How to Pick Your Sales Commission Structure
Anyone can piece together a sales commission structure. The challenge, however, is choosing the right commission structure to achieve the results you seek.
For instance, if a company plans to increase multi-year deals over the next quarter, the sales commission structure should reflect that, which means, that reps should earn a higher commission rate on multi-year contracts. In doing so, you’re encouraging and rewarding them for locking in an extended contract. Without that incentive, why would a rep even bother?
That’s just one example to keep in mind, but there’s plenty to consider.
Below, we’ll outline various commission structure types and sales commission structure best practices. Our last section will include three sales commission structure examples for an AE, SDR, and sales leaders that have worked well to help our customers close deals and get more new customers.
What's the Difference Between a Compensation Plan and a Sales Commission Structure?
First, we’ll begin with the difference between a sales compensation plan and the commission structure itself. A compensation plan details a seller’s total compensation package, including base salary (or fixed pay), commission rates, incentive programs, and on-target earnings (OTE).
Meanwhile, the sales commission structure sets the rules for the commission section of the compensation plan. The commission structure dictates the what, when, and how reps get paid from sales.
So, could you have a compensation plan without a sales commission structure? Yes, only if the comp plan didn’t include a commission or variable pay component. On the flip side, could you have a sales commission structure without a comp plan? Nope.
9 Most Common Sales Commission Structure Types
Now that we have differentiated comp plans from commission structures, let’s look at the nine different structure types most often used by sales teams.
1. 100% Commission
Also called “straight commission” or "commission-only", 100% commission structures pay salespeople entirely based on sales earnings. The plans do not include base salaries or guaranteed pay.
Some sales leaders tag straight commission plans as controversial, citing high turnover and bad sales practices as side effects. But, when reps only receive payment based on the deals they sell, they are highly motivated to sell more–which is good for your bottom line.
If you use this sales commission structure, ensure you have an effective sales process and provide salespeople with the resources they need to succeed.
2. Base Salary Plus Commission
The most widely adopted commission structure type across SaaS pairs a base salary with a commission plan. We recommend a 50/50 split, where 50 percent of a rep’s pay comes from their base salary while the other half comes from sales earnings. We’ve also seen organizations adopt a 60/40 ratio. In this ratio, the base salary makes up 60 percent of the rep’s OTE, and the remaining 40 percent consists of variable pay.
To find an OTE ratio that works best with the revenue your team generates and your average team attainment, use our free Quota: OTE Ratio Calculator.
The benefit of this structure is salespeople have a base pay to rely on but are still rewarded for better sales performance, which increases retention.
3. Tiered Sales Commission
Meanwhile, a tiered commission structure works great for organizations looking to incentivize top performers. In this structure, reps unlock higher commission rates as they hit a designated amount of deals or revenue benchmarks. You may also hear this structure referred to as multiple rate, accelerators, escalators, or multipliers.
An example of a tiered sales commission structure may include a 7 percent commission rate on deals up to $75K in bookings. Once surpassing the $75K sales goal, the rep starts earning 9 percent on all new deals within the same period.
4. Single-Rate Sales Commission
We define a single-rate sales commission as variable pay earned off a fixed percentage from every deal closed. This structure is the easiest to understand and widely adopted. You may have also heard the single-rate structure referred to as flat-rate commissions, fixed-rate commissions, or commissions.
What’s the standard commission rate in SaaS, you ask? 10 percent.
5. Gross-Margin Commission
Next up is the gross-margin commission structure, which adopts a similar approach to the single-rate plans. Where gross margin differs, however, is that it considers the business’s profits from the deal. So, instead of accruing commissions based on the contract value or annual recurring revenue (ARR), the sales representative would earn commissions from the gross revenue collected.
For example, if a rep sold a contract for $50K, but it cost the business $15K to secure the deal in associated expenses, the rep would earn commissions on $35K.
6. Commission Draw
The commission draw shows up sixth on our list. These allow reps to borrow against future commissions earned and have the most impact when ramping new hires.
If you offer commission draws, you’ll need to decide whether the rep has to pay back the draw (recoverable vs. non-recoverable). Check out our guide linked above where we explain in detail when to consider commission draws and outline the pros and cons.
7. Residual Commission Model
The residual commission structure may be a good fit for companies looking to reward reps for maintaining long-term business relationships with their accounts.
The residual commission model pays the original rep continuously as long as the account continues to create revenue via renewals and upsells. Agencies and consulting firms most frequently adopt this commission structure.
8. Territory Volume Commission
Territory volume commission models involve a team approach to sales. Organized by territory, teams collaborate to sell across an entire region or vertical. Then, as deals come to fruition, the team earns a set commission rate on the deal and splits the commissions evenly.
For example, three reps share a quota of $100K a month for deals in Minnesota. If one rep closed $50K, the second closed $35K, and the third sold $15K, then the team hit its target. As such, the three reps will split 12% commission, collecting $4K in earnings each.
9. Base-Rate Only
The ninth structure, base-rate only, doesn’t involve any commission percentage at all. Instead, sales reps earn a fixed salary or hourly rate. Companies may use this compensation plan for independent contractors, but we don't recommend it.
