Humans thrive in structure. Love it or hate it, structure is nature’s DNA. Physics, engineering, architecture, construction, sales, even marketing, structure provides a foundation for growth and stability. Whether it’s your daily routines or your sales compensation plans, structure gives flight to success and ensuring you have the right structure for your commissions is the key to that success. Let’s break down nine different sales commission structures.
A sales commission structure is a type of compensation plan that companies use to pay their salespeople. It usually includes commissions, bonuses, and other incentives on top of base salary, and it defines the extent to which sales commission can vary.
The type of sales commission structure you use for your sales team not only impacts their income, but can also affect their morale—for better or worse. Choosing the right structure can help to attract and retain top talent. Choosing poorly can have the opposite effect.
It’s a critical decision, but it can be hard to know where to start. No one sales commission structure is inherently “best.” It all comes down to what makes the most sense in the context of your organization and sales team.
In this article, we’ll walk you through the importance of choosing the right sales commission structure, how to pick the right sales commission structure for your team, and the nine most common sales commission structures:
- Base pay compensation
- Basic commission
- Multiplier commission
- Tiered commission
- Residual commission
- Commission draw
- Territorial volume commission
- Straight commission
- Gross margin commission
The importance of choosing the right sales commission structure
Every salesperson’s performance is directly linked to the amount of money they can earn. Generally speaking, they’ll pursue the work that allows them to earn the greatest amount. A well-structured commission plan encourages top performance because accountability produces results.
Sales teams that lack a well-defined and thought-out sales commission structure soon find their bottom line suffering, and must change their sales commission structure to motivate better performance.
The right sales commission structure for your team has the power to:
- Provide a strong incentive: It motivates salespeople to close as many deals as possible by increasing their productivity and decreasing their time-to-close.
- Attract top talent: Choosing the right sales commission structure helps attract top talent by providing greater financial security.
- Increase efficiency: A good sales commission structure should be based on how effective each individual is at selling, motivating greater efficiency.
- Higher sales conversion rates: A properly structured sales commission plan incentivizes salespersons to take the necessary steps that lead to higher conversions.
- Reduce employee turnover rates: A sales commission structure that includes a high base salary along with a performance incentive is a powerful tool for promoting loyalty.
How to pick the right sales commission structure for your team
The right sales commission structure depends entirely on the specifics of your team and organization. What works well for one company may not work at all for another.
For example, companies like Amazon, Uber, and Airbnb use a straight commission structure, where commissions are paid out according to how much revenue a rep generates. By contrast, companies like Nike and Apple use a variable commission structure, with commissions paid out according to how much of their quota a rep sells at the end of the day or week.
To determine which structure is best for your team, you need to understand how your sales organization operates, what drives its revenue, and what motivates your sales reps.
As we walk through the nine most common types of sales commission structures, consider the following questions:
- What is the cost of your product or service?
- What is your target market?
- How much do you need to sell to make a profit?
- What is the cost of the sale?
- What is the size of the sale?
- Are there any risks involved in selling a product or service?
- Is the compensation fair?
- Will the compensation motivate sales teams to work well together?
- Will the commission structure let you have a healthy profit margin?
9 sales commission structures compared
Sales commission structures vary from company to company. With so many types of sales commission structures, it can be difficult to understand them all, let alone determine which one is best for your business.
To help you make the right decision, we’ll examine nine of the most common sales commission structures, provide an example structure for each, and consider reasons why a given structure might be good or bad for different organizations.
1. Base pay compensation
The base pay compensation structure pays salespeople a set wage for the amount of work they put in, rather than paying commissions on every sale. They’re paid a flat hourly rate regardless of how many deals they close.
This sales commission structure usually won’t push individuals to improve their productivity or performance, and it may encourage putting in a minimal amount of effort. It similarly fails to motivate the team as a whole, as they have no incentive for working together toward a common goal. And when top performers and lower performers earn the same, it removes any sense of healthy competition.
However, base pay compensation has the advantage of being an extremely simple structure that’s easy to manage. And it tends to promote a low-stress environment for employees.
Example structure:
- Sales reps are paid a flat hourly rate of $30 per hour.
- No additional commissions or bonuses are provided.
- Pay remains constant regardless of sales volume or performance.
Good for organizations that:
- Prioritize stable income for their employees.
- Aim to reduce stress and create a more balanced work environment.
- Operate in industries where sales cycles are long and unpredictable.
Not for organizations that:
- Depend on sales performance to achieve revenue goals.
- Need to drive high sales volume and aggressive targets.
- Struggle with employee motivation and productivity.
2. Basic commission
With a basic commission structure, companies pay salespeople base salaries on a flat hourly rate, along with a percentage of sales they make. When they make a sale, they earn a commission. There are usually no monthly targets in place, and a commission on the sale is the only variable component of their compensation.
Companies with high enough revenue can afford to pay an hourly rate in addition to commission. This system places different levels of responsibility on both parties, which can lead to a better and more productive relationship.
A basic commission package makes it easy for salespeople to understand their expectations, keeps them motivated to work, and helps them understand their work better. It also gives sales leaders an idea of each rep’s performance, and it can help them set individual goals.
