For sales-focused roles, commission plans are among the most important components of a compensation package and they strongly influence the types of deals and activities worth focusing on. When structured strategically, commission plans reward activities that best serve the business and motivate employees to do their best work.
The wrong sales commission structure, however, doesn’t give employees enough incentive to work harder, faster, or better, and may even create misalignment between employee efforts and organizational goals. So it’s important to get your commission plan right—and to make sure sales teams understand exactly how it works.
Performio’s incentive compensation management software has helped organizations process more than $100 billion in sales commissions for more than 75,000 sales professionals. We’ve seen every type of commission plan you can imagine, and we’ve also seen what happens when sales reps don’t understand how commission structures affect their payouts.
In this article, we’ll cover:
A commission plan is the component of a sales compensation plan that determines how employees are compensated for contributions to sales. Sales commissions are typically a variable, performance-based cash incentive, and the commission plan defines how and when it is earned—and how high it can go.
Commission is most often a percentage of each sale, a percentage of gross profits, or a flat rate tied to revenue-generating activities like closing deals or securing renewals. Commission plans allow sales professionals to earn more income by generating more revenue or securing better profit margins for the company.
As an example, suppose a compensation plan pays a sales rep a base salary + sales commission (this is one of the most common sales compensation structures). The commission plan governs how much commission they can earn, for what activities, and when it’s paid. Say they make $60,000 in base pay, and the commission plan lets them earn 5% commission on sales of a $10,000 product. For every sale they close, they make $500 in commission.
That’s the basic concept, but numerous variables complicate how commission plan payouts are calculated, and it mostly depends on the structure an employer chooses.
A commission plan structure is the framework that determines how commissions are calculated. While there are numerous variations, commission plan structures generally fall into a handful of common types.
Different commission plans emphasize different organizational priorities by changing what sales reps are most incentivized to focus on, and how much incentive they have. Effective and motivated reps optimize their efforts around the activities and deals that maximize their earning potential and lead to the biggest payouts. So it’s important that organizations choose the structure that best aligns with their goals.
Here are some of the most common commission plan structures, and what they’re best suited for.
|
Commission plan name |
Best for |
|
Straight commission |
Highly motivated sales reps and short sales cycles |
|
Draw against commission |
Ensuring consistent income for reps through long sales cycles |
|
Residual commission |
Prioritizing customer loyalty and retention |
|
Tiered commission |
Providing consistent motivation, and increasing earning potential for top performers |
|
Multiplier commission |
Strongly incentivizing quotas |
|
Gross margin commission |
Preserving margins and disincentivizing discounts |
|
Territory volume commission |
Entering new markets |
Pros: Simple structure with a clear connection between performance and earnings.
Cons: High risk makes it unsuitable for long sales cycles and volatile markets. Straight commission plans can also overemphasize customer acquisition.
Straight commission is a sales commission plan in which reps only get paid commissions. No salary. No hourly rate. The more people sell, the more they make. It’s a simple (but risky) structure that can be attractive to some reps for its high earning potential, and appealing to businesses because it essentially turns sales reps into contractors whose pay is entirely based on the revenue they generate for the company.
This works best for organizations with short, straightforward sales cycles and motivated sales reps who can handle the risks. It can also work well for seasonal demand and roles.
Pros: Provides consistent income through long sales cycles and volatile market conditions.
Cons: “Draw against” debt can make maximum earning potential feel out of reach, sapping morale.
Draw against commission is similar to a straight commission plan. But unlike straight commission structures, draw against commission plans guarantee reps a consistent monthly income. When reps don’t sell enough for their commissions to equal a guaranteed payout, they still receive their guaranteed payout by taking on a debt that future commissions will “draw against.” This debt can passively build in the background, until it’s paid down in months with higher performance.
For example, suppose a sales rep has a guaranteed monthly payout of $4,000. During a month of low sales, their commissions only amount to $3,000. They still get paid $4,000. The following month, they earn $5,000 in commissions. The $1,000 they earned beyond their guaranteed pay goes toward their debt from the previous month.
This model offers more stability than straight commission, making it more useful to organizations with difficult onboarding periods, long sales cycles, or volatile markets where you can’t reasonably expect sales staff to close the same number of deals each month.
Pros: Motivates sales reps to maintain customer relationships and build loyalty.
Cons: Can overemphasize retention if reps don’t have sufficient incentive to pursue acquisition.
A residual commission structure pays a sales commission based on recurring revenue, such as monthly insurance premiums or SaaS subscriptions. This structure incentivizes sales reps to create and maintain long-term customer relationships.
