Sales commission guide: Types, structures, and FREE calculator inside

The key to attracting and retaining top-performing sales reps is sales commission. 

A skilled sales rep needs recognition for his performance to stay motivated. In addition, a commission is a crucial factor for keeping the salespeople in your organization satisfied. 

Yes, exposure and skill development are important, but monetary benefits play a vital role in the overall development process 

Did you know that 43% of employees are likely to leave a company just for a 10% increase in their salary? 

Therefore, if you don’t want to lose your best sales reps, you need a strong sales commission structure. A model that fairly compensates your sales heroes for their hard work. 

In this guide, I have covered every aspect that is required for building a solid sales commission structure. Moreover, you’ll be getting access to our sales commission calculator tool in this article, so stay tuned. 

Table of content 

1. What is sales commission?
2. What are the types of sales commissions?
3. Why is it important to provide sales commission?
4. How to effectively implement sales commission in your business?
5. What are the types of sales commission structure? 
6. Sales commission calculator
7. What are the average sales commission rates by industry?
8. How does a typical sales commission agreement look like?

What is sales commission?

A sales commission is earned by a salesperson based on the number of sales they have made in a specific period. Generally, a commission is provided in addition to the basic salary given. However, every company has its own policies in this matter. 

Sales commission plans are the perfect way of showing appreciation to your employees and encouraging them to perform better. It is a way of showing that your business is sharing a part of the profit along with the base salary. This comes as a gesture of care towards your employees. 

It is important to note that sales commission is a part of sales compensation plan. This article is exclusively dedicated to sales commission. 

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What are the types of sales commissions

When we’re talking about sales commissions, the first thought comes – it’s for sales reps only. I know what you’re wondering, who else could be possibly eligible for getting sales commission? 

Well, sales commissions are bifurcated into three categories – individual commission, team commission, and mixed commission.  

1. Individual commission 

The individual commission plan is targeted towards salespeople who have exceeded their sales quotas. As a result, they are paid a commission based on the sales they made. This is only applicable to the salesperson that is involved in making sales. 

Usually, in such situations, a salesperson is also given monthly or weekly targets, which helps their employer determine their commission. 

2. Team commission 

You can provide team commission when a target is assigned to the entire team. Thereafter, when your sales team achieves or exceeds their target, the commission is given which can be split among the team members.  

The distribution of the commission is based on the percentage determined by the company. 

3. Mixed commission 

In an effort to encourage the employees to perform better, many companies offer a commission on an individual basis and to the teams as well. The allocation of the mixed commission is based on the effort required on each project. 

So, these are the main three types of sales commissions given to employees. In the rest of this article, our main focus would be on individual commission. It would give you a broader idea as a leader on how you can design a commission structure for your team. 

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Why is it important to provide sales commission?

A sales commission plan can have a strong impact on your sales growth, so it’s essential to select a plan that works best for your organization. If you’re on the fence about providing sales commission to your reps, these points will change your mind! 

1. Motivation for sales reps 

Motivation is a driving factor for the success of any task. Likewise, if you want your reps to crush their quota in sales, then you need to provide rewards in form of commission. 

Whenever reps get an extra monetary benefit, they will be encouraged to perform even better. So, if you want to retain your best-performing sales reps, providing them sales commission is highly effective. 

2. Boosting productivity 

Let’s say that a sales rep is working with a fixed salary.  

At the end of the day, they got another task on a priority basis. Do you think they’ll stay late and finish it? Probably not.  

But, in the same scenario, what if the sales rep is getting a commission on every deal made? Then they’re more likely to focus on important leads and act accordingly. 

3. Increase in company revenue 

The sales commission plan and your company’s revenue are proportional. The more deals your sales reps close, the more commission they’ll earn. Hence, a significant increase in the company revenue. 

4. Reduced turnover 

Did you know that 56% of the employees that left their job mentioned that inadequate pay was their motivating factor to switch jobs? 

