I鈥檝e always been fascinated by the power of sales and how it can make or break a business. When managing content for a leading sales training company, I used the opportunity to learn everything I could about the sales world. I spoke to leaders and reps firsthand, enquiring about their vision, challenges, struggles, compensation, sales commissions, and more.
Regarding sales commissions, I clearly remember what head of sales training at , casually said in our first few conversations: 鈥淎 well-structured commission plan is a bridge between ambition and achievement." He implied sales commissions were not just about rewarding results but also powerful tools to align motivation, drive performance, and foster a culture of growth within the sales team.
This inspiration has stayed with me, and since then, I鈥檝e kept going deeper into what goes into crafting sales commissions. In this blog, I鈥檝e compiled everything I鈥檝e learned about determining the best sales commission structure for your sales team or yourself.
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The easiest way I understand sales commissions is they鈥檙e like a carrot at the end of the stick. Typically, commissions for sales push reps to close deals and surpass targets. The same commissions act as potent tools for leaders to inspire teams, manage performance, and drive business growth.
A typical sales commission structure formally outlines how much an organization will pay its salespeople for each sale. I鈥檝e seen leaders put in quite some work, factoring in several aspects to plan a well-rounded sales commission structure.
This includes factors like:
When I was discussing sales commission structures with , founder of , he shared his mantra: "The best commission structures align individual goals with company success.鈥
For context, Aulakh explained they set clear KPIs for their reps, like driving guaranteed placements for new clients or nurturing long-term partnerships. This ensures they see how their efforts directly contribute to overall revenue growth. By tying commissions to measurable outcomes, such as boosting placements in top-tier outlets by 15%, they give their team the highest incentives to meet and exceed expectations.
While this is Aulakh鈥檚 approach, the ideal commission structure may differ depending on your company鈥檚 unique needs. Do you want to learn how to create a sales commission structure that marries your company interests and individual goals? Let me walk you through a step-by-step guide that I would follow.
From what I've learned, my ideal approach to creating a well-rounded sales commission structure would involve the right mix of research, combining what I鈥檝e found and communicating it well. Here鈥檚 a step-by-step rundown.
I鈥檇 start by reviewing the big picture: the company鈥檚 annual sales goals. This would clarify where the company wants to go, the revenue potential, and any gaps in the pipeline. It would also highlight areas where my team can improve. Such clarity is essential to designing the right sales commission structure.
For instance, let鈥檚 assume one of the company's goals is to increase the sales of a new service by 15% while retaining 30% of current customers. I would explore a combination of different commission structures for such an objective. Perhaps introduce a residual commission plan for customer retention and an absolute commission plan to encourage selling the new service. I鈥檒l be talking in detail about these later.
Every salesperson on a team is unique, and I鈥檝e found that their roles often evolve, especially in diverse organizations with multiple products and channels. Given that, next I鈥檇 look at each role closely 鈥 things like how they source leads, close deals, and their .
While doing this, I鈥檇 try to ascertain where the commission could drive the most impact and tailor the commission structure to focus more on those areas. I鈥檝e seen firsthand how much this helps ensure the sales commission plan is effective and every salesperson feels valued for their contributions.
Budget constraints are always part of the equation, right? So, before making any sales commission promises, I鈥檇 also dig into the sales budget numbers. Some aspects I would think about include:
My efforts would then focus on ensuring that the commission structure motivates the sales team and is simultaneously sustainable for the business.
Sales goals are another team motivator and help sales reps measure their performance. I鈥檇 plug in efforts to have reps engage with these numbers regularly, not just during monthly meetings. I鈥檝e found this handy tool to simplify calculating essential KPIs like deal size, win rate, and commission rate.
I鈥檇 investigate these numbers for each team member and role to identify current sales performance patterns. I鈥檇 also examine individual performance and overlaps in territory, schedule, product choices, etc. This insight would steer me toward a sales commission structure that effectively rewards the team for their efforts.
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So far, I鈥檝e primarily discussed my approach to research for developing sales commission frameworks. With that in place, my next step would be putting it all together to create the first draft of the commission plan.
