I’ve built two sales teams over the last two years that now collect over $2.5m per month in cash. And one of the most important aspects of this sales machine was nailing down my team’s commission structure.
Figuring out compensation for your sales team is key to your company’s success. Get it wrong, and you could be staring down the barrel of massive and consistent sales rep turnover, financial risks, and mediocre sales results.
The way to avoid these pitfalls is to understand the types of commission structures available, when it makes sense to adopt each one and how to choose the best option for your team.
Read on to discover how to tick all these boxes so you can attract, retain and motivate top sales talent.
The Main Types of Sales Commission Structures (With Examples)
1. Base Rate Only Compensation
The base rate model is simple.
You pay your salespeople a flat hourly or monthly salary regardless of their performance.
You reward your reps for showing up and doing the work and not based on how many customers they pull in or what percentage of their projections they meet.
Say you have six salespeople; you could choose to pay each a standard salary of $1500 a month. If this rate ever changes, it’s driven by a predetermined salary scale. For example, company policy might state that your sales reps are entitled to a 50% upward pay review every two years.
A fixed salary model works best if inbound leads drive your sales process.
This means prospects initiate contact. And then your reps spend time walking them through your offering and answering their questions instead of actively chasing down new leads.
On the one hand, this commission structure offers security and certainty to your reps. And can reduce the pressure they feel on the job and improve their performance. It could also reduce the chances that your reps will resort to questionable tactics to close deals.
On the other hand, a base rate model may not be as powerful a motivator as other payment structures because it puts a cap on your reps’ earnings. Plus, it may also encourage nonchalance and bare-minimum work.
2. Base Salary Plus Commission Model
This compensation system combines fixed rates with a specified commission. So sales reps get guaranteed hourly or monthly payments plus a percentage of their revenue.
How would this play out in a hypothetical situation?
You could set a $500 salary and a 5% commission on generated revenue. If a sales rep sells products worth $30,000, at the end of the month, they will get a base salary of $500 and a $1,500 commission (5% of $30,000), putting their take home at $2000.
Opting for this model is excellent if you’re looking to prioritize sales rep retention and reduce churn.
It’s easy to see why this compensation structure is one of the most popular options. It provides stability for employees and rewards their performance while allowing you to incentivize exceptional sales efforts. Not to mention that it automatically makes your company more appealing to top sales talent who value security and a high earning potential.
On the flip side, it might be difficult to manage especially when you’re offering different commission rates for different products. Also, a market downturn could leave you with a fixed payroll that outweighs your revenue and put your company’s financial health at risk.
3. Revenue Commission
Revenue-based commission lets you compensate sales reps with a predetermined percentage of their revenue. It’s a simple framework used to determine the commission structure when running a commission-only or revenue plus commission payment model.
Say you have a product that goes for $1000, and you’ve set the payable commission at 10%. Each time a sales rep sells this product or service, they earn $100 in commission.
It’s common to find companies focused on penetrating new markets or expanding their market share leaning towards this commission plan. It aligns with their business goal, and it’s also a good fit for organizations with small sales teams and simple offerings.
Since revenue commission means everyone gets paid according to their performance, it’s fair and highly motivating.
4. Gross Margin Commission
The gross margin model considers the cost of production when allocating sales commission. While in the case of revenue commission, sales reps earn their pay based on the total generated revenue, gross margin commission is calculated on what’s left after a product’s production cost has been subtracted from its selling price.
You calculate gross margin compensation using a fixed percentage similar to the revenue commission compensation model.
Here’s how it works: assuming you have a product whose cost of production is $600 and selling price is $1000. You could peg the commission rate at 10%. When a sales rep closes one deal and generates $1000, they get 10% of the profit, which is the difference between $1000 and $600. That’s 10% of $400 which is $40.
The gross margin commission model is ideal for companies that deal in a product with an unstable price.
This will motivate sales reps to strike profitable deals because they know they will make more from them. It’s also a great option if you’re looking to expand your sales team or business.
Apart from motivating your sales reps to upsell one product, this commission framework will also encourage them to focus on selling products with the highest profit margins if you have multiple offerings. Plus, it prioritizes the financial health of the business.
On the downside, gross margin commission could reduce sales reps’ willingness to offer deals such as discounts to customers. While such deals aren’t always advisable, they could prove helpful in expanding the company’s market share and setting the stage for profitable long-term relationships with customers.
5. Residual Commission Model
Speaking of lucrative long-term customer relationships, here’s one commission model that relies on it.
The residual commission plan compensates a sales rep each time the customer they closed pays the business. The business bases this compensation on a predetermined rate.
Assuming your company offers enterprise software for $500 per month, you could peg the commission rate at 10%. So each time a client renews their subscription, the sales rep that secured their account will earn $50.
Naturally, this plan works for companies that handle long-term accounts or offer subscription-based products requiring renewals.
Common examples include those in the insurance sector, enterprise software providers, etc.
One of the upsides of this commission structure for sales is that it encourages sales reps to keep current customers happy and prioritize retention, contributing to steady revenue for your business.
6. Tiered Commission Model
Here’s where companies have gotten a little creative with determining sales reps’ commission rates. Commission rates increase with the tiered commission model as your reps hit specific benchmarks. This might be selling a particular number of items or reaching a revenue target.
For example, a company’s sales reps may be entitled to a 5% commission on all sales that place their total generated revenue between $0 and $50,000. But soon as a rep moves to the $50,001 to $100,000 revenue range, their rate moves up to 8%. And once they exceed $100,000 in sales, their rate is jacked up to 10% and on and on.
This framework is ideal for companies with large sales teams or those looking to scale their sales department or business.
Such businesses have sufficient funds to fund a continuous increase in commissions.