However, a basic compensation package isn’t the most effective structure for motivating salespeople to sell more. The incentives to perform may not be sufficient with no targets to chase. It also fails to drive personal growth. Salespeople may also be less invested in maximizing their company’s revenues.
Example structure:
- Sales reps receive a base salary of $4,000 per month.
- Additionally, they earn a 5% commission on each sale made.
- No monthly sales targets or additional bonuses.
Good for organizations that:
- Want to balance stable income with performance incentives.
- Have enough revenue to support both base pay and commissions.
- Seek to motivate salespeople without creating excessive competition.
Not for organizations that:
- Operate in competitive markets where high performance is critical.
- Require strong performance incentives to drive sales.
- Need to provide strong personal growth opportunities for sales reps.
3. Multiplier commission
The multiplier commission structure starts with a basic revenue commission percentage. This percentage is multiplied by an agreed-upon figure based on a salesperson’s quota achievement. A multiplier plan gives reps the opportunity to earn more money as they progress in their sales career. This may provide an affordable way for companies to drive customer acquisition and sales.
It effectively incentivizes sales reps to increase their sales and earnings, but it can be difficult to implement, especially for companies that are new to this kind of structure. They can be tricky to set up, and require constant monitoring and tweaking to get it right.
Multiplier commission structures allow businesses to offer different levels of compensation for different levels of performance, similar to the way salary ranges are typically determined. This ensures that all salespeople are evaluated on the same set of standards, with a focus on core values and performance.
However, salespeople may not fully understand their commissions how the compensation plan works. This lack of clarity can cause frustration for those who want to know what they’re earning daily. The multiplier commission structure can make it harder for salespeople to track their performance and leads, especially if they aren’t in charge of their territory or don’t have a dedicated manager. But companies can address these issues by clearly spelling out the commission structure, leaving no room for doubt or confusion.
Example structure:
- Sales reps earn a standard 10% commission for a fully completed quota.
- If they attain 90% of the quota, a multiplier of 0.9 is applied to their standard commission. Their revised commission would be 9%.
- For 75% of the quota, they earn standard commission × 0.8 multiplier = 8% commission.
- For 50% of the quota, they earn standard commission × 0.6 multiplier = 6% commission.
- For 40% of the quota and under, they earn standard commission × 0.4 multiplier = 4% commission.
Good for organizations that:
- Want to motivate sales reps to reach their full quotas.
- Are willing to invest in setting up and managing a complex commission structure.
- Aim to drive significant increases in sales and customer acquisition.
Not for organizations that:
- Struggle with tracking and monitoring detailed sales performance data.
- Are unable to communicate the structure in a way that salespeople can understand.
- Have unpredictable sales cycles, making it difficult for reps to consistently hit quota.
4. Tiered commission
With a tiered commission structure, companies set tiers based on an objective metric, such as the number of units sold or total revenue generated. Sales reps receive an increase in their commission rate for every new tier they reach. The further one progresses through the tiers, the more money they make.
Tiered commission structures allow businesses to scale up their sales departments, encouraging sales reps to explore new revenue channels such as upsells and cross-selling. It’s a particularly popular sales commission structure among companies in the B2B space.
Example structure (by units sold):
- Sales reps earn a 4% commission on the first 1,000 units sold.
- They earn 5% on the next 1,000 units sold.
- They earn 6% on every additional 1,000 units sold after that.
Example structure (by revenue generated):
- Sales reps start by earning a 4% commission.
- They earn 7% once their total revenue generated reaches $10,000.
- They earn 10% once their total revenue generated reaches $15,000.
Good for organizations that:
- Want to motivate top performers.
- Operate in industries where they need to exceed sales targets.
- Aim to attract and retain top sales talent with significant earnings potential.
Not for organizations that:
- Lack the technology to manage the complexities of multiple commission tiers.
- Want to avoid aggressive sales tactics that may harm customer relationships.
- Operate in markets with limited sales opportunities, making it difficult for reps to reach higher tiers.
5. Residual commission
Under a residual commission structure, sales reps receive commission for as long as the accounts they generate continue creating revenue. This structure is intended to incentivize sales reps to continue building positive relationships with customers beyond the initial contract signing, offering customers a more personalized and consistent experience.
Residual commission structures are most common in organizations operating on high-budget, long-term accounts, such as investment banks, consulting firms, and insurance companies. Customers have an ongoing relationship with the company, which can be reasonably expected to continue for some length of time. The number of commissions generated also tends to be quite high.
This model provides a sustainable way to grow and scale your business with minimal risk of failing. It ensures that sales reps do their best to retain customers, while the company benefits from increased revenues.
Example structure:
- Sales reps earn 6% commission for active clients.
- When a sales rep signs a client for $5,000 per month, they receive $300 per month.
- This lasts for as long as the client continues paying the company.
- A rep who maintains 50 clients of that same value will earn $15,000 per month.
Good for organizations that:
- Operate with high-budget, long-term accounts and ongoing customer relationships.
- Aim to incentivize sales reps to maintain long-term client relationships.
- Want a sustainable way to grow and scale with consistent revenue streams.
