Your sales team’s success depends not only on strategy and tools but also on individual performance. Sales reps need enablement, training, and proper compensation to stay motivated, grow, and succeed. But what sales commission structure should you implement?
It could be a salary + commission, commission-based only, or variable rate. Understanding which one best fits your business helps you attract high-caliber sales talent who are accountable for their performance and ensures fair incentives for your team.
We’re here to help navigate the complexities of creating a fair and rewarding sales commission structure. In this article, we’ll be tackling the following:
- What is a sales commission structure
- Why you need to find the right sales commission structure
- Examples of popular sales commission structure
- How to find the best commission structure for your business
What is a Sales Commission Structure
Companies compensate their sales personnel using a sales commission structure. Each structure has different pay levels. The most common model uses a base hourly rate + commission on every sale.
Let’s use The Office as an example. In one episode, the new CEO removed the cap on sales commissions, which led to Jim working overtime and closing sales left and right. But when the cap returned, he felt no point in exceeding the required sales quota.
This shows the importance of a fair sales commission structure to the overall performance, motivation, and growth of your sales team and your business. Your chosen model must have achievable benchmarks, offer financial stability, and be rewarding for your sales team.
Why You Need a Sales Commission Structure
One of the biggest reasons why talented, high-performing salespeople transfer companies is due to better opportunities. Implementing the right sales commission structure helps reduce the churn rates of these valuable sales reps and offers the following benefits:
Improved Productivity and Performance
It's no surprise that compensation improves productivity and performance. The more sales closed, the better bigger the paycheck. However, there is a caveat. Studies have suggested that pure, incentive-based models can negatively impact performance.
Another sales compensation study suggested that commission-based compensation only boosts performance and productivity when the reps' workloads are properly managed.
In a nutshell, a sales commission structure only works when there’s proper sales enablement.
Reps often juggle between sales operation tasks—the most prominent being prospecting, outreach, and following up on leads. Not to mention the time it takes to implement the technical setups required for cold emails.
Instantly significantly reduces the workload by streamlining and automating these tasks, allowing sales reps to focus on what they do best—closing sales.
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Increased Motivation
Sales is a field where high-performers thrive. High-performing sales reps often make more than managers. Without a commission structure, your sales team remains stagnant. They won’t be motivated to go above and beyond.
But remember, a commission-only structure only affects extrinsic motivation. If you want a holistic approach to boosting motivation, you need a commission structure that positively affects intrinsic motivation.
Studies have shown that this comes as stable, salary-based compensation. When sales personnel have financial security and the proper sales enablement, they become accountable for their earning potential.
Sales Reps Holding Themselves Accountable
If you’ve stumbled into sales communities, read sales books, or joined sales slack channels, you’ll find a common theme—high-performing sales reps earning more than managers. Meanwhile, average and low-performing ones make significantly less.
This means that sales reps are accountable for how much they get month after month. It can even foster healthy competition within your team. High commissions help your team become more responsible for achieving individual and team goals.
Examples of the Most Popular Sales Commission Structures
There isn’t a one-size-fits-all sales commission structure. Each business is unique, and even companies within the same industry can have high-ticket or low-ticket products.
The important thing here is context. When determining which sales commission structure to implement, you should consider ticket size, percentage splits, and workload. Here are ten models to consider:
Commission Only
Commission-only models don’t offer sales reps a base salary. Instead, reps are paid a fixed percentage on every sale.
Reps usually won’t have enough leverage to negotiate a higher commission percentage. But it’s always possible, especially for sales reps who consistently perform and bring value.
Best use case: Commission-only structures benefit businesses with short sales cycles. These businesses often outsource sales talent and provide lead and inbound marketing funnels, engagement tools, and frameworks.
How it works: If your company sells a service for $25,000 with a commission rate of 25%, reps would earn $6,250 for each sale.
Cons: Most salespeople don’t choose commission-only models because they offer little to no financial security. But they can work, especially if you provide the proper sales training programs and tools.
Tiered Commission Structure
The tiered commission model works best for high performers. In this model, sales reps earn a higher commission percentage after hitting specific benchmarks or sales goals.
Best use case: If your company can’t negotiate for higher commission percentages just yet but wants to incentivize high-performing sales reps.
How it works: Let’s say your tiered structure tiers are $10k, $15k, and $20k. Your reps can earn a 5% commission on each sale for the baseline. For each sale they make surpassing $10k, they can now earn 8%. When they hit $15k in sales, this could increase to 10%, and so on.
Cons: Although this model positively impacts top performance, bottom or average performers can easily be left behind, causing resentment or jealousy.
Residual Commission Structure
The residual model provides sales reps with recurring commissions as long as the account they close drives revenue for the business.
Reps must think beyond closing the sale and ensure that the account they close stays with them. This emphasizes the need for nurturing and customer support.
Best use case: Businesses with recurring customer revenue, such as digital marketing agencies, insurance providers, or SaaS.
How it works: A sales rep closes a $2,000/month deal for a service on a 5% commission. Each month that sales rep can earn $100 from that single account as long as it’s still active.
Cons: Prospects that require recurring needs are often difficult to close. For sales reps, commission percentages might be low, which demands high sales volume.
Multiplier Commission
This commission structure can become complex. However, companies using this model can create commission structures tailored to their sales goals and benchmarks.