By providing commissions based on the number of sales made, you’re also helping in reducing the overall employee turnover rate of your company. 

How to effectively implement sales commission?

Implementing sales commission in a company can be a tricky business. 

A wrong sales commission plan and all your efforts will go down the drain! Now, you don’t want that, do you? 

So, before you implement any sales commission plan in your company, you need to keep some factors in mind.  

I have listed down the key elements that you need to consider before you make a decision. 

1. Define your sales goals 

The first question you need to ask yourself is – what your sales goal is. 

• Is it to acquire new customers? 
• Do you want to target existing customers? 
• Is the sales commission plan focused on high-value deals? 

Define your purpose and then you can implement your sales commission plan so that it works perfectly. 

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2. Clearly determine commission according to the roles 

Now, when you are determining the commission for your employees, you need to pay heed to their job role in the company. Is it a sales rep or a manager? Or is it someone at the senior level? 

The below chart will help you figure out the role of your employees and based on that you can structure the commission plan. 

Their job roles will define the commission, so you need to implement it accordingly.  

Moreover, it’s also crucial to communicate the sales commission process to your employees so there’s consistent transparency between employees and management. 

3. Avoid capping salaries 

By capping salaries or commission, you limit the potential of your sales reps. 

For a moment, put yourself in your sales reps’ shoes. How would you feel when you worked for 25 days a month and got paid only for 15 days? 

Well, that’s the exact case of capping salaries. By putting a cap on their income, you’re not giving them the income that they have earned. 

4. Align it with company standards 

One of the most crucial factors of setting up a sales commission plan is that it needs to align with your company standard.  

You need to consider the budget, employee strength, sales process, and various other factors so that when you do implement a sales commission plan, it aligns with your company’s standard. 

What are the types of sales commission structure? 

Every company’s requirement is different; thus, the sales commission structure will vary for each industry. 

Usually, a sales commission is made up of two elements – fixed and variable pay.  

Fixed pay is what the rep receives irrespective of the targets they achieve. And the variable pay is the commission percentage that the rep gets on achievement of every task. 

Now, I know that choosing a sales commission structure can be a tricky process, so I have listed down the various types of sales commissions structures every company has a choice to implement. Based on that, you can determine which works for your company and its employees. 

1. Straight commission plan 

The Straight commission plan is exactly like what it suggests – a commission-only model that is paid on every deal made. In this commission structure, there’s no fixed pay, so the income of your sales rep is entirely dependent on the deals he/she closes. 

While this can be a motivating factor for many reps, they also have to endure stress as they constantly try to close deals. 

2. Base salary plus commission 

This is one of the most common sales commission structures – it consists of fixed pay and variable pay. So, the rep gets a fixed income each month and on top of that, they receive a commission based on the percentage determined by you. 

This provides a safety net for your sales reps as they’ll have a fixed income irrespective of their performance. However, the base salary is not sufficient to meet the needs so most reps rely largely on the commission. 

3. Commission draw 

The draw against commission model is specially created for the newly hired sales reps. 

In this commission structure, a sales rep is guaranteed a certain amount of commission for every month. So, if they earn less commission than that, they will be still paid the full amount. The difference is drawn from their next commission pay. 

Mostly, such commission draw plans are recoverable, but some companies also have a non-recoverable structure. For your ease, I’ve provided an example of both commissions. 

4. Tiered commission 

The tiered commission structure is best for the companies that want to encourage their reps to close more deals.  

This commission structure comes with a benchmark, so when your rep crosses that benchmark, their commission percentage increases.  

In hindsight, the more deals your rep closes, the higher commission percentage they’ll receive on the revenue. 

Similarly, there are some companies that also follow a similar structure for underperforming reps.

Consider a rep has a quarterly goal of $50,000 and their commission is $7000. In this scenario, if they achieve a 70% quota, they’ll only receive $4,900 as their commission for their quarter. This practice is known as relative commission. 