Not for organizations that:
- Have short sales cycles and low long-term client engagement.
- Require quick revenue turnover and immediate results.
- Struggle with tracking ongoing revenue from multiple clients accurately.
6. Commission draw
The commission draw structure is a new approach to wage-based compensation. It has three main parts: base pay, commission, and bonuses. Commission rates are usually higher than top-down models like the commission-only structure or the base pay plus commission structure.
Sales reps are promised a certain amount of money each month regardless of the number of sales they generate for their company, which can be a reliable way to keep people motivated.
This structure is most often used for new hires who transition to a different sales commission structure once they’re established. Companies can quickly get their new sales reps up to speed on the business while still giving them the opportunity to build their salary in the first year.
Example structure:
- New hires receive a monthly draw of $5,000 and a 10% commission on sales.
- If they earn $4,000 in commission, the draw amount covers the difference of $1,000.
- If they earn $6,000 in commission in a month, they keep the full amount as is.
- The organization may also stack on bonuses to motivate them further.
Good for organizations that:
- Want to help new hires as they ramp up their performance.
- Are willing to provide a safety net to alleviate financial stress.
- Balance security with performance-based incentives.
Not for organizations that:
- Don’t want to use a different commission structure for new and established reps.
- Prefer straightforward commission structures without the complexity of draws.
- Have sales reps who might become complacent with a comfortable draw amount.
7. Territorial volume commission
Under a territorial volume commission structure, the sales generated within a territory are added up, and the total commissions are divided equally among all sales reps working within that territory. It’s designed to foster a team-first environment that is focused on collaboration and results, motivating sales reps to work as a unit rather than individually.
However, this structure may leave top performers feeling frustrated that they receive no additional compensation for their success, especially when they’re straddled with low or below-average performers on the same team. It may also lead some sales reps to become complacent, believing they can coast on the success of others on their team.
Example structure:
- A territory with four sales reps has a collective sales target of $100,000.
- The four reps bring in $30,000, $26,000, $24,000, and $20,000 in revenue respectively.
- The territorial commission rate is set at 30%.
- $100,000 in revenue earns $30,000 in commissions, divided evenly as $7,500 each.
Good for organizations that:
- Aim to foster teamwork and collaboration within their sales teams.
- Have well-defined sales territories that can be managed effectively.
- Want to improve overall team performance and morale.
Not for organizations that:
- Have high-performing individuals who may feel unfairly compensated.
- Face challenges in defining and managing territory boundaries fairly.
- Struggle with internal conflicts over territory assignments.
8. Straight commission
A straight commission, also known as a revenue commission, works by paying salespeople a fixed percentage of the total sales price. Sales reps do not receive a salary, but are paid only commissions based on the revenue they bring in.
A sales rep’s ability to earn is determined entirely by how much they sell. It’s simple to understand and execute for reps and company leaders alike, and paying sales reps based on the revenue they bring in ensures that top sales performers are also the highest paid.
Many companies use this method when they want to grow their market share or enter new territories. They’re not as focused on profit as they are on larger business goals.
Example structure:
- Sales reps earn a 10% commission on all sales revenue generated.
- If a rep generates $50,000 in sales for the month, they receive $5,000 as commission.
- No base salary is provided.
Good for organizations that:
- Want a simple and direct link between sales performance and earnings.
- Aim to maximize revenue through clear incentives.
- Have straightforward products or services with high revenue potential.
Not for organizations that:
- Need to consider profitability or long-term customer value over short-term revenue.
- Operate in markets where aggressive sales tactics could harm brand reputation.
- Prefer a more stable and predictable income structure for their sales reps.
9. Gross margin commission
A gross margin commission structure allows sales reps to earn commissions based on the profit of each sale, rather than on revenue. The costs associated with closing a deal are subtracted from the sale price, and sales reps earn a commission on the resulting profit.
This sales commission structure can help align sales and marketing. It ensures that every sale supports the company's bottom line, and it disincentivizes sales reps from relying on discounts to close deals.
Example structure:
- Sales reps earn a 10% commission on profit.
- A product is sold for $1,000 with a cost of $400, resulting in a profit of $600.
- The rep earns $60 for the sale.
Good for organizations that:
- Operate on small profit margins relative to the cost of their products.
- Want to align sales incentives with company profitability.
- Encourage sales reps to consider the impact of discounts on sales.
Not for organizations that:
- Have complex or variable cost structures that are difficult to track.
- Struggle with transparency and understanding of costs and margins.
- Need to avoid demotivating sales reps if margins are slim or inconsistent.
Track and calculate sales commissions for any structure
It’s important to pick the right sales commission structure, but it’s even more important to track and calculate commissions accurately. And that can be a challenge no matter which sales commission structure you go with.
Thankfully, Performio has you covered with our best-in-class incentive compensation management (ICM) platform.
Tracking and calculating commissions is a breeze with our intuitive dashboards, advanced reporting, and more. You’ll be able to see all of your team’s sales activities at a glance, know whether they’re on track toward meeting their quotas, and save countless hours on tedious manual calculations.
Want to see what Performio can do for your organization? Request a demo today.