For this, I鈥檇 balance different needs, such as the sales team鈥檚 expectations, the company鈥檚 strategic goals, and the stakeholders鈥 input. Then, I'd choose the best-suited sales commission structure and build a flexible plan 鈥 after all, sales goals are moving targets, right?
Once I have a simple and easy-to-understand sales commission plan draft, I鈥檇 give myself time to step back and reflect on it. In my experience, I鈥檝e rarely seen a perfect sales commission plan in the first step. Once I identify any shortcomings, I'd tweak it until it feels right.
The next stage is introducing the new commission structure, which is a significant shift for any company, both financially and culturally. I鈥檇 want full support from all key stakeholders for this, so I鈥檇 plan my presentation and present it clearly, using data, visuals, and examples to explain decisions.
I鈥檝e seen that the best leaders are open to feedback at this stage, even when it鈥檚 hard to hear. And that鈥檚 because, often, these conversations lead to valuable refinements that strengthen the plan. So, I鈥檇 mirror that. After all, this is all about collaboration and ensuring that everyone, from the leadership to the sales team, sees the value in the structure I鈥檓 building.
Timing makes or breaks a sales commission plan.
I first realized this when , the head of sales at , pointed out to me, 鈥淎n annual performance objective may be appealing for its administrative simplicity, but sales teams can quickly become demotivated if they realize three months in that they鈥檒l never hit quota.鈥
He had a fair point. I delved deeper to note that timing has two aspects:
While there鈥檚 no magic formula for timing, the best bet is to work with key teams to determine the best launch date 鈥 whether it鈥檚 tied to the fiscal year or another company milestone. As for when commissions will be paid, it's best to collaborate with the finance team to set a clear and consistent schedule. This way, everyone will know what to expect.
This is one of the most exciting and nerve-wracking steps. I鈥檝e learned that transparency is critical when sharing a commission plan. So, in the spirit of that, I鈥檇 go for a structured rollout instead of one-on-one conversations to simultaneously present the plan to the entire team.
While presenting, I鈥檇 prepare well beforehand to answer any questions in as much detail as possible. I would do everything possible to ensure every team member understands the plan and feels confident about what鈥檚 next.
Now that I鈥檝e shared my ideal approach to working around a sales commission structure, let me share some sales commission pro tips I鈥檝e accumulated.
With all my research on sales commissions, one resource that particularly stood out to me is Marc Wayshak鈥檚 book . Drawing from Wayshak鈥檚 insights, my observations, and the suggestions I gathered from experts, here are some tips on creating an effective commission structure.
Salary caps are the highest salaries an employee can make at a company. Capping decreases the earning potential of your salespeople. I鈥檝e figured this isn鈥檛 the best strategy for motivating people to do their best. The best sales management teams always support their team and want individuals to make as much as possible in return for their hard work.
I can鈥榯 emphasize this enough: Sales compensation doesn鈥檛 have room for do-overs. Take my word for it 鈥 each time you introduce a new compensation plan, you鈥檒l move your sales team鈥檚 goals and targets, diminishing your reps' morale and motivation. So, do your best and spend extra time to get it right at the onset.
Ensure the compensation and commission plan is clear. This will ensure the commission structure is easy to implement and without loopholes.
Do you want to hack around this? If I were to check simplicity, I鈥檇 ask myself if a salesperson could fill in these blanks quickly: If I do X, I will make $Y. If they don鈥檛 get it right, it鈥檚 a sign to simplify things.
I鈥檝e learned that not all products are created equal in commission-based sales. While letting reps focus on their preferred products boosts engagement, it鈥檚 also essential to consider the bigger picture when choosing products. After all, sales commissions also impact supply chains, profit margins, and sales turnover. So, I鈥檇 suggest prioritizing products aligning with team strengths and business priorities.
Sales goals directly impact business strategy. Many people are involved in these processes, and I鈥檝e seen firsthand how this can create a situation where different teams have divergent priorities.
In that vein, a super valuable approach I鈥檝e found is using financial goals as a starting point for defining the sales commission structure. This helps ensure the team focuses on the right priorities.
