8 Common Sales Commission Structures
Sales is a difficult and stressful job. So why do it? To put it bluntly, sales is one of the best ways to make a six-figure income early in your career. And top earners can make well into seven figures. This is because of the way sales reps are rewarded for their hard work: sales commission plans.
But not all sales orgs use the same commission structures — and not all commission structures are right for every salesperson. In this comprehensive guide, we will explore eight different types of sales commission structures to help you understand which best suits your goals.
What is a sales commission?
For anyone new to sales, it’s essential to understand the concept of sales commissions before diving into the different commission structures.
Sales commission is a portion of the revenue generated by the company rewarded to sales reps for any successful sales they make. Unlike most other professions, commissions can comprise up to 100% of a seller’s income, depending on the org and structure.
8 Common Sales Commission Structures
The amount of commission can vary depending on a variety of factors: the organization, the industry, the product. Here are eight common forms of sales commission structures.
1. 100% Commission
Income = Bookings Value of Sales x Commission Rate
• High earning potential
• No guaranteed income
In a 100% or straight commission structure, sales representatives earn their income solely from successful sales. There is no base salary component to the job.
This structure offers high earning potential because there is usually no commission cap. (As of 2023, the majority of commission plans in tech are uncapped.) With no commission caps, sales reps can maximize their income by maximizing the amount of deals that they close. They have a high degree of control over their earnings and can work as much as they’d like to increase their income.
However, this high-income potential comes with increased risk, as sales reps lack the security of a base salary. There are other commission plan structures that do not have a cap but may also offer security in the form of a base salary.
2. Base Salary + Commission
Income = Base + [ Bookings x Commission Rate ]
• Balance of security + higher earning potential
• Less upside than models with tiers or accelerators
• Can create incentives for “sandbagging”
The base salary plus commission structure is a widely used sales commission structure. In this arrangement, sales representatives receive a fixed wage or annual salary in addition to earning commissions on each sale they make.
This model strikes a balance between providing employees with a degree of financial security through the base salary and motivating reps to increase sales through the commission component. While the base salary alone may not suffice to cover a salesperson’s entire income, it serves as a safety net during slow sales periods.
What’s “sandbagging”? Let’s say that a rep has a quota of $100K per month, and they’ve already closed $120K. Another deal could close during the last week of the month, but they purposefully let it slip into the next month so that it can count towards the next month’s target.
What are “bookings”? Bookings are the expected 12-month value of a deal.
3. Tiered Commission
Income = [Sales x Commission Rate] + [Above-target Sales x Above-target Rate(s)]
High earning potential
•Incentivizes reps against sandbagging
• Increases disparity between higher and lower compensated reps
• More complexity can lead to more uncertainty
A tiered commission structure is designed to motivate and reward top-performing sales reps.
This structure offers sellers higher commissions after they achieve certain milestones, such as closing a specific number of deals, reaching revenue benchmarks, or achieving key milestones.
This approach can encourage salespeople to keep closing deals or driving new revenue beyond their quota and also to upsell and cross-sell to increase their average ticket, driving overall sales success.
While a tiered commission structure can serve both as a reward for top performers, it can also be a means to penalize poor performance. If a sales rep falls short of their monthly quota, their commission may be reduced proportionally.
There may even be a floor for deals or revenue required to start earning commissions. Lastly, some commission plans may have accelerators built in for other factors, such as multi-year deals or customers from a high-priority list.
A variant of a tiered commission structure involves multipliers. This version starts with a standard commission percentage, which is then multiplied by predetermined factors based on a sales rep’s performance. These multipliers usually apply across a range.
For example, sales under 50% of quota may have commissions multiplied by 0.5, then 50%–75% quota attainment multiplied by 0.8, 75%–100% quota attainment multiplied by 1, 125%–150% multiplied by 1.25, and so on.
This commission structure offers greater income with increased performance, but can be challenging for both employees and employers due to its mathematical intricacies. Plus, the variable nature of this commission model may introduce uncertainty for sales reps.
5. Gross Margin Commission Model
Income = Sales Profits x Commission Rate
Sales incentives are directly aligned with company profits
• Reps may focus only on higher-margin deals
• May be at odds with faster revenue growth
The gross margin commission structure is similar to the revenue commission model. But instead of earning commissions based on revenue, sales reps in this structure receive a percentage of the profit.
For example, if a product costs $600 to produce and a sales rep sells it for $1000, their commission is calculated from the remaining $400 in profit.
This model discourages reps from offering discounts to close deals, as it would diminish their earnings. Salespeople are incentivized to focus on products with higher profit margins and increasing their income through upselling and delivering value.
6. Commission Draw
Income = Base + [ Monthly or Quarterly Commission Draw +/- Value of Commission Relative to Draw Amount ]
• Smooths out commissions, especially when selling items with long sales cycles
• Feeling that sales reps are “in debt” to the company
• Sometimes risk of clawbacks
The commission draw structure offers an advance payment — or draw — to provide new sales reps with a steady income while they adapt to their roles.