The plan starts with a basic commission percentage. It is multiplied by a variable depending on the percentage of sales rep’s quotas, benchmarks, or sales goals.
Best use case: This model can help managers accurately measure the performance of each sales rep based on pre-determined benchmarks.
How it works: Let’s say the base commission starts at 10%. Sales reps who complete 75% of their quota will get a multiplier of 0.8. Those that get 76% to 85% get a multiplier of 0.9. And those who complete 86% or more get a multiplier of 1.
Cons: This creates a clear divide between underperformers, average performers, and high-performers.
Base Salary + Commissions
The most popular sales commission structure is base salary with commissions. It gives your sales team financial security and incentivizes high performers.
In most cases, you don’t want to cap the commissions. This ensures that your team stays motivated to reach and surpass quotas.
Best use case: This sales commission structure is best for attracting solid sales talent, even at the base level, as it provides reps with the stability and foundations to excel.
How it works: Sales reps earn an hourly or base salary, such as $50,000 annually, and a 5% commission on each sale.
Cons: There really isn’t much downside to this model. Business owners must understand how to set the commission rates to protect the business and ensure reps are fairly compensated.
Gross Margin Commission
Instead of generating commissions per sale, the gross margin model lets reps earn on profit. This accounts for the total cost of completing the sale.
Best use case: Companies who want to support their bottom line. This model best fits companies selling high-ticket products or services with high profit margins.
How it works: Let’s say a sales rep closed a deal worth $1,000. However, the expenses to complete the deal came at $450. That means the sales rep can only earn commissions on the $550 profit from the deal.
Cons: This model won’t work for companies with thin profit margins. Reps are also encouraged to pursue sales with the highest possible revenue, discouraging them from offering discounts or promos to close deals.
Territory Volume Commission
Territory volume commissions depend on the sales team's performance in a geographical region or specific territories. Teamwork is essential for higher commissions.
Best use cases: This commission structure is best for businesses with multiple geographic target markets, field sales teams, or multiple branches nationwide or internationally.
How it works: Three sales reps could be assigned to a “territory.” Rep A sold $50k worth of products, Rep B sold $30k, and Rep C sold $20k. All three reps would then split the commission for the $100k total revenue generated within their territory.
Cons: This compensation structure doesn’t reward high performers. In our example, Rep A clearly sold more products but wasn’t fully compensated for the sale, which could eventually lead to Rep A, a top performer, finding a sales role at another company.
Draw Against Commission
Think of draw against commission structures as a cash advance. Reps, even those in training, get a guaranteed commission monthly, regardless of how many sales they’ve made.
There are two variations to this structure: Recoverable and Non-recoverable.
A recoverable draw against commissions is essentially a loan you give to a sales rep that they must pay back.
Non-recoverable draws are payments to sales reps that you don’t get back. But if the employee earns more than the draw, you need to pay the difference in commission.
Best use case: If you’re onboarding, training new hires, or experiencing fluctuating markets.
How it works: Let’s say you hire a new sales rep. You give them a $2,000 monthly draw. The sales rep must get $2,000 in sales to cover the draw by the end of the month.
You can use a non-recoverable model during a new hire’s ramp period. Then, switch to the recoverable variation of the draw against commission when the training period ends.
How to Find the Best Commission Structure for Your Business
Your sales commission structure should drive your sales team to perform at their best. Here’s a list of things to consider to help you identify the best sales commission structure:
What Does Your Sales Operation Ecosystem Look Like?
In every sales team, there will always be people that outperform the rest. But you can’t solely rely on top performers if you want consistent sales growth.
If your team only has a few high-performers, a tiered commission model can incentivize other reps to at least meet quotas to get the full commission.
Structure Commission Around Business Goals
Commission models must align with your overall goals. Let’s say you have multiple products, each at different price points.
If you go for a gross margin structure, reps will likely focus on selling the product that generates the highest revenue. In this scenario, a gross margin commission would make more sense.
How Big is Your Sales Force?
Do you manage a team of two high-performing sales reps, or do you have 20? Businesses with fewer sales reps could use a high-percentage commission-only structure. Companies just starting could also outsource sales using the same model.
But, companies with dozens of reps and a high volume of sales might benefit more from a base salary + commissions structure. If all reps are commission-only, there’s a significant risk to their financial stability if they underperform, which can lead to high churn rates.
TL:DR
Sales is an industry where top performers thrive. The more sales, the more revenue. That’s why having a fair commission structure is essential to help incentivize better performance. To recap, here are the most popular sales-commission structures you should consider:
- Commission only is best for businesses offering high percentage commissions or those looking to outsource sales teams.
- Tiered commissions incentivize sales teams to go beyond sales quotas.
- Residual commissions are best for businesses whose products or services require recurring customer payments.
- Multiplier commission ensures a high base-level performance from your sales team.
- The base salary + commissions is straightforward and helps ensure sales reps have financial security.
- Gross margin commissions benefit selling high-revenue generating products.
- Territory volume is better suited for sales field teams with close performance levels.
- Draw against commission structures are best for onboarding or training new sales talent.
Sales commissions are just one factor contributing to your team's overall performance. To ensure holistic sales growth, you need tools for streamlining and optimizing sales operations.
That’s where Instantly and B2B Lead Finder comes in. It’s an all-in-one tool that streamlines and automates prospecting, outreach, and nurturing at scale! Try it out today!