I owe this pro tip to , the head of sales at . He pointed out to me that 鈥渜uotas should be higher than the business needs your team to deliver.鈥
In his experience, sales organizations that consistently hit their business goals give their sales reps a quota of at least 20% higher than the business goal. Jankowski explained that the expanded quota allows reps wriggle room to take PTO, sick days, or just have a lousy month without risking the business.
Sales quotas are excellent tools for letting reps know what to aim for, and territories help simplify complex markets. However, though valuable, these approaches can present unique challenges for individual reps.
So, when building your commission structure, I鈥檇 stress that you account for these differences. Whether it鈥檚 balancing workloads or recognizing distinct market dynamics, tailor quotas and territories to individual circumstances to create a fairer and more effective system.
Make data your go-to resource for building and refining commission plans. Historical performance metrics can offer a solid foundation. I鈥檇 swear by them to ensure the sales plan is fair and achievable.
Beyond planning, I would also rely on data to track how the team responds to the commission structure over time. This will help adjust strategies, keep everyone motivated, and drive growth.
So far, I鈥檝e shared my steps for creating a well-rounded sales commission structure and pro tips. When you get into the game, it also helps to have a fair knowledge of the fundamentals. Let me take you through that, in case you鈥檙e unfamiliar.
Sales commission rates are the percentage of profit or any other compensation sales reps get to meet goals. Goals might include making a sale, meeting a quota, or succeeding as a team.
There鈥檚 no exact science to determining that figure, but referencing average commission rates for your industry is a good starting point.
Let鈥檚 look into these in detail:
The base salary plus commission plan is the most conventional commission structure. With this plan, salespeople receive a base salary plus commission. The standard salary-to-commission ratio is usually around 60:40, with 60% fixed and 40% variable.
When to Use It: This structure is ideal for companies where sales rep retention is critical to the sales organization鈥榮 success. The company actively invests in each rep鈥檚 success while encouraging their performance.
With a base salary plus a commission plan, a salesperson working for a high-end retail outlet might earn a base salary plus 5% of sales.
Pro tip: This combination of security and rewards often motivates sales reps to grow.
With this plan, sales reps' income comes directly from their sales 鈥 no base salary.
When to Use It: This structure is best suited for startups or businesses lacking reliable access to capital. In many ways, it amounts to a pay-as-you-go plan, which often suits firms that lack the resources to provide competitive base salaries.
With a straight commission plan, a sales rep at a B2B SaaS startup might earn a 15% commission on every sale. For example, if they land a deal worth $10,000, they would earn $1,500 on the sale 鈥 but they wouldn't receive any base compensation beyond that.
Pro tip: High-performing sales reps typically thrive in environments set by this plan, but the structure doesn't lend itself to stability.
With a relative commission plan, a rep's typical commission for sales is directly proportional to how much they hit a set quota. That compensation comes on top of a base salary, giving reps more safety net than a straight commission plan.
When to Use It: This plan is the more secure answer to a straight commission plan. It鈥榮 still directly tied to performance, but it doesn鈥檛 alienate reps who might be running into trouble, leading to less turnover.
As you can see in the example above, the quarterly deal quota is $120,000, and the rep meets only 75%. So, they receive the same percentage, or 75% of the quarterly commission, in addition to their base salary.
Pro tip: This commission structure is great for more complex organizations. It offers an opportunity to reward every rep, even if their pipelines look wildly different. For example, I鈥檝e seen some territories pull in more sales than others. This works great for those cases. You can adjust the quota by territory and align the commission with that territory. This way, the commission structure rewards reps for putting in equal effort. This structure can also flex with changing business goals while remaining relatively stable for sales employees.
An absolute commission plan pays reps for hitting set goals and performing specific activities, like acquiring new customers. An absolute commission structure can help incentivize underperformers like the relative commission plan. That said, the emphasis is less on revenue and more on activity.
