Sales Commission Structure and Compensation Best Practices

Oleg Campbell 27 Oct 2022

Sales is a great career with lots of benefits, but it is challenging; the sales industry has one of the highest turnover rates around. To ensure you get — and retain — the best sales talent, you need to reward them accordingly. This means having an attractive sales compensation plan with a sales commission structure that incentivizes top performers.

In this guide, we’ll look at some of the typical sales commission structures along with the best practices for implementing them.

What is sales commission? What is sales compensation?

One of the big appeals of a sales career is pay that reflects performance — the more you sell, the more you earn. Sales commission refers to the variable pay a salesperson makes based on their sales.

The commission is just one part of an overall sales compensation plan. Sales compensation includes base salary, commission and any other bonuses or incentives that are paid to the salesperson.

There are different commission structures to use (and sales commission tools to calculate those), but all of them are designed to encourage your salespeople to perform at their best. By rewarding their hard work, you can incentivize specific behaviors and retain your best talent, lowering sales turnover.

The sales commission you use directly impacts your team’s sales performance, providing an incentive to attract top performers and ensure that they bring their A-game every day.

Picking the right sales commission structure

With so many benefits, it’s unusual to find a sales organization that doesn’t have some kind of sales commission structure in place. However, there are many different structures to choose from, with no one-size-fits-all ultimate commission structure that’s guaranteed to get the best results. The right structure for you will depend on your business and the type of product or service you sell.

Similarly, whatever commission structure you choose, you’ll also need to consider the commission rate. Too low and it won’t be enough of an incentive, possibly even offending reps and making them feel underappreciated. Too high and you could eat up your profits and go over budget.

At the most basic level, the more commission you offer, the more your salespeople will be incentivized to sell. However, you can’t just keep raising commission rates and always expect to see a corresponding increase in sales; sooner or later, even the best reps will hit the wall. Technology (such as Reply’s all-in-one sales engagement platform) can help scale their efforts but, at some point, your commission rate will have diminishing returns.

To find the right rate, consider several different factors. For example, what is your budget? How much can you afford to pay your top performers? What kind of commission do your competitors offer? Many modern sales teams are based all over the world, so staying competitive can be a challenge.

The type of business and product or service also affect the rate. Generally, a more complicated sales process with a longer sales cycle, requiring lots of technical knowledge and expertise, will have a higher commission rate. Simple products that can be sold quickly and require less involvement will have a lower commission rate.

As a result, commission rates can vary dramatically, ranging from as little as 5% to as much as 50%.

The most common sales commission structures

Picking the right rate might be important, but choosing the right type of commission is vital for getting the best results while still being able to stick to your budget. Here are some of the different sales commission structures you can use in your sales organization, depending on your specific situation.

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Base salary only

While technically not a commission structure, the simplest way of compensating your sales reps is with a set salary. In this type of plan, each rep is paid an agreed figure with no commission to be calculated or applied.

Although this is the most straightforward payment method, it’s very rarely used. Zero commission means zero incentive to sell, so it’s unlikely you’ll attract top-tier talent or get particularly good results.

You’re most likely to come across this payment structure in jobs where sales is one small part of the role, a minor responsibility among many. Here a commission-based system would encourage employees to spend all their time selling, while a clear salary would compensate them fairly for all other tasks.

Commission only

At the other end of the scale, we have a pure commission-based plan. Here, reps are paid exclusively based on how much they sell with no base salary to serve as a safety net.

This might sound appealing to companies, as all the risk is on the reps’ shoulders. If the salesperson doesn’t make any money for the business, then the business doesn’t have to pay them anything. The lack of a safety net can also be a powerful motivator, especially if you’re offering an uncapped commission. The strong rise to the top, making the most of the opportunity to earn as much money as possible, for them and your business.

Unsurprisingly though, not every sales rep is ready to take on that level of risk, so you might struggle to find applicants. The high pressure also means that even reps who step up and take on the challenge are more likely to burn out and quit.

As compensation is exclusively based on sales, it’s only natural that reps will spend all their time selling. Other responsibilities may suffer, with a salesperson skipping valuable training or ignoring important admin tasks so they can squeeze in one more sales call.

Revenue commission

In a traditional revenue-based commission structure, salespeople receive a predefined percentage of all the sales they make (in addition to their base salary). So, if you’re selling a $2,000 product with a 10% commission rate, your salespeople will make $200 in commission for each unit they sell. This is ideal for smaller sales teams with simple products sold at a fixed price.

A popular variation of this is a gross margin commission plan, where the commission is based on profits rather than sales revenue. This is useful where reps can control the pricing. While the ability to offer discounts can help close more deals, it can also mean money is left on the table. When the commission is based on profit, the salesperson is less likely to jump to huge discounts at the first sign of an objection.

Placement fees

In this type of commission structure, a salesperson receives a set amount of commission (rather than a percentage of revenue) for each unit sold. For example, you might be paid $450 for each unit you sell. If you sell five units in a month, you’ll receive $2,250.

This type of commission is particularly popular in auto sales, where a placement fee is paid for each car sold. This might be in addition to other commissions (acting as an added incentive) or it could be the sole method of compensation.

Tiered commission

Sometimes referred to as a performance gate, a tiered commission plan is structured so that the commission rate varies based on performance. While a standard revenue commission plan pays the same percentage rate no matter how much you sell, in a tiered commission plan the rate also goes up as the sales increase.

For example, you could use the following sales commission structure template:

Sales revenue	Commission rate
< $10,000	5%
$10,000 – $20,000	10%
> $20,000	15%

So, if a rep sold $15,000 worth of product in a month, they’d get 5% on the first $9,999 ($499.95) and 10% on the remaining $5,001 revenue ($500.10). This gives a total of $1,000.05 in commission.

This gives an added incentive to your sales teams and encourages them to go for the gold, as your best salespeople get the best rewards.

A straight-line commission uses a similar idea: The commission rate correlates directly to quota attainment. So, a rep who only hits 50% of their quota only gets 50% of their allocated commission, someone who has 100% quota attainment gets 100% of their commission, a high performer who hits 150% of their quota gets 150% of their allocated commission, etc.

SaaS sales commission

Compared to calculating the commission on selling a one-off product, commission plans for SaaS and other subscription-based services might seem more complicated at first glance. How do you calculate commission when a customer might sign up for one month or ten years?

In reality, it’s not that complex. As Joel York points out in his article, the only difference between SaaS sales compensation and any other compensation plan is that you need to pay commission based on the lifetime value of the deal, rather than any kind of unit price.

Now, calculating lifetime value itself might seem daunting, but it’s always proportionate to recurring revenue. As covered in our SaaS sales guide, Customer Lifetime Value (CLV) can be worked out using the average monthly payment or average Monthly Recurring Revenue (MRR). Alternatively, you can use Annual Recurring Revenue (ARR), as long as you stick to the same format throughout the compensation plan. Whichever format you use, simply replace the unit price from other commission structures with the customer value.

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Final thoughts

No matter how much someone loves sales, there’s no denying that it’s a challenging career. As a result, sales managers also face the off-putting challenge of attracting and retaining the best talent.

By knowing the different types of commission structures and understanding how they can be effectively used, you can ensure your top performers are rewarded for their hard work, resulting in happier employees and increased revenue for your business.