It’s common practice in compensation management to incorporate a sales commission structure to incentivize and motivate good performance. If you think it’s about handing out a few dollars for every sale, you’re missing the bigger picture. It’s an art form that can turn average salespeople into superstars.
But how do you pick the perfect plan for your team? We’ll decode typical structures, help you navigate the right plans and throw in some real-world examples before you explore sales commission software. Read on to find out more.
Compare Top Sales Commission Software Leaders
Article Roadmap
- What Is a Sales Commission Structure?
- Best Structures
- What Is Sales Commission Software?
- Top Requirements
- Questions To Ask
- Next Steps
What Is a Sales Commission Structure?
A sales commission structure is a set of rules for how and when a salesperson gets compensated. It factors in sales, quotas, volume, specific task completion and more.
Most commission structures for sales reps feature a combination of a fixed amount with a variable amount.
In other words, one part of the salary is consistent, while the rest depends on the worker’s performance, as seen in the image below.
Compare Top Sales Commission Software Leaders
Best Structures
Browsing through common sales commission structure examples will reveal the strengths and weaknesses of each. For ease of understanding, Let’s break down the popular structures into outcome-based headings.
Performance-Driven Structures
A performance-driven sales commission structure is essential for motivating and rewarding sales teams based on their achievements.
Straight
Also known as 100% commission or commission-only income, this sales commission structure example emphasizes aggressive selling. Salespeople operate with no commission cap.
It’s common in companies that need to get products out quickly with low income. Referral programs that involve affiliate marketers, contractors and external sales partners fit in this bracket. Nonetheless, this technique entails hazards.
It’s risky and best for companies looking to cultivate shorter sales cycles. Such plans contribute to higher turnover rates and lower morale. It’s primarily applicable for 1099 employees and independent contractors.
It’s high-risk, high reward for more experienced team members but could lead to a demanding work environment. For this reason, it’s uncommon.
Tiered
In this sales commission structure, professionals earn a higher commission percentage when they achieve higher sales thresholds. A tiered commission features increased payments once staff reach a predetermined goal.
A salesperson could earn a 5% commission on the initial $10,000 of revenue they generate, a 10% commission on revenue between $10,001 and $20,000 and a 15% commission on revenue exceeding $20,000.
This structure encourages the sales team to exceed their goals and close the highest volume of deals. In this system, they may use accelerators or elements that increase the payout exponentially.
Gross Margin
This structure considers expenses since sellers earn a percentage of the profit. It’s a great way to encourage tightening margins.
If a company’s cost or bottom line is ballooning, this can effectively combat it. However, this also means there’s a bottom to the number of discounts to offer a client. It’s a handy tool while trying to scale a business.
Revenue Commission
Organizations rely on this structure when they focus on big business goals instead of total profit. This idea is especially effective in encouraging big sales and top performers.
Companies also use it when expanding their market share, growing into a new area, focusing on a single product or encouraging success when there’s fixed pricing.
Compare Top Sales Commission Software Leaders
Security and Stability Structures
Stable sales commission structures provide a reliable and consistent framework for compensating sales teams.
Base Rate
In this plan, workplaces pay an hourly or flat rate, like the one for other salaried workers. This method isn’t as popular in modern workplaces because it doesn’t reward high sales.
For competitive employees who stand out, there isn’t as much motivation to work hard.
This strategy is appropriate for businesses that involve a lot of teaching, consulting and other support before or during the sales process. You’ll want to prioritize knowledge and qualified support over numbers. Companies that primarily have inbound leads also use it.
Team members can be honest and unbiased since it doesn’t contribute to their bottom line. If they still want to use money as a motivator, managers still have raises and bonuses to reward their best workers.
Draw Against Commission
This plan combines elements of the previous two. Each salesperson receives a guaranteed monthly payment and commission.
If they earn less from the commission than their salary, they keep the commission and the difference between it and the draw amount.
However, the draw is an advance payment that the employee must repay if their commissions do not reach the draw amount. This arrangement commonly rewards new hires as they establish a customer base. Still, it can be problematic for the organization if the salesperson continually earns less than predicted.
Take this example:
- The set draw is $3,000. The worker earns $1,000 in commission.
- They earn $3,000 monthly, $1,000 from the commission and $2,000 from the company.
- The employee now owes $2,000 to the company to be paid back at a future date.
Here’s how to adopt this commission structure so it’s fair to sales reps:
The sales ramp-up period should be equal to the standard duration of your sales cycle + 90 days. This plan addresses the lack of incentives during a sales representative’s ramp and onboarding.
In times of economic turbulence, changing market conditions or unanticipated disruptions like the COVID-19 pandemic, a draw ensures that representatives get paid even when sales fluctuate for reasons outside of their control.
Base Salary Plus Commission
This plan includes a set salary alongside a sales commission structure, often in a 60-40 salary-to-commission ratio. It gives the rep a sense of security but pushes them to make their numbers.
