Whether you’re a startup looking to hire your first official salesperson or a seasoned commission-based business reconsidering your current commission structure, landing on a sales commission system that aligns to your business model is crucial.
There are several structures to consider, and we’ll highlight the most commonly used ones below.
But as you think about which one to move forward with, remember to ask yourself “would I be incentivized by this structure?” Because if the answer is anything but a resounding “yes” then the likelihood of it being successful is slim to none.
Read on for steps to create a sales commission structure, best practices, commission structure examples, how to write a commission proposal, and getting your sales commission system off the ground.
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How to set up sales commission structure
To begin setting up sales commission structures, you should start with defining the commission rate, determining the sales goals, establishing the commission formula, and communicating the plan clearly to your sales team.
The first question to address is your business’s North Star metric. What is most important in the coming year? Is net new business? Low customer acquisition cost (CAC)? Annual recurring revenue?
“Every revenue organization chases a North Star metric,” said Able VP of Sales Jeff Kirchick. “And everyone aligns around it and understands it. For us, we’re looking at a metric largely because we don’t know much about our churn right now and we don’t want to make any assumptions that’s key to our lifetime-to-value calculation.”
From there, pick a commission structure that drives the metric while considering:
- Product or service: The type of product or service you sell will have a big impact on your commission structure. For example, if you sell a high-ticket item, you may want to have a lower commission rate but a higher base salary. If you sell a low-ticket item, you may want to have a higher commission rate but a lower base salary.
- Target market: The type of customer you’re targeting will also have an impact on your commission structure. For example, if you’re targeting businesses, you may want to have a different commission structure than if you’re targeting consumers.
- Sales process: How you sell your product or service affects your commission structure. Longer sales cycles, for instance, typically follow a different commission structure than short sales cycles.
- Budget: Think about your quota to OTE ratios and CAC costs. If a rep hits quota, do they pay for how much it costs to have the rep on your team? What is the profit margin on your average deal size and commission cut to your revenue team?
- Sales goals: What are your sales goals for the year? Your commission structure should mathematically get your company to the financial goals.
- Sales pipeline: How many potential customers are in your sales pipeline? This will help you determine how much commission you can afford to pay.
- Team performance: How have your salespeople performed in the past? Even if your founder was the sole seller previously, look at the history of the deals. What was the average deal size? How long did it take? What would the founder have earned from variable compensation based on the deals the founder brought in?
- Industry benchmarks: What are other companies in your industry doing? This can give you a starting point for setting your own commission structure.
So, find a starting point and be prepared to iterate over time as you add more personnel to the organization. Evaluate and plan ahead as much as you can, while leveraging market data and industry trends.
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Types of sales commission structures
A 100% commission structure, or commission only, pays salespeople solely based on their sales performance. This means that they do not receive a base salary, and their earnings depend entirely on the number of sales they make.
This type of structure can motivate salespeople, as they know they can earn more money by selling more products or services. However, they can also be risky for businesses, as salespeople may be more likely to take on risky or unethical sales practices to make a sale.
Check out Asher Mathew’s interactive Commission Only with Accelerators compensation example.
“100% commission is the fastest way to learn sales, customer success, and marketing. Small companies and startups are doing this. You get a lot of exposure,” Asher said.
Base Salary + Commission
The most common structure in SaaS is the base salary + commission structure that pays salespeople a base salary plus a commission tied to sales performance. This type of structure is more common than a 100% commission structure, as it provides salespeople with some financial security while still motivating them to sell more.
The amount of base salary and commission that salespeople receive will vary from company to company. Some companies may offer a 50/50 split, while others may offer a 60/40 or 70/30 split. The amount of commission that salespeople earn will also vary depending on the type of product or service they sell, the size of the sale, and their sales performance.
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.
A tiered sales commission structure, also one we see frequently utilized, incentivizes top performers.
Under this model, sellers earn increases in commission rates as they pass a pre-deteremined number of deals or revenue benchmarks.
Also known as “multiple rate,” accelerators, escalators, or multipliers, this structure might pay 10% on deals up to $50K in booking, then increase to 12% after passing $75K.
