Factors to consider

In his book, The High-Velocity Sales Organization, Marc Wayshak states that the sales turnover rate is double the national average. This makes it imperative for organizations to find ways to properly attract and retain talent. When choosing your organization’s payout for commissionable sales, consider:

• Incorporating a structure that matches the company. Too many organizations look at outdated methods when it comes to compensating sales commissions. It’s important to find the structure that fits or to tailor one to suit the company’s objectives.
• Using analytics. A sales dashboard helps both sales and management get a proper view of successes and areas of improvement. It levels the playing field and provides a visual of how actions align with goals.
• Giving salespeople the right tools. No matter how generous your structure is, it’s important to work with a customer relationship management (CRM) tool that won’t impede their process or progress. If the software they use has a steep learning curve or it contributes to a process bottleneck, teams won’t be as productive as they can be.

10 Sales Commission Structures

1. 100% Commission

When a 100% commission structure is used, sales agents only earn when they sell.

When it’s used: Organizations that don’t have a lot of capital to spend on staff, such as startups, use commission-only as a pay-as-you-go plan. It’s also used for temporary or contract sales.

Advantages: This is great for high-value products that have a short sales cycle. High-performers who thrive on a challenge like this structure. They see it as perpetual motivation. The company doesn’t have to pay their sales agents anything other than their commission.

Disadvantages: When there’s a dry spell, it can be hard on the sales staff. It can become a feast-or-famine setup that can lead to high turnover because team members don’t have financial security. In some cases, it can create a toxic work environment where sales staff will do whatever it takes to make the sale. That behavior can negatively impact the company’s reputation.

2. Base salary + sales commission

In this structure, the salesperson makes a relatively low base salary, as well as a commission from sales made. For example, they may make $500 per week, plus an additional 4% on a product or service they sell.

When it’s used: This is great for almost any business that has just one primary item that they sell to all customers.

Advantages: This is a very straightforward structure that makes it easy to calculate how much they’ll make for a certain number of sales. The salesperson also has a bit of security knowing that if they have no sales, they’ll still have money coming in to pay the bills. They also have the chance to nurture leads instead of constantly churning. This relationship-building helps the company in the long run.

Disadvantages: The commission rate may not be as high, which means teams need to sell more to make great commissions. They have a base salary to fall back on, so salespeople aren’t as motivated to make sales right away. The business has to have the money to support this, whether enough sales are coming in or not.

3. Tiered commission

In this structure, commissions are paid when a certain sales revenue target is achieved. After reaching that benchmark, salespeople receive a certain percentage of sales at each tier. For example, a salesperson may earn 5% when they reach sales of $10,000, and then 8% after that until they hit $20,000. This can go on for as many tiers as desired.

When it’s used: More established companies with deeper pockets can execute this plan.

Advantages: This motivates sales staff to continue closing deals, so they can achieve higher commissions. Businesses can even make it more interesting by adding other nonmonetary incentives at higher levels.

Disadvantages: Payroll fluctuates, so the business must have the funds to pay high-performing agents.

4. Gross margin commission

This is where the salesperson makes the commission on the company’s profit on the product. For example, if someone sells an item for $100, and the company’s profit is $25, the commission is on the $25 profit, not the $100 sale.

When it’s used: Organizations in sectors where the cost of a product isn’t fixed use this structure. Under this structure, a sales agent can coax a customer into paying more for an item to get a higher commission.

Advantages: This structure keeps your business from overpaying sales staff. Sales agents know the profit potential and will focus on higher-value prospects.

Disadvantages: Because profit margins are thin, sales staff may not leave room for discounts, which could help them win more business. They may not see any room to offer deals or incentives to customers, limiting the opportunity to build a long-term relationship with them.

5. Base salary + bonus

In addition to a base salary, sales agents make a bonus every time they sell a specific volume within a certain time frame. For example, whenever they sell $100 worth of products in a day, they may get a $50 bonus.