That's because this plan doesn’t incentivize or motivate sales teams to close deals, which should be the goal in a sales job.
Sales Commission Structure Best Practices
After choosing a commission structure to follow, you’re ready to tailor it to your business and build a comp plan. When doing so, we suggest following these best practices.
Don’t Do It by Yourself
The best commission structures and comp plans result from a group effort. Invite RevOps, Finance, and your senior reps to the conversation. This helps build alignment and ensures the compensation plans reward reps and make sense for your overall business goals.
Simplicity is Your Friend
If it’s hard for you to explain your sales commission plan to a colleague or friend, then it’s too complicated. Your reps will likely struggle even more to understand it. Aim for simplicity. This enables leaders to quickly reiterate what reps should be selling and for sales reps to understand what the outcome of their efforts will amount to.
Outline your compensation program, make sure everyone has a copy, and review it with your team in a designated meeting. This is especially important amid mid-year changes to a commission structure or plan. Make sure reps know what the changes entail, the why behind the changes, and how the company will support them under the new changes.
Pull up historical compensation data and run it through your proposed commission structure. No historical data? No problem. Use random or expected data, then run extreme scenarios, like what would happen if a rep achieved a 400 percent quota. Testing will help prevent a wild card situation of paying a rep over 100 percent on ARR.
These may seem obvious, but you’d be surprised how frequently we see teams skip all or some of these tips.
3 Sales Commission Structure Examples
As promised, we put together three solid commission structure examples below. These will help you understand how different commission structures work in the real world.
We recommend a comp plan with a decelerator, an accelerator, and a multi-year kicker. This incentivizes AEs to overperform and decentivizes underperformance.
The decelerator: For a rep who hits below 50% of the monthly quota, they earn a reduced commission rate of their standard commission rate. Meaning, that if I hit my monthly quota of $40K and my standard commission rate is 10%, then I would get paid $4K. But, if I only make 40% of my quota, or $16K in sales, I am paid 7% on that $16K—or, $1,120.
However, if I achieve between 50% and 100% of my quota, then I earn my standard commission rate of 10%. So, using the example above, if I book $35K in deals, then I would earn $3,500 in commission.
The accelerator: The accelerator kicks in for deals brought in after achieving 100% quota within the specific time frame. In the above example, the rep would earn 15%, a 5% bump, on any deal that comes in after crossing 100% quota.
Multi-year deal commission: Then, for multi-year deals, apply an extra 5% to the commission rate for any deal over one year.
Sales Development Rep
For an SDR compensation plan, we recommend a structure that’s based on the number of qualified opportunities and the amount of revenue.
So, if an SDR’s OTE is $80K, split between a $50K base salary and $30K target, half of the target OTE should consist of qualified opps and the other toward revenue.
Set a target of qualified opps: Let’s say 30 per quarter. Then give the SDR a percentage of any revenue they generate as well, such as 3%.
The idea here is to incentivize them to land a bunch of opportunities. But, by rewarding them with commissions from revenue generated, you’re motivating them to push for high-quality opportunities that are more likely to close.
A good sales manager compensation plan should be attainment-based.
Attainment points: Hold your manager to 90 percent of their team’s quota sum and follow a point system.
Let’s say I oversee a team of five sales reps, and each person has a $200K quarterly quota. The sum of my team’s quota is $1M. However, I’m held to 90 percent of the total sum, or $900K. Following a points-based bonus, I get $250 per attainment point. For instance, if my team accrues $900K in sales, I hit 100 percent of my goal and get a bonus of $25K. If the team hits 70 percent ($700K), I will earn 70 attainment points, or a bonus of $17,500.
This structure aligns sales leaders with their team target. It also allows for flexibility if someone on their team leaves and the quota sum goes down. Under this approach, leaders can focus on building their sales team up rather than trying to get as many team members as possible.
Automating Sales Commissions with QuotaPath + Close
Still here? Hello! I know that was a lot of info, but you can clearly see there are many factors to consider when building a commission structure, including industry, total sales, and business goals. Keep in mind, there is no one best sales commission structure. I recommend seeing what your competitors do and finding a commission structure that works well for your specific business goals.
Hopefully, this info was helpful!
What’s even more helpful is integrating your CRM with QuotaPath. For growing, remote-based sales teams, we recommend the sales-first CRM Close. Close’s solution supports reps every step of the sale, including prospect and outreach efforts, lead scoring, and much more.
By integrating Close with QuotaPath, you can seamlessly feed deal information directly into QuotaPath. This allows sales reps, leadership, Finance, and RevOps to see real-time updates on existing and forecasted commissions and ARR.
Want to see the integration in action? Schedule time with a QuotaPath teammate today for a custom, live demo.
PS: If you send us your comp plan ahead of time, we can even show you how it’ll map out in our platform.
I'm Graham Collins, QuotaPath’s “Resident Sales Nerd.” It’s a nickname I’ve earned over the years after conducting more than 300 comp plan strategy calls for teams looking to re-evaluate their plans and structures. We offer these calls as a free resource to anyone in the sales community.