If your sales organization is struggling to strike a balance between company requirements and the compensation needs of employees, it's likely time to reevaluate your compensation plan and commission structure.
As a salesperson, it's valuable to know what types of commission plans are available and what salary and commission rates you should look for from an employer.
Luckily, I've compiled some resources for you to figure out the best sales commission structure for your sales team or yourself. Ready to learn more?
Keep reading or click one of the links below to jump to the section you’re looking for:
- What is a sales commission?
- Sales Commission Structure
- How to Put a Sales Commission Structure in Place
- Sales Commission Rates
- Sales Commission Structures with Examples
- Average Sales Commission Rates by Industry
- What is a sales commission agreement?
- Sales Commission Agreement Templates
What is a sales commission?
Sales commission is a key aspect of sales compensation. It's the amount of money a salesperson earns based on the number of sales they have made. This is additional money that often complements a standard salary.
Why is sales commission important?
Sales commission is standard in many sales roles. It's used to motivate, drive sales, and reward sales teams for strong performance.
Commissions can also influence sales team strategies. For example, if certain products offer a higher commission, a salesperson might choose to focus on those products exclusively.
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Sales Commission Structure
A sales commission structure outlines how much an organization will pay its salespeople for each individual sale. When planning a commission structure, sales leaders should consider factors like how much of their budget they can allocate for commission, how much they’ll pay for different levels of sales output, employees’ base salaries, and any potential bonuses or incentives they’re willing to include.
How to Put a Sales Commission Structure in Place
1. Review annual sales goals.
Sales goals are the benchmarks for your department, so they're the best place to start as you create a commission plan. These goals show the sales team where the business wants to go and how they can help get it there.
They also give you a clear picture of how much revenue your team generates, gaps in the pipeline, and areas where your team can do better. As you make key decisions about commission, you can use these goals as a foundation.
For example, say your annual sales goals include boosting sales of a new service by 15% and retaining 30% of your current customers. You may want to set up a residual commission plan for your team members who work with current customers or an absolute commission plan to drive new service sales.
2. Evaluate each sales role for commission.
Each salesperson is unique. The longer they're with your company, the more personalized their role will become. Many organizations also have a diverse range of products, channels, and locations, and that can also impact sales positions.
To draft your commission plan, take a look at each role. Dig into the way your team sources leads and closes sales. Then, take a look at recent performance feedback. This can help you focus your plan on areas where a commission plan can be most influential.
3. Review budget and revenue goals.
Your sales budget drives most of your strategies, and that should include your commission plan. Before you promise your team compensation that you can't deliver, spend some time with the budget. Then, look at how you can measurably impact revenue goals with a lift from your sales reps.
4. Check KPIs for each sales position.
Sales goals are another team motivator. They also help your sales reps measure their performance. If your reps only see their metrics during monthly meetings, you might want to get them more engaged with their numbers.
This tool can simplify the process of calculating essential KPIs like deal size and win rate, as well as commission rates:
Featured tool: Sales metrics calculator
As you create your commission plan, look at the numbers for each team member and role. And don't just look at individual performance, look at overlaps in territory, schedule, product choices, and more. This overview can help you see patterns in your current sales performance. Then, you can use this knowledge to reward your team in the most effective way.
5. Develop an initial commission plan.
Once you've gathered your research and drafted your initial ideas, it's time to put together your plan.
A sales commission plan has to balance employee and stakeholder needs and expectations, strategic goals, and more. You want a plan that's flexible because sales goals are often a moving target. But your plan also needs to be simple and easy to understand.
So, don't expect your first draft to be perfect, and give yourself enough time to step away and think about each decision before you commit to it.
6. Review your sales commission proposal with stakeholders.
If your business doesn't already have a commission structure in place, it can be a big financial and cultural shift. Your plan will have more value to your business if it has the full support of key stakeholders. Ideally, the full company will see the value of this approach.
So, spend some time on the presentation of your plan. You'll need to present your plan in a way that's clear to a range of people with different loyalties and opinions. You may want to add data, quotes, and images to support your ideas. This can help other stakeholders see where you're coming from and offer more constructive insights.
It's also important to stay open to suggestions. There's a good chance you'll hear feedback you may not like or expect, and you might need to revisit your plan many times before it's ready to launch.
7. Decide on timing.
There are two crucial elements of timing for sales commissions.
First, the initial commission launch. Do you need it to align with your company's fiscal year or can you start right away? Are there any major company benchmarks or holidays approaching? These factors and more can impact when you decide to share your sales commission plan.
Next is when your sales team will start to see commissions in their paychecks. For some businesses, the commission period matches the pay period. But others award reps for the prior period or create a custom schedule based on details in the commission agreement.
You may want to work with your finance team to set a schedule that's easy for everyone to understand and stick with.
8. Start offering sales commissions to your team.
Some companies and relationships are more casual than others. So, it can be tempting to start sharing sales commission details one-on-one once your plan is ready.
But according to 2022 SHRM research, only 61% of employees feel that their compensation is fair for their role. This makes transparency in compensation more important than ever.
So, carefully plan how you want to share your commission plan. You may be able to tweak your initial stakeholder presentation, because data, quotes, and images will be important to your audience. Present the points of the plan clearly and include every relevant detail. Either way, it's important to:
- Anticipate questions
- Be consistent
- Think about the details before you start having conversations
This is an exciting step for your team, and the more prepared you are, the more useful your commission plan can be.
