligible for a $2,000 draw every month. Unfortunately, he only sells $1,500 worth of product. So, Mike receives the full $2,000 he is guaranteed, but must reimburse his company for the $500 he didn't earn at a later date.
9. Territory volume commission
The territory volume commission structure divvies up commissions based on the success (or not) of entire geographical regions, i.e. territories.
Because of this, territory volume commissions structures are best suited to field sales teams, as well as sales departments that rely on teamwork.
So, what does this look like in real life?
Imagine that Mike, John, and Jimmy are all assigned to the same region. Over the past month, Mike sells $50k worth of product, John sells $65k worth of product, and Jimmy sells $35k worth of product, for a regional total of $150k. Each rep then splits the 10% commission evenly.
The downside to this compensation plan is that top performers aren't fully rewarded for their excellence. In the example above, John sold the most, but received the same pay as Jimmy, who sold much less than him. This might frustrate John and convince him to find a new job.
The territory volume commission structure in action
Mike works for Company XYZ. He and his colleague Amanda have been assigned to the same territory. Last month, Mike sold $75k worth of product, while Amanda sold $85k worth of product, for a regional total of $160k.
Mike's company pays 8% commission, as long as reps hit their quotas. Mike and Amanda did, which means they split the $12,400 commission evenly, resulting in $6,400 each.
10. Multiplier commission plan
Finally, we have the multiplier commission plan, which enables companies to create custom compensation structures and really motivate their reps to achieve more.
With this structure, companies pay a standard commission percentage. This percentage is then multiplied by predetermined numbers based on each individual rep's level of success.
The downside to this compensation plan is that it can be difficult to implement. There's a lot of math for your company to keep track of, and reps may be unclear on how much money they'll make in a given sales period.
However, this commission model does allow sales managers to measure rep performance against several KPIs, not just sales. This can be useful for building a sales department that pursues healthy business habits, instead of closing at all costs.
The multiplier commission plan structure in action
Mike works for Company XYZ and is paid a 10% commission on every sale he makes. This commission rate is multiplied by .5 if Mike attains less than 50% of his quota, .8 if Mike attains less than 75% of his quota, 2 if he attains 150% of his quota, and 3 if he attains 200% of his quota.
How to choose the right commission structure
Whew, that was a lot of information! Are you still with us? Good, because we're not done yet.
Now that you understand the 10 most popular sales commission structures, it's time to choose one for your sales department. Follow this five-step process to pick the right structure.
Evaluate your company's goals
What are you trying to achieve? And which sales commission structure will motivate your reps to work hard and accomplish these things?
The key is to be specific. If your goal is to "close more deals," you need to dig deeper. Every sales department wants to boost sales numbers. Focus on how you're going to do this.
For example, you could focus on expanding your current territories. Or landing bigger accounts. Or improving team productivity and/or culture. Each of these things will help you close more deals in less time. But they also give your reps a more tangible goal to aim for.
Once you know your goals, you can pick a commission structure that will help you hit them.
Benchmark commissions in your industry
Choosing your company's sales commission structure is only half the battle. You need to choose competitive commission rates, too, which you can do by benchmarking your industry.
How do your direct competitors compensate their sales reps? Can you match, or even beat, these arrangements? If you can, you'll have an easier time attracting top talent. You'll also reduce your turnover rate and save your company money. (More on turnover below.)
One of the best (and easiest!) ways to research and evaluate commission rates in your industry is to study the Xactly Benchmark Database.
Consider each rep's job description
Your sales department is full of people, many of whom have different job descriptions. Case in point: sales reps aren't asked to perform the same tasks as sales managers.
If your department employs inside and outside reps, sales enablement professionals, and/or canvassers, your team's job descriptions will be even more varied.
This is why it's important to consider job descriptions when evaluating compensation plans.
If you only incentivize actual sales, for example, your sales reps will be the only ones who earn commissions. As such, the other people in your department won't be motivated to do their best work. And they'll probably end up leaving your company for a better job.
To avoid this, choose a different pay structure for each role in your company. That way everyone feels like they're fairly compensated for their efforts.
Be mindful of turnover rates
Once you've solidified your company's compensation plan, you need to evaluate it.
Is your team happy? Are they motivated? If you've chosen the right sales commission structure, and offer competitive commissions, they should be.
There are two ways you can answer these questions:
- You can ask your employees. Take the direct route and have a conversation with your team. Ask them if they feel like they're adequately compensated. The only problem with this approach is that your employees might not be honest with you.
- You can check your turnover rates. You can learn a lot about employee happiness by looking at your department's turnover rate. If it's higher than normal, you probably aren't paying your team enough. If you were, they'd stick around for longer.
Analyze individual rep performance
In all likelihood, your department employs both high-performers and low-performers. Take a moment to analyze individual rep performance and confirm.
If this is the case, then here's a tip for you: use a tiered commission structure.
A tiered commission structure will allow you to reward your best performers, while motivating your laggards to improve their skills and achieve more. It's a win-win!
The right sales commission structure will keep your reps motivated. The wrong one will force them to jump ship and your company's sales will plummet.
Fortunately, after reading this article, you have a deep knowledge of the sales commission structures available to you. You also know how to choose the right one for your team.
Simply follow the steps we outlined above and evaluate your company's goals, benchmark commissions in your industry, consider each rep's job description, be mindful of turnover rates, and analyze each individual rep's productivity levels.
If you do that, we're confident you'll be able to choose the right compensation plan for your business, and your revenue will grow as a result. Good luck!
Image via Tim Mossholder on Unsplash