9 Sales Commission Structures (How to Pick the Best for Your Team)
Anyone can piece together a sales commission structure.
The challenge, however, is getting the right commission structure in place to fit your sales cycles and sales goals.
For instance, if a company plans to increase multi-year deals over the next quarter, the sales commission structure should reflect that so a salesperson can earn a higher commission rate on multi-year contracts. In doing so, you’re encouraging and rewarding them for locking in an extended contract. While your total sales increase, the sales rep's incentive disappears, so why would they 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 with our customers in driving the right behaviors.
What is a Sales Commission Structure?
Some companies will offer higher commissions and lower basic salaries, while others will opt for safer options like a generous base salary plus single rate sales commission.
Here's an example of how choosing different sales commission structures can impact a salesperson's earnings after they close a $100k software deal:
💰Single-rate commission structure: This structure pays a fixed commission rate for each sale. If the rate is 10%, this salesperson will earn a flat $10,000 commission for closing this deal.
💰Tiered commission structure: Under this structure, the bigger the deal—the bigger the commission check. Usually, a tiered commission structure is tied to a percentage. Deals under $100,000 may pay 10% commission, but deals over $200,000 could be set at 25%. So, while the $100k software contract will bring in $10,000, the $200,000 deal will bring in $50,000, more than the single-rate commission structure.
It's important to remember that there isn't a typical sales commission structure you should follow. The right sales commission structure depends on variables like budget, number of salespeople, and sales goals. But you must do your research before settling on one—the commission structure you choose will impact not just how much your salespeople earn, but how hard they work and their loyalty to your company.
Before we dig into all that, let's clear up some nuances between compensation plans and sales commission structures.
What's the Difference Between a Compensation Plan and a Sales Commission Structure?
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). On the other hand, a sales commission structure sets the rules for the commission section of the compensation plan. The commission structure dictates the what, when, and how team members get paid from sales.
Here's an example of a compensation plan and sales commission structure for a salesperson who works with startups selling products:
- Their compensation structure includes a base salary that they are paid regardless
- A 10% single-rate sales commission rate is added for every sale they make
- The compensation plan is the base salary plus the commission
- The sales commission structure details how the commission is calculated, earned and paid
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 Types of Sales Commission Structures
The right sales commission structure for your salespeople will encourage them to perform their best and make sense for your bottom line.
When choosing one, remember that each structure incentivizes different behaviors:
- Commission-heavy plans usually catch the eye of aggressive reps who are all about quick sales and closing deals
- Sales reps are more likely to go after fewer, larger deals if their plans are tied to a tiered structure over pure commission
- High base salary/low commission structures are best suited to seasoned reps with a background in negotiating complex deals and keeping customers around long-term
There’s a lot to consider—here are nine sales commission structures to choose from 👇
1. 100% Commission
Also referred to as “straight commission" of "commission-only", 100% commission structures pay teams entirely based on sales earnings. The plans do not include base salaries or guaranteed pay.
Some people have tagged 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.
When 100% commission makes sense: If you need to give salespeople a reason to close deals and boost their earning potential without a lot of company cash. This commission structure is ideal for startups that need to get selling but don't have the money to pay competitive base salaries to sales reps.
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% of a rep’s payout 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% of the rep’s OTE, and the remaining 40% consists of variable pay.
To find an OTE ratio that works best with the amount of revenue your team generates and your average team attainment, use our free Quota: OTE Ratio Calculator.
When base salary + commission makes sense: This structure is a good balance between company budgets and a healthy rep's commission. The commission percentage is calculated on what your company can afford while still offering salespeople an incentive to sell more.
3. Tiered Commission
A tiered sales commission structure works great for organizations looking to incentivize top performers in their sales process. 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 rates, accelerators, escalators, multiplier commissions, or multipliers.
An example of a tiered sales commission structure example may include a 7% commission rate on deals up to $75K in bookings. Once surpassing $75K, the rep then starts earning 9% on all new deals within the same period.
When a tiered commission structure makes sense: If deals and metrics are tracked and calculated accurately. This commission structure incentivizes top-performing reps with more commission, but it requires an infrastructure to keep track of every deal and rep earnings in minute detail.