Check out our guide on multiple rate structures for more examples, or input your own numbers in the following Compensation Hub templates:
- Commission with Accelerators
- Commission with Accelerators & Decelerators
- Commission with Multi-Year Accelerators
A single-rate commission structure is one in which salespeople earn the same commission rate on all sales. This type of structure is the simplest to understand and administer and is perfect for a first-time compensation plan at a startup.
We’ve got this template to experiment and test your numbers with: Single Rate Commission.
A gross-margin commission structure is one in which salespeople earn a commission on the gross profit from a sale. This type of structure can be a way to motivate salespeople to sell products or services that are more profitable for the company.
You could also incentivize reps to sell more profitable services or products over other ones by paying higher rates over those less profitable.
A commission draw, or draw against commissions, is a loan given to salespeople against their future commissions. This type of loan can be helpful for new salespeople who are not yet generating enough commissions to cover their expenses.
A residual commission is a type of commission that is paid to salespeople on a continuing basis for sales that they have made in the past. This type of commission can be a way to reward salespeople for maintaining long-term relationships with their customers.
Territory Volume Commission or Team Commission Structure
A territory volume commission, or a team commission structure, pays salespeople based on the performance of their team within a specific territory versus individual performance. This type of structure can be a great way to motivate salespeople to work together and help each other succeed.
Sales quotas vs commission structures
What’s the difference between sales quotas and commission structures?
A sales quota sets a target amount of sales that a salesperson or sales team is expected to achieve in a given period of time. Quotas can be set for individual sellers, teams, or even entire sales organizations. They are typically based on historical sales data, market conditions, and the company’s overall sales goals.
A commission structure sets the framework, or rules, that determines how, when, and what salespeople earn based on their performance.
Typically, you will see compensation plans include both a quota and a commission structure. However, they are not mutually exclusive. Some companies set quotas but might not pay any variable compensation. Meanwhile, early-stage companies may offer incentive packages that do not include quota targets just yet.
How to structure commission for sales: best practices
Once you have chosen a commission structure, it is time to tailor it to your business and build out a compensation plan.
Here are some best practices to follow:
- Don’t do it alone. The best commission structures and compensation plans are the results of a team effort. Involve your revenue operations, finance, and senior sales representatives in the conversation. This will help to build alignment and ensure that the plan rewards reps and is aligned with your business goals.
- Keep it simple. If you can’t explain your commission structure to a colleague or friend, it’s too complicated. Your reps will likely struggle even more to understand it. Aim for simplicity so that leaders can easily reiterate what reps should be selling and reps can understand what the outcome of their efforts will be.
- Make sure it’s logical. Align it with the company’s overall goals and objectives and make sure it incentivizes the right behaviors. Meaning, you wouldn’t have a higher commission rate on a product you’re looking to sunset within the next 6 months.
- Ensure that it’s equitable and fair. This can be done by standardizing your sales compensation plans for every person who shares the same title and making your territory distribution equitable. You can do this by giving every rep an equal size book of business (and the right book of business for their role) to make it easy for new hires to join the team and be successful early on.
- Communicate effectively. Outline your compensation program, make sure everyone has a copy, and review it with your team in a designated meeting. This is especially important if you are making mid-year changes to your commission structure or plan. Make sure reps understand the changes, the reasons for the changes, and how the company will support them under the new plan.
- Test it. Pull up historical compensation data and run it through your proposed commission structure. If you don’t have historical data, use random or expected data. Then, run extreme scenarios, such as what would happen if a rep achieved a 400% quota. Pressure testing will help you avoid a situation where you have to pay a rep more than 100% of their annual recurring revenue.
These tips may seem obvious, but you’d be surprised how often teams skip them. By following these best practices, you can create a commission structure that will motivate your reps and help you achieve your business goals.
Sample sales commission structure
|Commission with Multi-Year Accelerators
|This AE comp plan incentivizes reps to sell longer contract terms by paying a higher commission rate on multi-year deals and to overperform by paying an accelerated rate (12.5%) once the rep surpasses quota.