Sales reps receive a predetermined monthly draw, ensuring a consistent income, regardless of their sales performance. If their commission earnings fall below the draw amount, they keep the commission and receive the difference between the draw and their commission. This is considered an advanced payment to be repaid over time.
While this compensation plan proves beneficial for new hires during their learning phase, tracking earnings and debts may pose challenges. But salespeople who exceed the draw amount can see significant income.
A draw is sometimes used in lieu of a ramp-up phase, where new reps have low/no quota while they train and get up to speed. Generally, a ramp-up phase is more beneficial to reps because it doesn’t put the cost of learning the roles onto the sales rep.
7. Residual Commission Model
Income = [ Initial Sale + Renewal Amount ] x Commission Rate
• Incentivizes selling to customers who are a good fit
• Allows salespeople to develop long-lasting relationships with accounts
• Can make it hard for new reps to establish themselves without a pre-existing “book of business”
The residual commission structure rewards sales reps for nurturing lasting customer relationships and fostering repeat business. This can be ideal for reps in SaaS companies, agencies, consultancy firms, and businesses with recurring or subscription models,
In this model, sales representatives earn commissions as long as the accounts they’ve initiated continue to generate revenue, e.g., through contract renewals, upselling new product releases, or maintaining long-term, high-budget accounts.
8. Territory Volume Commission
Income = [ Territory Sales x Commission Rate ] ÷ Team
• Team-based goals
• Team-based goals
• Risk of “free riders”
The territory volume commission structure emphasizes collaboration and teamwork. Sales reps within a specific region or target audience earn income based on a predetermined rate tied to their territory. The compensation is contingent on the overall sales volume and revenue generated within that region, with commissions evenly divided among the salespeople operating within it.
While this approach can promote a sense of fairness and equity, it may not fully reward high-performing individuals. It can also potentially create divisions within teams if certain individuals feel that others are not contributing equally.
10. Base Rate Only
Base rate only isn’t really a commission structure. Sales reps receive a standard wage or annual salary, with no additional commissions for their sales efforts.
There’s little motivation for reps to exceed their basic responsibilities or strive for exceptional performance, as there are no financial incentives for doing so. Top performers aren’t rewarded in this system since all sales reps receive the same compensation, regardless of their individual performance.
Base rate only might be used in small, budget-conscious companies or in high-volume inbound sales models characterized by short sales cycles, where salespeople primarily act as order-takers rather than deal closers. Their primary focus is on providing customer support, addressing inquiries, and guiding prospects to suitable products and services.
Is There a Typical Sales Commission Percentage?
There is no one-size-fits-all commission percentage or structure. Sales commission percentages vary depending on industry, company size, and sales roles.
Commission percentages and structures also depend on the specific goals and priorities of the sales team. For example, a focus on customer acquisition may result in a higher commission percentages for those reps, while account management reps may receive a lower commission percentages.
What to Consider About an Org’s Sales Commission Structure
The commission structure is going to be one of the most important elements to review when considering a position within a new sales organization. Here are the questions we’d recommend asking yourself when thinking about joining an org at a new company.
1. What are your income expectations?: This is the obvious place to start. With an income expectation in mind, you can quickly decide whether an org is even worth considering. If you want some consistency in the amount you take home each month, structures with no base pay are clearly not an option. On the other hand, if your motto is “greater risk, greater reward,” then 100% commission is perfect for you.
2. How does the commission structure compare to your current org?: Assess your current commission structure, top earning potential, and your average monthly or quarterly performance. How do you expect that to be different under the new structure or within the new organization?
3. How does the commission structure compare to their competitors?: This may be easy if you’re moving from one competitor to another. In the case that you’re not, RepVue’s compare companies feature can help you with side-by-side information on two organizations to help you see the differences.
4. What matters to you besides the money?: A sales organization can have your ideal sales commission structure — and still be a bad fit. What does quota attainment look like? How do other sellers rate their product-market fit? What about culture and leadership? They can all factor into your ability to excel.
Make Sure You Have It in Writing
For any commission structure, it’s crucial to have a clear agreement in writing. This agreement should outline the expectations and obligations for both the sales rep and the company.
Do not make the mistake of not having clear documentation about how your commissions are structured. This should be established at the beginning of your tenure as a sales person — and any changes should ideally occur only between commission cycles. Mid-cycle commission plan changes should be very rare — and should only happen due to some sort of extraordinary event.
Knowing which sales commission structure is best for you is critical when considering a new sales organization. While none are one-size-fits-all, it’s essential to understand the benefits and shortcomings of each, then align that to your overall goals.
Choosing to work for a sales org with the right sales commission structure for you requires careful consideration of your unique objectives, the standards of your preferred industry standards, and more. But in the right sales environment, you can excel and often achieve levels of income much higher than other professions.