Sales commission is a common job feature for sales professionals. But what commission structure is right for your company?
The right answer to that question is based on a variety of factors – your sales goals, the sales talent on your sales team, and the resources available to your business.
Motivating salespeople to greater heights can become easier when you choose the right sales commission structure.
Let’s look at different sales commission structures that may prove useful to motivate your sales team. Each one has the potential to be the best sales commission structure in the right situation.
Types of Sales Commission Structures
Base Salary Plus Commission Structure
This is one of the most typical sales commission structures, including a fixed base salary and a variable commission based on the number of sales.
For example, the sales rep may earn $24 per hour and 4% of sales closed. Sales employees often prefer the base salary plus commission payment method, and the base salary is useful because it provides a measure of security.
The incentive to sell is greater when sales reps earn a base salary plus commission. And sales reps are more likely to be retained when they are guaranteed a base salary.
Of course, weighing all costs against the total sales beforehand is important so that the typical sales commission percentage is set at an appropriate level for your business and the industry in general.
Straight Sales Commission Structure
A commission-only structure ties all sales representatives’ income to their sales. There is no base salary included.
Sometimes the commission-only model needs a better reputation. But there are positives to a straight commission structure.
This straight commission compensation plan emphasizes getting more sales, and it can create a highly effective sales process where sales reps are driven.
It can also benefit a company just starting or lacking financial resources to offer competitive salaries upfront.
This commission structure tends toward instability. The sales incentive may be stellar, but if the sales reps cannot follow through, they may choose to leave for a sales position at another company.
Relative Sales Commission Structure
In relative commission structures, a sales rep has their commission tied proportionally to how close they get to their sales quota.
Base pay is given, so the prospect is less risky from the standpoint of the sales rep. This tends to lower turnover on a sales team.
For example, a sales rep paid with a relative compensation plan may have a sales quota – or specific sales target – of $100K with a commission of $10K. The sales rep will receive $7,500 (on top of their base pay) if they make it to 75% of their quota.
This compensation plan has the benefit of being the fairest across a sales team, and it allows the plan to flex with each sales agent and territory assigned.
A cousin to the relative sales commission structure is a multiplier commission model. This increases multipliers from a basic revenue commission percentage to a maximum as the sales rep approaches a quota.
Tiered Commission Structure
The tiered commission structure provides a step-up system of commission percentage based on milestones.
Sales teams may be granted a 5% commission on sales up to $50K and 6% on sales from $50K – $100K.
The tiered commission system can also highly motivate sales reps to sell. But you must also make sure that your business can fill orders for which a customer pays. Be ready to meet increased demand if necessary.
Territory Volume Commission Structure
A sales department can be split across regions and split a team commission rather than one based on an individual’s sales. This is the basis for the territory volume commission model.
This commission structure is attractive to sales leadership when sales managers are tasked with leading a large sales team.
This compensation plan promotes teamwork and might make sense when your business runs a long sales cycle or many sales reps are involved in the average sale.
A territory volume commission will reduce unhealthy competition and allow for consultation between sales reps before and during the sales process.
Draw Against Commission Structure
A sales rep may be granted a predetermined commission in the form of advanced payments at the beginning of a sales period.
With a recoverable draw against commission, the sales rep pays back the amount drawn out in advance from their total commissions for that period.
This compensation structure may be used with new hires to ramp them up as they get up to speed.
In a non-recoverable draw against commission, the sales rep isn’t expected to pay any of the drawbacks.
This creates a guaranteed stipend, which isn’t necessarily motivating the increased effort. It is usually a temporary measure during times of uncertainty to add stable income.
So, while a draw against commission structure isn’t right for every organization, it can provide an important incentive for sales reps in the right circumstances.
Residual Commission Structure
A residual style of sales commission structure rewards sales reps who close deals with long-term accounts. They can receive residual, continuing payments over time for as long as the customer is generating revenue.
However, sometimes customers leave through no fault of the salesperson who landed the account.
This commission structure can be quite effective for businesses that value customer and employee retention. Agencies or consulting firms that manage long-term contracts with customer accounts will shine here.
Revenue Commission Structure
Some sales leaders use a revenue commission model based on the total amount of products or services sold by sales reps.
This commission structure is easy to understand and apply. Use it when products or services have a set price.
Or use it when entering new markets where profit isn’t the primary focus but you are more concerned with overall business sales goals.
Gross Margin Commission Structure
Other companies may use a gross margin commission structure that applies the sales commission to the total sales minus expenses – the profit.
Gross margin commission structures are tied directly to what the customer pays, and the sales reps can only offer discounts by limiting their pay.
The advantage of a gross margin commission model is that it maintains the company’s bottom line. That can make all the difference when trying to scale up your business.
Which Sales Commission Structure and Rate Is Right For Your Sales Team?
As we’ve seen, there are a variety of sales commission structures. Which ones represent the best sales commission structures for your business depends on the specifics of your business and the makeup of your sales team.
- Consider how you calculate the number of sales to apply to commission structures.
- It’s wise for sales leaders to understand what motivates individual sales reps on their team and the group.
- Determine what it costs to hire full-time sales agents versus independent contractors.
- Ask yourself, “What will motivate reps? What sales commission model would appeal to me if I were in the position of my sales reps?”
Average Sales Commission Rates
It’s difficult to say the typical sales commission, and it might be near 5% if a company offers a generous base salary.
But other companies may skew toward the 40-50% commission structure with a lower or no base salary.
It is highly dependent on your company, and all the factors involve. Do your homework to calculate the full cost of whatever sales commission method you choose for your sales reps.
Sales Commission Tips
Ensure the entire team stays informed on sales commissions, payout calendars, and other details of your chosen sales commission structure.
Be open to adjustments. Over time the nature of your company may change as it matures, and your customer base or the economy may change too.
There’s nothing wrong with negotiating new sales commission structure rules with sales agents.
You can be assured that your sales representatives can reach new and higher sales goals when you take the time to select the best sales compensation plans.