9 Types of Sales Commission Structures and How To Choose One

By Indeed Editorial Team

Published 16 August 2021

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

Commission structures are an essential element of any business that wants to grow and improve their revenue gain. Many salespeople earn a living through their employer's pay commission system, so the amount that they sell can affect their overall yearly income. Gaining a firm understanding of these commission structures can help you make a more informed decision about choosing the one that works best for your company. In this article, we discuss what a sales commission structure is, explore nine types of commission plans and review some tips to help you decide on the right one.

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What is a sales commission structure?

A sales commission structure is a system within the sales industry that describes how a company's sales associates earn compensation, called commissions. There are many commission plans for sales that provide different pay levels. Some pay weekly, every other week or once a month.

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9 types of commission structures for sales

Here are nine types of sales commission structures for you to consider:

1. Base rate only commission

The base rate only plan pays sales representative an hourly or flat salary. This commission structure benefits businesses where salespeople spend a lot of time educating and supporting customers before and after a sale goes through. There's no incentive to upsell or sell more products or services.

Example: The company's four salespeople each earn $1,250 a week no matter how many sales they make.

Related: What Is Net Salary: Definition and Guide To Calculating Net Salary

2. Base salary plus commission

The base salary plus plan is one of the most common commission structures. It provides salespeople with an hourly or straight base salary plus a commission rate. Typically, the base salary is often too low to support someone's income entirely, but it does provide a guaranteed income when sales are low. The standard salary to commission ratio is 60:40 with 60% being the base rate and 40% being commission-driven. The plan best serves as an incentive or motivation for increased sales performance. The calculation for base rate only commission is Commission Percentage x Amount Sold = Commission Total.

Example: A salesperson earns $500 a month in salary with 10% commission, or $500, for $5,000 worth in sales. If he sells $20,000 of product in one month, he earns $2,500: $500 in salary and $2,000 in commission.

3. Draw against commission

Draw against commission plans function on advance payments that help new hires acclimate to their sales roles without losing income. Sales representatives earn a salary, or draw, each month for a specified time regardless of sales. If they earn less in commissions, they keep the commission and the difference between it and the draw amount. The funds are considered advanced payments until commissions reach or exceed the salary draw. These advanced payments must be paid back eventually to employers. The calculation for draw commission is Commission Total - Draw = Commission Owed.

Example: A salesperson expects to earn $4,000 a month in commission and receives $2,000 a month in draw. If they met their $4,000 goal, they earn $2,000 more, the amount over the draw. If they earn only $1,000, they owe the company $1,000, the amount under the draw.

4. Gross margin commission

Gross margin is a model for providing commission that takes into consideration the expenses that occur when selling a product. In this plan, the salesperson earns a specific percentage from the overall profit amount. Since their commission is dependent on the final sale cost, there's less of a chance that the salesperson is going to provide a discount. This plan encourages upselling since the salesperson can earn more commission when they sell additional products and services. The calculation for gross margin commission is Total Sale Price - Cost = Gross Margin. Gross Margin x Commission Percentage = Total Commission.

Example: A car salesperson has a vehicle they are selling for $100,000, but it costs $60,000 to manufacture. The gross margin in this scenario is $40,000. The car salesperson earning 5% of the margin would gain a compensation of $200.

5. Residual commission

Residual commission plans are really beneficial for salespeople who have continuous clients or accounts. The more revenue that accounts continue generating, the longer you can expect to keep receiving your commission payments. In this structure, company encourage their salespeople to keep their clients and use processes that encourage customers to provide repeat business. This is a very common commission structure in consulting firms and agencies that manage long-lasting accounts. The calculation for residual commission is Payment x Commission Percentage = Total Commission.

Example: An insurance salesperson lands a large account. As long as that company pays its premiums of $3,000 a month, the salesperson receives a 5% commission or $150 each month.

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6. Revenue commission

Businesses and companies that focus more on achieving their important business-related goals rather than total profits frequently use this commission plan when deciding on their employees' commission rates. The employer also sets the percentage of revenue that salespeople earn. In this type of plan, employees have the chance to become leading sales performers. The calculation for revenue commission is Sale Price x Commission Percentage = Total Commission.

Example: A boat salesperson is selling a boat for $2500 and has a 3% earning on sales. After the sale, they can expect to receive a $750 payment in revenue commission for executing it successfully.

7. Straight commission

A salesperson working within the straight commission system can expect to earn money only when they complete the sale. This system may appeal to skilful salespeople who like the opportunity to earn an income based on their own merit and capabilities. In the straight commission plan, salespeople often function similarly to independent contractors and may even decide on their own working hours. This can save their employer money, since they only lose money when a salesperson generates revenue. The calculation for straight commission is Sales x Commission Rate = Income.

  • Example: A customer sales representative selling vacation cabin rentals earns $150 when they make a booking. More time spent on the phone with the customers increases their chances of finalising the sale.

8. Tiered commission

In the tiered commission model, salespeople earn a certain percentage of commission on all sales up to a designated amount. Once they achieve their revenue goal, their commission increases. This encourages them to exceed sales goals and close more deals.

Example: A salesperson's base commission is 5% up to a total of $100,000 in sales. That commission increases to 7% for total sales between $100,001 and $200,000. Any sales over $200,001 earn them 10% in commission.

9. Territory volume commission

In this model, salespeople earn their income based on the set rate for their defined region. The amount of compensation typically depends on territory volume, where sales numbers are totalled and commissions split equally among salespeople within the region. This compensation plan only works for sales representatives who work in a team-oriented environment. The calculation for territory volume commission has many factors depending on the company's sales formulas. A simplistic calculation is Sales Totals x Commission Percentage divided by Number of Salespeople = Commission Total Per Person.

Example: A company expects a two-person sales team to sell $50,000 in product each month in a 100-mile region. One sells $30,000 while their co-worker sells $20,000. Since they have met the total goal, they split the 10% commission, earning $2,500 each.

Tips on choosing the right commission plan for sales

It's important for a company to outline their commission structure and come to a conclusion on how they want their sales operations to function. A plan that works for one business may not be effective for a different company. Here are a few tips to help you identify the commission structure that is right for your organisation:

  • Consider your business model: It's important that you consider the business model of your company to help you determine which commission plan works best for your employees. This often involves the company's primary goals and methods for bringing in revenue. Create a list of the pros and cons of using each model to help you determine which ones best align with the structure of your business.

  • Prioritise your efforts on a sales process that works: Consider the sales methods that help your company reach your revenue goals most efficiently. You can try documenting the results of the plan within a specific amount of time to assess how well it worked. If it didn't help you reach your sales goals, then try a different process and repeat.

  • Consider turnover rates: Turnover rates are notably high within the sales industry, but this shouldn't be a cause for concern. It can be beneficial to try out a few commission structures as your company and employees change over time.

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