Additionally, they earn a commission based on the revenue they generate, and the commission percentage is typically higher than what they get in a pure commission model.
The benefit is that they have a salary to fall back on if something drastic changes in the industry but have the potential to make much more.
Residual Payments
When a worker keeps the same customer over a long period, the payment increases. It encourages customer retention.
It’s beneficial for consulting services or any business that counts on repeat customers for survival. If a company has a problem losing accounts, this could be a way to encourage better service.
Compare Top Sales Commission Software Leaders
Custom Structures
Multiplier / Combined / Customized
A custom plan combines one or more plans to incentivize certain behaviors, volume, dollar amount or other goals. Some plans add one or more multipliers, which multiply the commission by a certain percentage based on the amount of the quota reached.
These plans are good for organizations with specialized needs, especially ones that need their teams to perform well often.
Territory Volume
This strategy is a region-based sales commission structure example where salespeople get specific territories and receive commissions depending on the overall volume of sales produced in that territory.
Within a specific territory, this organizational structure encourages cooperation and coordination among salespeople.
Each employee works within a specific region in this plan. Sometimes, the amount gets split between sellers who work in the same area.
Other Sales Commission Structure Examples
Here are a few more examples and what they’re based on:
- Goal-Based: Specific actions or goals, such as getting new customers.
- Event-Based: The time when specific actions, deals or tasks happen.
- Industry-Specific: Variables that come with specific industry conventions.
- Marginal Tax-Based: Marginal dollar rates and works like a tax bracket.
- Straight-Line: A set quota. The percentage is the percentage of the quota they meet.
Determining which commission structure is right for your sales reps takes time and planning, but it’s worth the effort to have a polished plan ready to implement. Once that’s locked down, it’s finally time to look at software to execute in the most efficient way possible.
Compare Top Sales Commission Software Leaders
What Is Sales Commission Software?
Sales commission systems are automation tools that create, manage and maintain compensation. They record the number of sales and automatically calculate bonuses.
Then, they provide a snapshot of the entire process.
Besides tracking budgets and calculating compensation, they help businesses tweak and optimize the best program possible. This strategy assists with deployment and reporting to create the ideal plan.
On the human capital side, it assesses performance and tracks objectives and benchmarks, making it easy to discuss individual performance.
Software helps you capitalize on the prime HR trend: Pay transparency.
CHRO and MD of AED Training, Mark McShane, gave us an inside look at how commission tools promote transparency:
Implementing sales commission structures necessitates a strategic fusion of motivational psychology and data analysis: transparency emerges as crucial—each sales representative must grasp the calculation of their commissions and envisage potential earnings.
“Our integration of a real-time tracking system lets reps monitor their sales and projected earnings; this approach has boosted morale and raised productivity by 20%, according to internal assessments.”
Top Requirements
Now that you understand what sales commission software does, let’s examine the essential features for finding the best software solution possible.
- Accessibility: Access to your network on the go is a huge priority. Make sure you pick a platform that works on mobile so that workers can update plans immediately.
- Automation: Save time by eliminating manual data entry. Users can focus on the more critical questions without worrying about updating spreadsheets or extensive coding.
- Commission and Compensation Management: Find a platform that can do the main calculation that determines payments while defining which metrics you’ll be examining. Factor in incentives, quotas, overwrites and accelerators to determine payment for sales.
- Real-Time Updates: When closing deals at significant events, it’s essential to see what’s happening in real time and push closed deals to the database, ensuring a seamless continuum of intel.
- Reporting and Analytics: Generate reports, monitor individual progress and track key metrics like bonuses, incentives, commissions or changes in territory. By providing reps with projected goals they can view, they can adjust plans as necessary.
- Inquiry Modules: Allow your sales team to easily input and search for commission-related information while also providing a user-friendly interface for maintaining their profits, as in Blitz.
- Scalability: If your team grows from 20 reps to 40 in the next few years, will you need a new platform? Give yourself some wiggle room for the sales volume the system can accommodate.
- Visibility and Transparency: Users can audit every interaction, compare timeframes and analyze the formula to ensure there are no errors that could throw things out of whack. Catch problems before they result in incorrect checks.
Compare Top Sales Commission Software Leaders
Questions To Ask
After the nitty-gritty, it’s time to personalize. A few questions cut to the heart of a typical sales commission structure:
Why should you use a sales commission structure?
Commissions are standard in the sales world. Why?
External motivators, such as financial incentives, are a great way to motivate people who handle repetitive tasks. Selling is an art that involves a lot of cold calling and tedious emailing.
There are many other situations where this payment works remarkably well. It’s appropriate for companies looking to target a few specific products or sell them in a short amount of time. It effectively brings a team together toward a reward, building cohesion and galvanizing staff.
