Making sales is like sitting in a high-competitive exam. Everyone who clears the exam gets a high-profile job. Similarly, your salespeople anticipate rewards when they crack a deal and businesses use a sales commission structure for this.
When you incentivize your sales reps for the efforts they put into selling, the motivation automatically follows. You just to find a way to keep your reps motivated through sales commissions.
So, let’s take a look at the most common sales commission structures that you can consider for your business.
1. Most Common Sales Commission Structures to Consider
There are different types of sales commission structures that may work better for different types of businesses. Let’s explore the most common ones that you must know about before you choose the best one for your business.
1.1. Base Rate Only
This is a simple sales commission structure because there are no commissions involved in it. In fact, salespeople are only paid a standard annual salary or hourly rate.
Most businesses don’t use a commission structure very often because sales reps lack the motivation to exceed their efforts and go beyond. Why would a sales rep want to work harder or put in extra effort when there won’t be any additional benefits? As simple as that!
But that’s not the complete story. Some small, cash-strapped companies use this commission structure either because they can’t afford expensive incentives or because the sales cycles are too short where all a salesperson has to do is take high-volume orders.
Some may even call these types of sales reps customer support reps because instead of focusing on closing deals, their job is just to answer prospect questions and guide them through their journeys to buy products and services as per their needs. In such cases, a base rate-only structure works well.
1.2. 100% Commission
It is a straight commission plan in which a sales rep earns only through the sales he makes. The best part of this sales commission structure is that it has the highest earning potential. As most companies don’t put a cap on such a commission plan, the sky is the limit for these sales reps. As the company doesn’t have to pay a base salary, each sale can bring in a high commission for the rep.
This structure gives sales reps total control of their income as they are free to work as per their availability and financial requirements. If they want more money, they can work more hours. This also keeps them updated on their performance.
You can consider commission-only reps as independent contractors who know the fastest route to the market. This can further save money on hiring people, taxes, and other expenses as you will have to pay only when the rep brings in some revenue.
At the same time, great income potential doesn’t always mean a higher income or better salespeople. Some sales reps may assume that there is a higher risk associated with the 100% commission structure as there is no base salary they can depend on. Also, companies offering 100% commissions may see a smaller applicant pool.
Many salespeople don’t want risky income and may prefer to have the security of a base salary. If you don’t have a solid training program that guarantees success, you may face trouble filling and maintaining your positions.
1.3. Base Salary Plus Commission
This is the most widely used sales commission structure. While some companies may offer an hourly rate as the base, others prefer giving a straight salary. Such a model is so efficient because it puts the responsibility of both the company and the sales rep.
The company gives reps a monetary reward on a regular basis, regardless of how they perform, along with the incentive for the revenue they get. In exchange for this, the sales reps put their best efforts and time into earning both parts of the reward.
In most cases, the base salary isn’t much and a sales rep can depend on it for a living. Anyway. Salespeople rely largely on their commissions but they do have a pillow to fall back in case they fail to achieve their sales targets or there’s a shift in the market.
Companies with such a sales commission structure often see a high application rate because sales reps are interested in companies that can help them grow. By offering a base salary, companies make sales reps feel confident that they will grow and that the company will be there to support them.
The structure rewards the performance and because companies are in complete control of how much they want to pay the sales rep as a base salary and decide the number of hours for which reps will work, they can predict their expenses and determine what a sales rep needs to sell to become profitable.
In such a model, customers benefit too. The sales process retains its integrity as there’s less pressure on the salespeople to close a deal. They don’t look for shortcuts or act outside the guidelines just to make a sale. This reduces stress for the sales reps and ensures that they adopt a more ethical approach to selling.
1.4. Tiered Commission
The tiered commission structure can be the extra motivation your sales reps need to achieve their goals. This compensation plan gives them the chance to earn higher commissions after they close a specific number of deals, hit a milestone, or generate a certain amount of revenue for the company.
The idea behind this plan is simple. You give your reps the opportunity to enhance their income by a great percentage if they make more sales than they usually do.
Such a structure can also be used to penalize your reps for their poor performance. It’s just as you reward your high-performing reps. For instance, if a rep reaches a small percentage of their goals, he gets a small chunk of the commission.
1.5. Revenue Commission
Let’s go back a little! We just mentioned the commission-only structure and the base salary plus commission structures. So, how do you think you will decide your commission rates?
One popular way of doing so is using the revenue commission model. It’s mostly used in field sales organizations or companies that have a fixed or predetermined price for their products.
This structure helps companies when they want to expand their market share or enter new regions. Their focus is not merely more profits but a larger business.
It’s simple to understand and apply for the sales reps and their leaders. The idea is to compensate reps as per the amount of money they generate as revenue. This means that when a salesperson performs exceptionally well and gets in a lot of revenue, they get to earn more money. It also means that the highest-performing salespeople earn the best salaries.
1.6. Gross Margin Commission
The gross margin commission structure is quite similar to the revenue commission structure we discussed in the previous section. The only difference is in the fact the reps earn commission on profits and not on the revenue they generate.
It’s simple to understand that the reps make earnings only on the basis of the actual money they make after the costs of the sales are covered.
This is one of the best sales commission structures for the companies as sales reps don’t promise unnecessary discounts just to close deals. It makes sure that every sale becomes a part of the company’s bottom line. It also encourages reps to sell products with the highest profit margins. It’s surely a win-win situation for both the company and the reps!