When to Use It: This strategy is most often employed to help direct sales reps' focus. If a business needs to improve its numbers for a specific activity, it鈥檚 a good bet to use an absolute commission plan that revolves around that activity. However, I鈥檇 say it鈥檚 a big no if your deal size is lower than the flat commission amount.
A salesperson working with an absolute commission plan might receive a flat $ commission for every new customer they acquire 鈥 regardless of deal size. As you can see in the example above, the rep is paid an absolute commission, irrespective of the revenue each customer generates. Since this is calculated at $500 per new customer, they get $2500 for five customers, over and above the base pay.
Pro tip: This structure is easy for sales reps to understand and deliver on. The more intuitive the commission plan is, the more likely it is to motivate your team to perform.
A straight-line commission plan rewards salespeople based on how much or little they sell. As the name implies, it鈥榮 rooted in a straight correlation 鈥 a trend that typically holds even after reps meet their quota. It鈥檚 one of the better ways for businesses to encourage underperformers to meet quota. At the same time, it doesn't slow overperformers down.
When to Use It: A straight-line commission plan works best for organizations that want to incentivize reps to reach their full potential.
Like a sales rep working within a relative commission plan, a salesperson working within a straight-line commission plan will receive compensation proportional to how much of their quota they hit. The difference is that commission earnings would continue after reps meet their quota.
In the example above, the rep has achieved sales above the quota. So, they鈥檙e compensated proportionally for the superlative results. This includes the payment of commission to the extent they鈥檝e closed business 鈥 in this case, 104% of the quota. So, they鈥檙e paid 104% of the typical commission for sales.
Pro tip: To make the most of this plan, ensure your business has the resources necessary for an uncapped commission structure.
A tiered structure encourages reps to put in extra effort by providing higher commissions as they hit substantial sales milestones. Reps can be paid increasing commissions as they meet their quota, exceed it, and continue to close more deals than expected.
When to Use It: A tiered commission plan is ideal for organizations with salespeople who consistently reach (but don鈥檛 exceed) their goals. It also offers more control over commission rates than the straight-line commission plan.
As you can see in the example, with a tiered commission plan, a rep might receive:
Pro tip: Tiered commission structures require careful alignment between different parts of the business. For example, if a specific product or type of client brings in higher-value deals, other teams must be ready to meet potential increased demand in those areas.
With this commission structure, salespeople work with clients in clearly defined regions. The team operating in each specific territory gets paid on a territory-wide, team-oriented basis rather than one revolving around individual sales.
When to Use It: A territory volume commission plan suits businesses with presences in multiple territories. It's also ideal for team-based organizations that want to fortify specific service areas.
As you can see in the example above, if a team of five generates $750,000 in sales within their territory at 10% commission, they would split the money and receive $15,000 each.
Pro tip: This sales commission plan relies on teamwork and shared responsibility for relationship maintenance. This strategy could be a good fit if your team has a long purchase cycle with many touchpoints to close a transaction.
With a recoverable draw against a commission plan, a sales rep receives their commission in advance. It usually comes out at the beginning of a payor sales period as a predetermined lump sum. At the end of that sales period, that lump sum or 鈥渄raw鈥 comes from that rep's total earned commissions.
When to Use It: A recoverable draw against commission plan is typically used to get reps off the ground in some capacity. It often compensates newly hired reps, ramping them up as they onboard. It could also be a good choice for a rep acclimating to a new territory.
With this commission plan, a sales rep might receive a $15,000 draw at the beginning of a given quarter. If they only reach 75% of their quota, they'd pay $3750 of that $15,000 back to their employer.
Pro tip: This strategy guarantees some income to sales reps as they ramp up in a new territory or role. However, the recoverable aspect of this commission can be confusing.
For example, some employers might want to recover this draw immediately or cap these payments. Others will wait a set period to collect. Deciding on recovery timing early on is essential to maintaining strong employee relationships.
A non-recoverable draw is essentially a fully guaranteed commission stipend. Like its recoverable counterpart, it starts with a firm giving its reps a predetermined lump sum. But with a non-recoverable plan, reps aren't expected to pay any of that money back.