Once a commission plan is in place, managers can oversee and help employees achieve their goals.
Unfortunately, this is where confusion and poor recording can cause issues. No one wants to muddle the waters with miscommunication, calculation errors and poor transparency.
Tempers run high when money is on the line.
Fortunately, this is where software helps the most.
What behaviors and outcomes do you want to incentivize?
Determine which sales initiatives and achievements you want to reward, such as closing deals, upselling current customers or gaining new clients. Incentivizing commissions for sales reps along these lines will result in the desired outcomes for your company.
Riva Jeane May Caburog, PR/Media Coordinator at Nadrich & Cohen personal injury law firm, pitches in with her advice:
Optimize sales commissions by tailoring flexible structures to diverse team roles. You can achieve this by customizing commissions based on sales cycle length, product types, or even target markets.
“For example, roles focused on acquiring new business could benefit from higher variable commissions, while account management roles could thrive on structures emphasizing customer retention and upselling.”
Does the plan align with your company’s budget and sales goals?
Whether your goal is to expand one wing of the company, grow your market share or tighten your margin, your sales commission structure should support it.
Teams can either use cascading goals, where sales derive their goals directly from the company’s strategic plan or objective key results, where each department creates goals that support the plan, even if they don’t directly tie in.
Bert Hofhuis, the founder of Every Investor, a London-based later-life finance company, says:
[…] it’s important to consider factors like the complexity of financial products and the length of the sales cycle. Effective implementation involves ensuring transparency and fairness in how commissions are earned and calculated.
“Regular evaluation and adjustment of these structures are crucial to keep them in line with market trends and organizational objectives.”
What is the right balance between base salaries and commission structures for your sales reps?
Consider the stability of your company’s finances and the level of risk your sales team members are willing to take. While a larger commission rate could mean increased earning potential for strong performers, a higher base income offers more security.
Are you paying your reps fairly and preventing turnover?
If sales turnover is a big concern, it’s time to reevaluate compensation. Does your staff feel adequately compensated and appreciated for their work? Are their goals attainable? Is it overly complicated? Is it in line with the rest of the industry?
If you’re losing staff to competitors, it might be a payment issue. Keep your ear to the ground to ensure equity.
Does your plan account for high and low performers?
Creating a plan only one or two staff members can achieve is a mistake. Design your plans to ensure you still have enough revenue if a high performer leaves.
While you should push lower performers, you don’t want to discourage and demoralize them. There must be worthy rewards for the best of the best so your top talent doesn’t get poached.
How competitive is your sales commission structure compared to others in your industry?
Research industry benchmarks and competitor compensation packages to ensure your commission structure is competitive, attracting and retaining top talent.
How do you choose the best structure for your sales staff?
There are a few necessary steps for discovering the best type of plan:
- Is your company a startup or well-established? Zendesk’s quiz helps you decide on a plan based on your organizational stage.
- What behavior are you looking to encourage? Are you more interested in expanding territory or landing big accounts? Are you looking to control expenses or create more collaboration?
- Take stock of the current data. Identify metrics, benchmarks and areas of improvement.
- Track the same measures to see what’s working and what’s not. Combine goals that target productivity and in-house objectives with broader business goals.
- Make sure the plan is consistent with the industry. You don’t want to shortchange your staff or choose something entirely off base.
- Keep current on the information. What are the HR trends? What metrics are making the most difference for the big players? Keep updating the plan semi-regularly to adapt to sudden shifts.
- Consult your sales team. Your best brain power comes from the people out in the field every day. You never know whose diverse background can come into play.
Everything works best when everyone is on board and happy with their compensation. What better way to get them excited than letting them help design it?
Compare Top Sales Commission Software Leaders
Next Steps
When looking for a sales commission structure to take your team to the next level, pick a plan to motivate your staff.
Once you figure that out, you’ll be able to decide if a base salary plus commission, tiered commission, residual payments or another plan is best.
With the right software and an airtight plan, you can create an optimized, exciting team that’s ready to take on the world.
Download our free Sales Commission Software Checklist for an all-around list of modules that help you manage incentives, test structures, prepare disbursal reports and more.
What’s the most effective commission structure for sales reps you’ve used? Have you used sales commission software to execute it? Leave us a comment below!
SME Contributors
Mark McShane is the CHRO and Managing Director of AED Training, a leading provider of AED training courses. He has headed multiple businesses in the heating, training, first aid, solar, renewables and digital PR niches. He is experienced in running multi-million-pound operations.
Riva Jeane May Caburog is the PR/Media Coordinator at Nadrich & Cohen personal injury law firm. She works closely with HR and extensively leverages sales-related software to complete her tasks.
Bert Hofhuis is the founder of Every Investor, a London-based firm committed to enhancing financial literacy and independence among the UK’s older population. His mission is to simplify and clarify personal finance information, particularly in the context of later-life planning.