1.7. Draw Against Commission
The commission draw structure can be called the combination of the commission-only and the base plus commission structures.
Such a commission structure lets sales reps earn a fixed salary each month, regardless of how much they sell. In case their commissions are lower than this amount, known as the draw amount, they get the guaranteed amount. This way, they get both their commission and the extra amount they need to reach their guaranteed salary.
However, these are the advanced payments that need to be paid back over time.
Such a commission model works well in the case of new hires who need time to adapt to the new situations. As per the studies, sales reps need about 9.1 months to gain full productivity guaranteeing them a draw allowance provides assurance.
It’s worth mentioning that the commission draw structure can be a little complex to execute. It can also become difficult for the reps to predict how much they will earn. What is even worse is they end up in debt if they have several bad sales cycles in a row.
1.8. Residual Commission
The residual commission structure works great for those organizations that have recurring business or subscription models such as SaaS companies.
Sales reps get paid commissions for as long as their accounts continue to generate revenue. Be it upselling new products and services or renewing contracts, when the customer keeps buying from a brand, both the company and the sales rep benefit.
In essence, companies reward sales reps for retaining customers and getting repeat business.
1.9. Multiplier Commission
Such a commission structure lets organizations create customized compensation plans for their reps. However, there is some math associated with the multiplier commission structure that makes calculations a bit difficult for both the employer and the employee.
As per this structure, the companies start off by deciding on a basic percentage of revenue that their sales reps will earn as a commission. This percentage is later multiplied or increased by a specific number depending on the performance of the individual rep in achieving his sales targets. The better a sales rep is at achieving his targets, the higher his overall commission will be.
It’s true that this type of sales commission structure is a little more complicated than other alternatives but it allows managers to include more factors while evaluating their rep’s performance.
However, for the reps, the variable nature of the commission can create a little uncertainty and not many may be interested in such a job profile.
1.10. Territory Volume Commission
As the name suggests, the territory volume commission pays reps on the basis of the success of the whole territory or geographical region. Such a type of commission structure is best suited for field sales teams as well as sales teams that depend on teamwork.
The downside of this type of sales commission structure is that the top-performing salespeople don’t get rewarded fully and the low-performing reps get a big share of the reward even when they didn’t earn it.
2. FAQs
2.1. What is a Sales Commission?
Most businesses have already been using sales commissions to motivate their salespeople to sell more. In general, a sales commission is a portion of the revenue the company generates that it gives to the sales reps when they make a successful sale. What this commission would be depends on the organization and its product or service.
The commission entirely depends on the performance and every rep has to prove that he is worthy of receiving the praise and reward.
Sales commissions are of two types, namely fixed and variable depending on the industry and the type of employment. For instance, a sales rep may earn a commission added to their salary, which is variable pay. However, there are brokers and agents who make money only through commissions. So, the percentage of the sales commission in the case of the former would be much less than that of the latter.
2.2. Why Are Sales Commissions Important?
You can call sales commissions standard in most sales jobs. They motivate and reward salespeople for the efforts they put into driving sales. In simple terms, the organization gives a reward to a sales rep who performs better than others.
Such commissions may also influence sales team strategies. For instance, if a sales rep has the opportunity to earn a high commission by selling a certain product or service, the salesperson might choose to focus on that product or service.
2.3. When is a Sales Commission Most Relevant?
Let’s explore situations in which a sales commission can work for a company.
- A sales commission structure can be highly motivating and effective when you have products with high value or high-profit margins.
- It can serve as a strong motivator for your salespeople to give their best.
- If you are planning to sell in a highly competitive market and aiming to attract talented salespeople, offering generous commissions can help you secure the most confident individuals.
- If your business relies primarily on sales for revenue, commissions can encourage your sales team to become more invested in achieving their goals.
- A sales commission structure can work for you if you prefer a variable pay structure, with incentives being high during periods of elevated revenue and low during low-revenue periods.
- If you are planning rapid growth or expansion into new markets, providing rewards or commissions to your sales team can assist them in reaching their sales objectives.
2.4. What Is a Sales Commission Structure?
A sales commission structure is the way a company incentivizes its sales reps for their performance in a certain period of time.
Some sales commission structures include fixed basic salaries to provide reps with a feeling of stability considering their personal finances. On the other hand, some sales commission structures offer high commission rates to get reps to sell better and work harder.
Any sales commission structure you choose for your company impacts the efforts your reps put into their jobs and their earning potential. So, it’s best to design your commission structures in a way that they are attainable and sufficiently rewarding.
If you want, you can calculate it as a percentage of every sale made. This means the more the volume and value of sales, the more commissions salespeople earn.
The idea of the commission is to ensure that the salespeople get fair rewards for their hard work. It’s a way of motivating them to work harder. Undoubtedly, it is a win-win situation for both the company and its salespeople.
3. Wrapping Up
Without a doubt, a good sales commission structure will keep your sales reps focused and motivated. Similarly, a wrong choice will make them jump off the ship and look for a better option.
Fortunately, by now, you would have obtained some good knowledge about different sales commission structures and how well they fit into your business model. You may even have to do some trials until you find the best one for your team.
After you find the right sales commission structure for your business, you will also have to keep an eye on how well your team is performing to reward them in the best manner possible.
Kylas sales CRM can help you set goals for your team and let you keep an eye on how they are performing. You can track your team’s activity progress which can further help boost your team’s productivity.