When to Use It: This plan isn鈥榯 particularly sustainable or motivating. It鈥檚 typically used as a short-term measure during company, industry, or broader economic uncertainty to ensure that sales reps have a stable source of income.
With a non-recoverable draw against commission plan, a sales rep鈥榮 employer would give the rep $15,000, assuming they鈥檒l hit the quarterly quota. If they don鈥榯, the employer can鈥檛 recoup that draw.
Pro tip: This strategy can help a business maintain long-term beneficial employee relationships during stressful times.
A residual commission structure is based on the long-term value of individual accounts. With this structure, salespeople who close deals continue to receive commission from those accounts on an ongoing basis 鈥 so long as they continue to generate revenue. This particular structure can have higher stakes than most.
On one hand, salespeople can build a breadth of solid, productive income streams over time. On the other, losing an account 鈥 for reasons that might have nothing to do with the salesperson who landed it 鈥 can mean a sizable commission hit that might be hard to recover.
When to Use It: This structure is best for businesses that build long-term client relationships, like ad agencies or consulting firms.
Expert perspective: Stingmore favors this commission structure 鈥渇or service-based companies as it encourages the sales team to consider longevity when qualifying leads and reduces the temptation to close 鈥榩oor fit鈥 deals that reps know will churn in a few months.鈥
A sales rep who works within a residual commission plan might bring in a large account. If that account pays a quarterly recurring payment of $250K per month, a rep making a 7% commission would earn $17500 per quarter in residuals from that client, in addition to base salary.
Pro tip: This strategy is helpful for both client and employee retention. It also incentivizes consistent follow-up, upselling, and cross-selling with current customers.
Take it further: Want more details on a typical sales commission structure? Check out this ultimate guide to sales compensation. It offers a more detailed view of sales commission structures and compensation plans.
Now, let鈥檚 look at industry averages.
I鈥檝e seen the best leaders track the typical commission for sales and overall compensation in their industry when working it out for their organization. This visibility and clarity on how their sales commission plan compares to the rest of their industry is super important to be fair and ensure everyone is satisfied. It also lets salespeople see how their sales compensation plan stacks up.
To help you quickly review that, I鈥檝e compiled the table below on average sales commission rates by industry. It uses wage data from the and reflects the median average pay for each industry. The commission rate will depend on the company and the commission structure they choose.
|
INDUSTRY |
MEDIAN PAY |
|
Wholesale and Manufacturing Sales Representatives |
$ 99,710 |
|
Insurance Sales Agents |
$ 59,080 |
|
Advertising Sales Agents |
$ 61,270 |
|
Real Estate Brokers and Sales Agents |
$ 58,680 |
|
Securities, Commodities, and Financial Services Sales Agents |
$ 76,900 |
|
Sales Representatives, Services, SAAS, Business Support, All Other |
$ 65,630 |
|
Door-to-door sales Workers, News and Street Vendors, and Related Workers |
$ 34,910 |
|
Retail Salespersons |
$ 33,680 |
|
Sales and Related Workers, All Other |
$ 44,610 |
These sales representatives sell goods for wholesalers or manufacturers to businesses, government agencies, and other organizations. Their job security and livelihood are often almost entirely intertwined with the volume of merchandise they can sell, and their commission structure tends to reflect that. I鈥檝e marked that these reps are often paid with absolute or base salary plus commission plans.
Insurance sales agents contact potential customers to sell different kinds of insurance. Agents spend time directly interfacing with clients, completing paperwork, and preparing presentations. They also fulfill other customer-facing and administrative responsibilities.
I鈥檝e seen that the commission for this brand of sales is generally paid on a base salary plus a commission. The commission percentages vary by the type of insurance agents are selling.
Advertising sales agents sell advertising space to businesses and individuals. They often work across various industries and media, including advertising agencies, radio, television, and Internet publishing. I鈥檝e noticed that advertising sales agents usually have strict quotas and receive a commission for meeting or exceeding them.
Real estate brokers and sales agents help clients buy, sell, and rent properties. Every state requires real estate sales professionals to be licensed, which could mean completing courses or passing a state-specific exam. Because they鈥檙e often self-employed, I鈥檝e seen many exercise the flexibility to define their commission structure.