When it’s used: The key here is the product volume, which makes this structure easy to adopt by many industries, such as wholesale and manufacturing or financial services. They can sell certain products or product packages and make a bonus.

Advantages: It provides a great incentive to workers, and you don’t have to pay commissions on a sale. You just need to set a bonus amount. It’s a straightforward sales commission structure that gives agents a good idea of what they’ll earn.

Disadvantages: It could be demotivating if they’re between bonus tiers, so it’s a good idea to ensure the tiers are set up at achievable intervals.

6. Residual Commission

As long as the client’s account is generating revenue, the salesperson gets a commission from that. This takes the long-term value of a client into consideration.

When it’s used: Companies that have longtime relationships with advertising agencies or consulting firms can use this commission structure.

Advantages: Salespeople get a nice commission from the first sale and a smaller commission on future orders. Because their compensation is tied directly to keeping the client with the organization, salespeople will do their best to keep their clients happy and business steady. There is motivation to try to upsell to clients and diversify their income streams, which is great for the sales agent and company.

Disadvantages: If the client goes, especially if the reason has nothing to do with the agent, the salesperson takes a hit. As a result, they may become demotivated or even leave.

7. Recoverable Draw Against Commission

The salesperson is advanced a predetermined lump sum payment or a draw for a given period. If they meet their quota, the amount of their advance is subtracted from the commissionable sales. For example, if the draw is $100 for a week, they have to make $100 in commission to break even.

When it’s used: This is mostly for new agents or agents getting used to a new territory.

Advantages: This draw is like a base salary, so sales agents are less stressed. They have money to start on and are motivated to make up the draw. If they get more than their draw, they make a profit.

Disadvantages: The company has to have the money to pay the draw upfront. If the sales agent can’t make their draw, they owe money. If they have a bad run, they can wind up in debt to the organization.

8. Territory Volume Commission

This is a team-based commission structure where salespeople have clients they work with within a specific region. They’re paid based on how much volume commission the territory makes.

When it’s used: Businesses that have an established presence in multiple areas and are looking to increase their market share use this structure.

Advantages: Whenever there are new products or they’re dealing with a new territory, it motivates agents to generate more sales. It’s relatively easy to understand and implement.

Disadvantages: Salespeople don’t have control over how much they can make because sales go into a pool. All sales are treated equally, and there are times when the organization will need to rebalance territories to make things equitable. Commission rates may vary.

9. Straight-Line Commission

This structure is based on reps fulfilling their quota. They’re paid based on how much they’ve fulfilled their quota. For example, if a sales rep fulfills 25% of their quota, they’ll be paid 25% of their commission. If they make 200% of their quota, they make double their commission.

When it’s used: Organizations that have the resources to help employees meet their full potential use this structure.

Advantages: It’s an incentive for underperformers to meet their goals without slowing down the high-achievers. Commission potential is uncapped, so they can work to make as much money as they can.

Disadvantages: Unless there’s quality mentoring or coaching involved, salespeople can become demotivated.

10. Non-recoverable Draw Against Commission

When it’s used: This is similar to the recoverable draw. The difference here is that if the salesperson doesn’t make the equivalent sales, they aren’t required to pay the money back. This is used asa temporary stop-gap during economically tough times.

Advantages: This structure is great for the salesperson because it relieves the pressure of making the money back or possibly falling into debt with the company when they don’t.

Disadvantages: It’s not sustainable for the company in the long run.

Using Multiplier Commission Structures

The multiplier commission structure is a customized combination of revenue and tiered commission structures. It’s based on both percentage of quota and a multiplying factor to determine how much commission is paid.

For example, let’s say an organization has an 8% flat commission payout. If a salesperson makes 50% of their quota, the organization could apply a multiplier to come up with a 5.5% commission. That means that for a $1,000 sale at 5.5% commission, the salesperson would get $55. This is a complex structure that’s great to help agents focus on high-quality deals and improve their performance.