Quarterly quota: $175,000
Progress toward quota:
0% – 100% = 10%
> 100% = 12.5%
0% – 100% = 12.5%
> 100% = 15.625%
0% – 100% = 15%
>100% = 18.75%
|Sales Development Rep
|Qualified Opportunity Bonus & Closed Won Commission
|This SDR commission structure encourages quality control of number of opportunities since the SDR earns a fixed bonus on every opportunity they quality for the AE to take on, and another commission percentage when that rep goes on to close/won it.
Commission rate: 2%
|VP of Sales
|Bonus per Financial Model
|This VP of Sales compensation structure pays a fixed, per attainment point bonus and accelerated bonus that’s tied to the organization’s financial modeling. Meaning, if your company hits 100% of the financial model, your VP of Sales earns 100% of their variable. Additionally, the bonus increases 1.5x after hitting goal.
It also includes a cliff, or commission floor, that restricts the VP from earning commissions until after the team surpasses 70% the financial target.
Annual quota: $9M
Bonus per percentage point toward 100%: $300
Accelerator after 100%: $450
|Team commission structure
|Shared Territory Commission
|This team commission structure involves a 10% commission rate that splits evenly between two sellers who share a territory quota when they hit the goal, regardless of who earns the most.
Collective monthly quota: $50,000
Commission rate: 10%
Payout if hit: $2,500 per rep
Sales commission system
Now that you have a proposed structure in place, you’re ready to roll it out to your team. To ensure a smooth rollout and adoption from your sellers, make sure to have communication in place that provides plenty of opportunities for reps to ask questions.
This plan should include:
- Sales-leader-driven workshops: These workshops should be led by sales leaders who are familiar with the sales commission plan and the company’s goals. The workshops should be an opportunity for sales reps to ask questions, learn about the changes to the plan, and provide feedback.
- Clear explanations of “the why” behind the changes and the math: Your leaders should be able to articulate why the changes are being made and how they benefit the company and the sales team. They should also be able to explain the math so that reps can see how you arrived at the numbers behind the plan.
- How the company will support the team with the new objectives: Share how the company will support the sales team in achieving the new objectives. This could include providing training, resources, or other forms of enablement, such as technology.
- A place of reference: Reps should have access to their commission structures, documentation, and resources to help them sell. Even better if there’s a virtual space for them to leave feedback or ask questions.
By following these tips, sales leaders can help to ensure that the sales commission plan is effective and that the sales team is supportive of the changes
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What is a sales commission schedule?
A sales commission schedule is a plan that outlines how and when sales representatives will be compensated for their sales. It typically includes the following information:
- The type of commission structure (flat rate, tiered, or quota-based)
- The commission rate
- The sales goals
- The payment terms (ie: does the rep become eligible for commissions at the time of the contract or upon the first invoice payment)
The commission tracking and reporting process
What are sales commission tiers?
Sales commission tiers are a type of commission structure that pays sellers a different commission rate based on how much they sell.
For instance, a compensation plan might include a decelerator as well as an accelerator, like this comp plan template. Both the decelerator, a lower commission rate that applies to deals closed before reaching a specific attainment target, and the accelerator, a higher commission rate after passing an attainment threshold, represent sales commission tiers.
Sales commission tiers differ from single-rate commission structures that pay a fixed rate on every deal regardless of underperformance and overperformance.
Companies most often implement commission tiers to motivate sellers to overperform and reward those who do. Sales commission tiers can help ensure that you compensate sales representatives fairly by paying more to those who sell more.
Remember to keep the tiers realistic. They shouldn’t be out of reach, but they also shouldn’t be so easy that reps wonder why tiers exist in the first place. Your commission rates per tier should also be competitive with standard rates and differentiated enough to motivate certain behaviors. Meaning, if the difference between one tier and the other is only 1%, is the payout enough for sellers to care?
What percentage is considered a good commission rate for sales?
The standard commission rate for SaaS is 10%. That’s why you’ll see most commission calculators and compensation plan templates start with a base rate of 10%.
This number comes from two rules. The first rule ties to the variable compensation and base salary split, which most frequently comes down to a 50/50 split.
The second rule is based on the sales quota to on-target-earnings (OTE) ratio. The most frequently-used ratio is a quota 5x that of the seller’s OTE, but you’ll see a spread between 4 and 6x.