The tiered commission model is appealing because it motivates salespeople to overperform since their earning power increases for every milestone they hit. It’s also an excellent model for identifying and rewarding top performers.
Despite its advantages, the tiered commission structure isn’t 100% foolproof. For one, it could leave you open to a wildly fluctuating payroll.
7. Multiplier Commission Model
Like the tier model, the multiplier commission structure uses revenue benchmarks to determine commission rates. But slightly differently. With this framework, you multiply a standard revenue commission percentage by a predetermined figure that varies based on the sales rep’s quota.
So, for example, a company pays a standard 10% commission on every sale. This can then be multiplied by 0.5 for sales reps that have met 50% or less of their quota. 0.8% for those who have hit between 51% and 75% of their target and 1 for those with a 76% or more quota completion percentage.
For example, someone who’s halfway to hitting his quota would earn a 5% commission on each sale (10% x 0.5). A 51-75% quota completion range gets them an 8% commission, and anything from 76% earns them the full 10% rate.
This compensation plan should be your go-to option if you want to measure your reps’ performance using multiple indicators such as their ability to upsell, cross-sell or prioritize bigger deals.
Although the multiplier model can be excellent motivation, implementing it is complicated compared to other commission structures.
8. Draw Against Commission
A draw against commission model guarantees your sales reps a paycheck each pay period irrespective of their performance. It’s similar to the basic rate model but has slight differences.
For example, there’s the recoverable draw against commission. A guaranteed and fixed advance payment that sales reps get at the start of a pay period which they will have to pay back over time.
Here’s how this might play out. You could offer a recoverable draw of $1000 at the start of the month. If a sales rep earns a lower commission than that at the end of the month, they will owe you the difference between their commission and the draw they received. Say the salesperson earns $700 in commission for that month; they will owe $300, which they will have to pay later.
But if the sales rep makes more than the draw they received, you pay them the difference between the commission and the advance pay. Assuming the rep earns $2000 in commission, they will go home with $1000, the difference between their commission and the draw received at the start of the pay period.
On the other hand, the non-recoverable draw function works more like a stipend. It’s also a guaranteed payment, but it’s non-repayable and usually temporary.
Draws are ideal for providing new hires with a financial safety net while they learn the ropes on how to earn enough from commissions.
They are also perfect for helping employees through economic uncertainty.
Although draws can improve employee satisfaction and reduce the pressure and anxiety your reps face, they can slow down growth and encourage mediocre results.
9. Territory Volume Commission Structure
The territory volume commission framework splits commission among sales reps based on revenue generated in specific regions. It’s a team-focused compensation method that looks to reward the collective effort of salespeople covering a particular geographic region.
For instance, four sales reps in charge of a particular county may have a collective target of $200,000 in sales. Say you’ve pegged the commission rate at 10%; when these reps hit their quota, they are entitled to a lump sum of $20,000 in commission. This is then split evenly amongst them — $5,000 per rep.
Naturally, this structure will work best for companies with a presence in multiple regions.
It’s also ideal if your sales process relies heavily on teamwork and cooperation.
While this may be a viable tactic to spur teamwork, it could lead to dissatisfaction amongst high performers since they will earn the same commission as other team members.
10. Commission-only Model
A commission-only plan rewards sales reps based on the deals they close and nothing else. Companies using this model typically offer high commission rates to make up for the lack of a base salary. And motivate their reps.
This structure might be a great fit if you’re still trying to find your footing financially since you pay sales reps only when they make a sale.
It’s often applied in industries like real estate, where sales reps can score big commissions from each deal.
Companies favor this model because it motivates sales reps to chase high-value deals. What’s more, it’s super attractive to salespeople who like having unlimited earning potential since this model doesn’t include a commission cap.
The downsides of a commission-only compensation structure include making reps desperate for the sale and potential disregard for standards among less ethical sales reps. Also, in the event of market fluctuations, it could leave sales reps in difficult financial situations if they cannot close enough deals to earn decent commissions. They’d likely quit, leaving positions that need filling.
How To Determine the Best Commission Structure for Your Team
Sales compensation structures should support your short-term and long-term business objectives.
So consider your goals as you draw up the commission structure.
You’ll find that certain compensation plans, for instance, will support market share expansion better than they contribute to short-term financial security.
Sales Commission Structure FAQs
1. What is the Typical Sales Commission Percentage?
Here are estimated sales commission percentages by industry:
a. Roofing and Storm restoration: 10%
b. Home security and alarm: 10-18%
c. Insurance: Up to 17%
d. Software-as-a-service (SaaS): 10-20%
e. Marketing: 10%
f. Advertising: 10%
g. Medical Equipment Manufactures: 10-30%
h. Automobile: 25%
i. Real Estate: 4-6%
j. Travel: 10-16%
k. Apparel: 15%
2. What is a Good Sales Commission Rate?
Typically, your commission rate will depend on how difficult it is to close deals in your industry, the experience, effort, and time needed, whether you’re already offering a base salary, etc. That said, generally, commission rates start at 5% and can go as high as 50%.
Money Matters…But It isn’t Everything
The goal of getting your compensation structure right is to attract, retain and motivate top sales talent. And seeing as 43% of sales reps will leave their jobs for just a 10% raise, there’s no denying that money is a motivating factor for sales reps.
But don’t get too hung up on putting together a juicy financial offer that you neglect other viable value propositions.
The best salespeople will always prefer the best offer and remain motivated by it.
In my opinion, a great offer is a combination of four factors: earning potential, attractive inbound lead flow or a well-defined sales process, brand story, and company culture. I’m convinced that your ability to get people to buy into your story or vision is a more significant driver than pay.