After a sales rep has acquired enough customers for their residual commissions to meet their personal goals, their focus generally shifts toward loyalty and retention, only returning to acquisition as customer churn reduces their residuals. Employers can rebalance this emphasis by capping residuals or by directly incentivizing acquisition within their commission plan.
Pros: High earning potential and incremental goals keep reps financially motivated.
Cons: Commission tiers add significant complexity to incentive compensation management processes.
Under a tiered sales commission plan, sales reps earn progressively higher commission rates as they pass sales thresholds. These thresholds are often referred to as accelerators, kickers, or ramp rates, and are designed to reward high performance. Once a sales rep reaches a new tier, subsequent sales generate a different commission.
Suppose an organization has three tiers of sales commissions. Tier 1 offers 5% commission for the first $25,000 in sales. Tier 2 offers 7.5% commission for the next $25,000 in sales. And Tier 3 offers 10% commission on every sale beyond $50,000 in sales. Tier progression resets at fixed intervals, such as on a monthly, quarterly, or annual basis.
|
Tier |
Monthly sales |
Sales commission rate |
|
1 |
$0–$25,000 |
5.0% |
|
2 |
$25,001–$50,000 |
7.5% |
|
3 |
$50,001+ |
10.0% |
These tiers can also be based on units sold rather than revenue, incentivizing reps to secure more deals.
Pros: Provides a strong incentive for reps to reach quotas.
Cons: Can be risky for less predictable markets or sales cycles.
A multiplier sales commission plan can offer positive or negative reinforcement for exceeding or failing to meet sales targets. Sales reps are paid a base commission rate that is multiplied by an amount that varies based on performance.
For example, a sales rep may earn a base commission rate of 5% if they hit their sales quota, but if they fall short, the base commission rate may be multiplied by 0.75, reducing it to 3.75%. On the other hand, exceeding their quota by 25% may trigger a multiplier of 1.5, bringing the commission rate to 7.5%. As with a tiered commission plan, the rate varies by performance, but the difference is that the entire sales amount uses one commission rate.
Pros: Emphasizes profitable sales and discourages discounts.
Cons: Can demotivate reps if margins are low or cost structures are unclear.
For products or services with tight margins, organizations may prefer to calculate sales commissions based on profit, not revenue. This allows employers to factor their costs into payouts and disincentivize discounts. Sales reps have less motivation to close deals by offering lower prices when these discounts have a greater impact on how much reps take home.
Pros: Promotes teamwork and expansion into new markets.
Cons: Can discourage top performers by deemphasizing individual performance.
A territory volume commission structure is a team-based model that splits commissions equally between all sales staff within a territory, according to a set territory rate. This reduces the risk sales reps take on when selling into developing markets, thereby encouraging veteran sales personnel to support growth in new markets. In some settings, territory volume commission plans are referred to as team commission or pool commission.
Your sales commission plan is a strategic choice that should be rooted in unique circumstances like your business goals, sales roles, and sales cycles. Creating your commission plan involves selecting the structure that best fits your unique needs, then fine-tuning commissions to ensure your incentives match your intended outcomes.
A manufacturing company Performio works with realized that their compensation plan’s lack of performance-based incentives was harming talent acquisition and retention. But since their sales cycle was three to five years, they weren’t sure how a commission plan would fit the logistics of their sales operations. Working with a sales consultant, they developed a unique commission plan that rewarded sales reps for the activities that were most strongly associated with sales instead of sales themselves, allowing them to pay out commissions much earlier in the sales cycle.
You don’t need to hire a sales consultant to make a commission plan that fits your unique business needs. But you do need to examine the factors that influence which structures make the most sense for your organization, and recognize that this is often an iterative process.
The most important consideration in structuring your commission plan is understanding how your choice will steer sales reps to work toward organizational goals. If expanding to new markets is the key to growth, you’ll want to create a structure that incentivizes that, perhaps offering higher rates for newer markets, or at least using a territory volume structure that doesn’t make it feel riskier to oversee developing regions.
Or maybe you work in an industry with low customer churn, and you want sales reps to stay motivated to acquire new customers. In this case, you’d want residuals to be high enough that veteran salespeople don’t feel they’ve been shorted, but low enough that they’re still motivated to acquire new customers—perhaps increasing the number of residual accounts they can be rewarded for, but decreasing the commission per recurring customer.
Your sales commission plan should balance organizational priorities, keeping sales activities and incentives aligned with your broader growth strategy.
Your industry, organizational structure, sales cycle, and pipeline all affect what makes the most sense for your sales commissions structure.