If you put these two rules together, the 10% standard rate becomes more clear.
For example, a rep’s OTE is $120,000, split between a $60,000 salary and expected earnings of $60,000 if they hit their quota. Their quota is $150,000 per quarter or $600,000 for the year. Their annual quota, $600,000, is 5x their OTE.
So, if hit their annual quota, they earn $60,000 in commissions, and the annual quota ($600,000) divided by their total earnings ($60,000) equals 10%.
What is a team commission structure?
A team commission structure is a compensation plan that rewards salespeople based on the performance of their team, rather than their individual performance. This type of structure can be a great way to motivate salespeople to collaborate and help each other succeed.
There are different ways to implement a team commission structure. One common approach is to set a team quota and then divide the commission evenly among all team members. Another approach is to set individual quotas and then award a bonus to the team if all members meet their quotas.
To pick which model is most appropriate for your team, think about the specific needs of your sales team. If your team is made up of experienced salespeople who are already motivated to succeed, a simple structure that divides the commission evenly may be all you need. However, if your team is new or inexperienced, you may want to consider a more complex structure that provides additional incentives for team members to work together.
What are the steps to building a commission-based sales team?
To build a commission-based sales team, follow these steps.
Define your sales goals. What do you want to achieve with your sales team? Do you want to increase revenue, grow market share, or launch new products? Use historical data to align your goals. If no historical data is available, source industry-specific data and ask peers within your network to share their experiences. Then, once you know your goals, you can start to develop a sales and compensation strategy that will help you achieve them.
Hire the right people. When hiring sales representatives, it’s important to find people who are motivated, have a strong work ethic, and are good at closing deals. Consider the type of product or service you sell and the industry you’re in when making your hiring decisions.
Train your sales team. Once you’ve hired your sales team, train them on the value of your products or services, your sales process, and your company culture. Have them research the industry, competitors, and more for a full picture.
Set clear goals and expectations. Set clear goals, expectations, and responsibilities for your sales team. Document it and make this available to your team to access at any time.
Provide your sales team with the tools and resources they need. Your sales team needs the tools and resources they need to be successful. This includes your sales tech stack, including a CRM system, a lead generation system, and access to your products or services.
Motivate your sales team. Sales representatives need to be motivated in order to be successful. This can be done through a variety of means, such as providing them with incentives, celebrating their successes, and providing them with feedback.
Track your sales performance. It’s important to track your sales performance so that you can see how your sales team is doing and make adjustments as needed. Track sales leads, sales opportunities, sales closed, and commissions earned.
Analyze your results. Once you’ve tracked your sales performance, it’s important to analyze your results so that you can see what’s working and what’s not. Did you achieve your goals? What percentage of your team hit quota? What was the gap between your lowest performer and your highest performer. These questions can help you determine how effective your compensation structure, as well as your sales motion.
Is commission typically based on sales or profit in a commission-based compensation structure?
Commission is typically based on sales, however, we also have seen it based on profit.
Sales-based commission, the most common type of commission, is a percentage of the total sales price that the salesperson earns. It’s both easy to calculate and understand.
Profit-based commission, on the other hand, occurs when the seller earns a percentage of the profit. This type of commission is more complex to calculate, but it can be more motivating for salespeople to focus on selling high-margin products or services.
To help decide which compensation strategy is most suitable for your business, weight the following:
Sales-based commission models make it easier for your team to calculate earnings and understand how they are paid. It’s applicable to any type of product or service and encourages reps to sell as much as possible.
However, this compensation structure can lead to salespeople discounting products or services in order to make a sale. Nor does this structure reward sellers for closing deals with high-margin products or services.
Profit-based commission should motivate your sellers to pitch high-margin products and services over other offerings that aren’t as profitable. You’ll also likely see less discounting.
The cons with this structure is that it’s hard to calculate and might not be appropriate for all your products and services. Reps unfamiliar with the company’s financials may also struggle to understand which item to sell to optimize their earnings.
Ultimately, the best way to determine which type of commission is best for your company is to experiment and see what works best for your sales team.