Securities, commodities, and financial services agents buy and sell securities or commodities in investment and trading firms. They can also provide financial services to businesses and individuals. Some advise customers about stocks, bonds, mutual funds, commodities, and market conditions. In my research, I鈥檝e noticed that most of these salespeople often charge flat-rate commissions per share or trade.
This sales category encompasses salespeople in positions and industries in various service-based businesses, including business support, technical consulting, electronics, telecommunications, computer systems and electronics, and software as a service. It excludes advertising, insurance, travel, and other categories. Given this category's wide range of industries and companies, I鈥檝e not been able to identify its most common commission structure.
This category includes several different kinds of salespeople, including professionals in telecommunications, residential building construction, and subscription programming. Like the previous one, the wide range of industries and companies in this category makes it hard to pin down a standard commission structure.
Retail sales refers to reps who sell merchandise (such as clothing, furniture, or appliances) in a brick-and-mortar environment. These environments include general merchandise stores and dealers specializing in specific wares, such as sporting goods or musical instruments.
Since success often depends on foot traffic rather than sales activity, I鈥檝e seen that retail salespersons are usually compensated by a base salary only. However, retail environments with high-ticket items frequently pay flat commission rates.
This sales category encompasses salespeople in positions and industries that don鈥檛 fall into the abovementioned industries. This can include roles at automobile dealerships, in non-depository credit intermediation, and with food and beverage retailers. The range of roles that fall into this category is broad, so the variety of the commission structures used tends to be as well.
Whatever the sales commission approach, employers and reps should be crystal clear on the commission structure and compensation plan before the rep joins the job. The sales commission agreement is where to share or gather this information formally.
A sales commission agreement:
The idea behind it is to ensure employers have clear terms of employment to protect themselves from legal recourse if an employee has an issue with the commission structure they鈥榬e working within. At the same time, employees know exactly how they鈥檒l be compensated for their efforts. Therefore, both parties must thoroughly understand what's in it.
This section allows the salesperson to sell products or services on behalf of their employer. The employer often limits the selling by restricting the regions or territories where the offerings are sold and prohibiting the rebranding and reselling their products.
The salesperson must agree to use documentation and tools approved by the company to track their sales activities. These might include resources like , software, or forms.
A requires the salesperson to refrain from representing or selling on behalf of a competitor for a period of time after leaving their employer.
The ensures the employee agrees to refrain from sharing confidential information or intellectual property.
This is the section with details of the commission structure. After reading this section, the employee and employer have a clear understanding of:
The salesperson and their employer agree to the details of the sales commission agreement by signing and dating the document.
While these are the generic and most common elements, there can be specifics. If you want any additional recommendations and insight, consult your legal team or seek the advice of a lawyer to help you craft your sales commission agreement carefully.
Want a headstart in developing a sales commission agreement or strategic business plan? Check out these templates I鈥檝e found to help you get started.
Edit and customize this sales commission agreement template to fit your needs. Your recipients can sign it, and you鈥榣l be able to track the document鈥檚 opens and views.
This sales commission agreement template builder will help you outline the working relationship between employee and employer. It includes general information (like address and phone number), commission structure, documentation, and non-compete and non-disclosure clauses.
With this fill-in-the-blank sales commission agreement, you can quickly plug in the details for your document. It includes a progress bar to show you how much more of the agreement needs to be completed.
My exposure to the sales world has made one thing clear: A well-designed commission structure is integral to hitting sales targets and keeping top-performing reps engaged.
I鈥檝e seen the most effective sales commission plans to balance the organization鈥檚 goals and the sales team鈥檚 motivations, ensuring both thrive. That鈥檚 what your aim should be, too!
If I were to summarize all my research on this topic, my preferred approach to crafting a solid sales commission structure would involve thorough research, clear communication, and a focus on industry benchmarks to stay competitive. Whatever plan you put together, ensure there is no ambiguity regarding earnings. Formalize it with a solid sales commission agreement to lock in clarity and trust.