4. Single-Rate Sales Commission
We define a single-rate sales commission as variable pay earned off a fixed percentage or total amount from every deal closed. You may have also heard of the single-rate structure referred to as flat-rate commissions, fixed-rate commissions, or commissions.
The compensation model is widely adopted because it's easy to understand and allows salespeople to earn the same percentage commission on all sales they make.
How much is the standard commission rate for SaaS? It currently sits at 10%.
When a single-rate sales commission structure makes sense: For companies with set sales quotas with strict budgets. Based on product values and the number of new customers that reps must close to meet their sales quotas, this commission structure makes calculating potential commissions easy.
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 rep would earn commissions from the gross revenue collected on the company's bottom line.
As an 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.
When gross-margin commission makes sense: If one of the company goals is to cut the fat on how long a deal takes to close or how many discounts sales reps offer a prospect. This structure incentivizes salespeople to sell products at a higher margin.
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 if the rep has to pay back the draw from a future number of sales or not (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.
When a commission draw makes sense: Companies may use commission draw to attract sales talent or new sales reps to their team. The commission draw structure gives reps a stable income during their training and ramp-up period that they can pay back later once they start landing clients.
7. Residual Commission Model
For companies that want to reward reps for maintaining long-term business relationships and improving customer retention, the residual commission structure may be a good fit.
The residual commission model pays sales professionals from the original sale on a continuous basis as long as the account continues to create revenue via renewals and upsells. Agencies and consulting firms most frequently adopt this commission structure.
When a residual commission model makes sense: This commission is a great way to reward salespeople for building strong relationships with customers and rewarding them with revenue commissions. Reps will put in the groundwork to build trust with a client, but retaining them will mean more money for them—and your company.
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 real estate reps share a quota of $100K a month for house deals in the state of Minnesota. If one rep closed a $50K sale, the second closed $35K, and the third sold $15K, then the team hit its target. As such, the three reps will split 12% in sales commission rates and collect $4K in earnings each.
When territory volume commission makes sense: If a sales organization wants to improve teamwork out in the field, territory volume commission is the way to do it. Offering commission on total sales volume in a territory encourages reps to work together to close as many deals as possible.
9. Base Rate Only
The ninth structure, base rate only, doesn’t involve any commissions for sales roles.
Instead, sales reps earn a fixed salary or hourly rate. We’re critical of these plans because they don’t incentivize or motivate the rep to sell, which should be the goal of a sales job.
When base rate only makes sense: We aren't a fan of this commission structure, but it can make sense if your industry has regulations to discourage sales incentives or kickbacks. This structure is also useful if your team is short-sighted and selling products that aren't a good customer fit just to make money on commissions.
Sales Commission Structure Best Practices
After you choose the best sales commission structure, commission structure to follow, you’re now ready to tailor it to your business and build out a comp plan. When implementing a sales commission plan, there are some best practices you should follow to ensure it all goes smoothly:
Don’t Do It By Yourself
The best commission structures and comp plans were the results of a group effort. Invite RevOps, Finance, and your senior reps to the conversation. This helps build alignment and ensures the plans reward reps and make sense with the business goals.
Simplicity Is Your Friend
If it’s hard for you to explain 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 easily reiterate what reps should be selling and for 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.
Test It Out
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% quota. Testing will help you prevent a wild card situation of having to pay a rep over 100% on ARR.
These may seem obvious as you’re reading it, 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.
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, the rep earns 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, then I am paid out 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 sales representatives bring in.
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 percent 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% of their team’s quota sum and follow a point system.
In this example, let’s say I oversee a team of 5 people and each person has a $200K quarterly quota. The sum of my team’s quota is $1M. However, I’m held to 90% 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, that means I hit 100% of my goal and get a bonus of $25K. If the team hits 70% ($700K), then I would 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 team up rather than trying to get as many people on their team as possible.
Automating Sales Commissions with QuotaPath and Close
Still here? Hello! We recognize that was a lot of information. But you can clearly see there are many factors to consider when building a commission structure.
We hope you have found this 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. Launched in 2013, 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.