Was this calculation difficult to consume? Fret not! I’ve got a sales commission calculator tool for you next 🙂 

5. Gross margin commission structure 

The gross margin commission structure is more specific, as it also considers the expenses incurred. So, the rep receives a commission on the profit after deducting the expenses, not the total revenue. 

The companies that implement this structure want to increase and retain their profit margin. So, the reps that provide huge discounts just to sell more products would not be able to benefit from it.

This sort of practice is more effective in a product-based company. 

6. Residual commission 

Companies that bill their clients periodically use the residual commission structure.

Suppose your rep closes two high-ticket clients for the company. He/she will receive the commission as long as the client is associated with your company.

Sales commission calculator tool

If you found the calculation too tricky, then you’re going to love this sales commission calculator. 

Simply download our commission calculator tool and enter your revenue numbers to find out the commission that you will require to give to your reps. 

Our tool is highly beneficial for planning the sales commission plan as you can get an estimate on how much commission needs to be paid based on the revenue generated. 

What are the average sales commission rates by industry?

Every industry has its own sales cycle and business process. Based on these parameters, every industry tries to follow a standard sales commission. Take a look:  

It’s clear that the wholesale, financial services, and SaaS industry is thriving in terms of providing sales commissions to their reps. This also indicates a higher scope of earning for reps in the mentioned industry. From a business perspective, this chart will help you gain insight into the average commission provided to the salespeople. 

How does a typical sales commission agreement look like?

If you have recently built a sales team in your company, or you’re considering implementing a sales commission structure, the first step is to create a sales commission agreement. 

A sales commission agreement consists of the terms of employment of your sales rep. So, every detail about your sales commission structure will be present in the commission agreement. 

Main elements of a sales commission agreement 

While drafting a sales commission agreement, you need to consider various factors and terms that you want to add. Moreover, you can also add clauses for the probability of occurrence of an event. 

I have listed down the main elements that are essential for every sales commission agreement and have also explained how they can be processed. 

1. Authorization 

The authorization section gives your sales reps permission to sell products or services on behalf of your company. In this section, you can also add the specific territory that you want your sales rep to cover, or restrict certain areas that don’t come under your target location. 

2. Documentation process 

This section mentions the specifics of the tools and documentation that every salesperson needs to use when they’re working on any deal. 

For instance, they must use a sales CRM to collect the contact information of the leads and manage the sales pipeline. 

3. Non-compete clause 

The non-compete clause states that the rep working for your company cannot represent or work under your competitor company. This is applicable during their work tenure and for a specific period after they leave the company. 

4. NDA clause 

It is important to have an NDA so employees don’t disclose any confidential information.

5. Commission structure 

This is the section where you need to mention the commission structure you have selected. You can refer to the types of commission structures, weigh in their pros and cons, and then decide the one that works best for your company. 

6. Agreement 

Here, both the employer and employee agree to the terms and conditions mentioned in the entire sales commission agreement. 

Sales commission structure template

If you want to find out what an actual sales commission structure template looks like, I’ve provided a template you can refer to. 

Source: PandaDoc 

Conclusion 

If you are going to start offering sales commission to your employees, it’s imperative to choose the right sales commission structure and implement it perfectly. 

Below are the key takeaways of our entire sales commission guide:

1. Sales commission is provided to the sales reps based on their performance. It motivates them to work harder towards achieving their sales quotas. 

2. There are three different ways to distribute commissions – individual commission, team commission, mixed commission. 

3. It’s important to provide commission because it improves productivity, motivates the sales reps, increases revenue, and reduces turnover. 

4. You can effectively implement sales commission by not capping the salaries, defining sales goals, clearly determine commission according to the roles, and align it with the company standards. 

5. There are a total of 6 types of sales commission structures. 

6. You can easily calculate sales commission with our sales calculator tool.  

7. Finding out the average sales commission pay for various industries like Insurance, SaaS, Real Estate, Advertising, and more. 

8. Learning about the sales commission structure agreement and understanding the format with the help of a template.