If your sales org has numerous specialized roles and a wide range of activities that strongly contribute to each sale, your commission plan needs to fairly distribute rewards with that in mind.That may mean creating different commission structures for different roles, or splitting commissions among teams.
Selling into the enterprise? Perhaps you need to use a draw against commission structure to give reps stability as they pursue deals that take many months to mature.
If different products and services have dramatically different profit margins, you may need a gross margin commission structure for some, but not others.
As you launch new products, you may want to offer greater incentives for them or perhaps set an earnings ceiling on others to help reps shift their focus from the legacy or flagship products they’ve been accustomed to selling.
Your commission plan should match the reality of your sales environment. Too often, sales organizations struggle to build plans that reflect the complexity of their sales processes. They can’t offer the right incentives because they’re stuck fighting against the limitations of spreadsheets, fragile formulas, or overly-simplistic rules. This is one of the main reasons sales organizations turn to Performio—where your commission plan is never held back by your software.
When goals feel unattainable, the reward doesn’t matter. In a tiered commission structure, for example, the majority of reps (80% or more) should be able to clear the first tier. The highest tiers should feel within reach for your best reps and highest achievers (10–20%), but low-performing reps will need to significantly improve or work much harder if they hope to ever get there. If no one can maximize their earning potential and everyone is struggling to hit quotas, your commission plan will increase turnover and may cost you some of your best reps.
Accelerators are meant to keep everyone engaged, but they should offer the best incentives to your top performers. With more quota thresholds, a smaller percentage of sales reps should be reaching the highest tiers, but your most effective sales staff should still be able to max them out.
If a large percentage of reps are consistently finishing just below the next threshold, you may need to lower it to keep them motivated. Set the bar too low, however, and your most motivated reps may move on to more rewarding opportunities. You may also find that once everyone clears a particular threshold, their sales activity falls off—in which case you’ll want to increase the quota for that tier.
Quotas require frequent rebalancing to ensure that they’re offering sufficient incentive while still feeling reachable and fair. Initially, you’ll want to review quotas and accelerator thresholds more frequently—perhaps quarterly. But when you’ve had more time to be confident your commission plan is doing its job, you may only need to revisit quotas on an annual basis.
Your structure and rate need to balance your organization’s specific profit margins and goals against industry norms. If your sales commission rate is substantially lower than competitors, you’ll have a constant uphill battle trying to rationalize your structure to candidates and employees alike. And if it’s too high, you risk incurring operational bloat that your competitors won’t share.
You won’t find your competitors’ sharing their commission rates, tiers, and structures publicly (they’re not going to reveal their strategy afterall) but they do often have to disclose on-target earnings (OTE)—the expected take-home pay for salespeople who hit their quotas. To stay competitive and retain your best staff, your commission plan should fall within that ballpark. But if you want to headhunt the competition, you can build a commission plan that gives top performers a much higher earning potential. In either case, it’s a good idea to periodically review OTEs from job postings in your industry. If your own OTE offering slips below theirs, it’s probably time to adjust your commission plan.
Payout schedules are an important part of your sales commission plan, and if salespeople don’t understand how it works, they may feel that they’re not being paid what they are owed, or that their contributions aren’t being recognized.
Your sales cycle, accounting processes, payment schedules, and other circumstances all influence whether it makes the most sense to pay commissions on a bi-weekly, monthly, or quarterly basis—but whatever your payout schedule, it needs to be transparent with clear explanations for expected and unexpected gaps between when a deal closes and when the commission actually appears on a paycheck.
Lack of clarity around sales commission payouts directly leads to “shadow accounting,” where sales reps waste time and energy calculating their commissions independently to verify or dispute payouts. Regardless of whether a mistake was made, the process sows distrust, weakens engagement, and creates frustration.
It should be easy for your reps to understand your commission plan and how they can maximize their earning potential.
Commission plans can get complicated fast. As you add variables to better reflect your sales processes and balance organizational needs, sales commission structures become increasingly difficult to manage. Formulas break, rules become restrictive, and spreadsheets turn the process into an indecipherable mess.
Performio brings simplicity and flexibility to commission planning. With Performio’s component-based architecture, you can build commission structures that fit your specific sales processes rather than working around rigid formulas or software limitations.
From the same place where sales leaders and admins build and manage commission plans, sales reps can get the clarity they need to understand payouts and resolve questions before they become disputes. Instead of relying on shadow accounting, reps can ask Performio to explain every dollar. Admins can use the same AI-powered support to provide thorough, context-aware answers that give reps greater clarity and confidence.
Want to see how Performio streamlines commission management? Explore Performio’s sales commission software.