Sales Commission Tips
In his book, "The High-Velocity Sales Organization", sales strategist Marc Wayshak discusses how important compensation and commission are to your sales infrastructure. He offers three tips to keep in mind when creating a commission structure: Don't cap salaries, do it right the first time, and keep it simple.
Let's review his tips and a few more essentials below.
1. Don't cap salaries.
Salary caps are the highest salaries an employee can make in their role at your company. Capping salaries decreases the earning potential of your salespeople. Sales management should be supportive of their team and want individuals to make as much as possible in return for their hard work.
2. Do it right the first time.
In sales compensation, there isn't room for do-overs. Each time you introduce a new compensation plan, it moves your sales team's goals and targets. This diminishes your reps' morale and motivation.
3. Keep it simple.
Make your compensation and commission plan clear. The simpler your plan is, the easier it will be to follow. Not only will this make the commission structure easier to implement, but it will also ensure there aren't any loopholes in the plan. A salesperson should be able to fill in the blanks: If I do X, then I will make $Y.
4. Focus on the right products.
If you're creating a product-based sales commission plan, choose your products carefully. While it can be beneficial for sales reps to focus on the products they like best, commission-based sales can also impact:
- Supply chains
- Profit margins
- Sales turnover
5. Connect commissions to business goals.
Sales goals have a direct impact on business strategy. There are many people involved in these processes. This can create a situation where different teams have divergent priorities. Using financial goals as a starting point for sales commission structure can help your team focus on the right priorities.
6. Keep employees in mind when adjusting quotas and territories.
Sales quotas let sales reps know what they are accountable for. Territories help simplify complex markets. These valuable approaches can also mean that each sales rep has unique challenges that impact their ability to close. An effective sales commission plan will take those differences into account.
7. Use data when making decisions.
Sales metrics and other data can help you make sure that your commission plan is in line with historic performance. If you want to do it right the first time, data is essential to the planning process.
Data can also track how your commission plan is motivating your team over time. This lets you shift strategies as needed to maximize growth.
Sales Commission Rates
Sales commission rates are the percentage of profit or other compensation that sales reps get for meeting goals. Goals might include making a sale, meeting a quota, or succeeding as a team.
What is a fair commission rate for sales?
The concept of a 'fair commission rate for sales' is fluid and tends to vary by industry and role. A sales commission rate can reflect factors like the value of products or services sold, employee involvement in the sales process, or the size of an employee’s sales territory.
There’s no exact science to pinning that figure down, but referencing average commission rates for your industry can be a solid starting point.
Sales Commission Structures with Examples
- Base Salary Plus Commission
- Straight Commission Plan
- Relative Commission Plan
- Absolute Commission Plan
- Straight-Line Commission Plan
- Tiered Commission Plan
- Territory Volume Commission Plan
- Recoverable Draw Against Commission Plan
- Non-Recoverable Draw Against Commission Plan
- Residual Commission
So, what commission structure should you choose? Well, there are a few to pick from. Common structures include:
1. Base Salary Plus Commission
The base salary plus commission plan might be the most conventional commission structure. With this plan, salespeople get a base salary with commission. The standard salary to commission ratio is 60:40, with 60% fixed and 40% variable.
When to Use It
This structure is ideal for companies where sales rep retention is critical to the success of the sales organization. The company is actively investing in the success of a given rep while encouraging their performance.
Sales Commission Rates Example: Base Salary Plus Commission
With a base salary plus commission plan, a salesperson working for a high-end retail outlet might be working for $25 per hour plus an additional 5% of any sales they make.
This combination of security and rewards often gives sales reps motivation to grow in their roles.
2. Straight Commission Plan
With this plan, sales reps' income comes directly from the sales they earn — there is no base salary.
When to Use It
This structure is usually leveraged by startups or other businesses that might lack reliable access to capital. In a lot of ways, it amounts to a pay-as-you-go plan. This often suits businesses that don't have the resources to provide competitive base salaries.
Sales Commission Rates Example: Straight Commission
With a straight commission plan, a sales rep at a B2B SaaS startup might make a 12% commission for every sale they make. If they land a deal worth $10,000, they would make $1,200 on the sale — but they wouldn't receive any base compensation beyond that.
High-performing sales reps typically thrive in environments set by this plan, but the structure doesn't lend itself to stability.
3. Relative Commission Plan
With a relative commission plan, a rep's commission is directly proportional to how much of a set quota they hit. That compensation comes on top of a base salary, so it gives reps more of a safety net than a straight commission plan.
When to Use It
This plan is essentially the more secure answer to a straight commission plan. It's still directly tied to performance, but it doesn't alienate reps that might be running into trouble — leading to less turnover.
Sales Commission Rates Example: Relative Commission
If a salesperson was being paid according to a relative commission plan, they might have a quarterly quota of $90,000 and a quarterly commission of $10,000. If they meet 85% of the quota, they'll receive 85% of the commission — or $8,500.
This commission structure is great for more complex organizations. It offers an opportunity to reward every rep, even if their pipelines look wildly different.
For example, some territories will pull in more sales than others. You can adjust the quota by territory, and align the commission with that territory. This way your commission structure rewards reps for putting in equal effort.
This structure can also flex with changing business goals while remaining relatively stable for sales employees.
4. Absolute Commission Plan
An absolute commission plan pays reps for hitting set goals and performing specific activities, like acquiring new customers.
Like the relative commission plan, an absolute commission structure can help incentivize underperformers. That said, the emphasis is less on revenue and more on activity.
When to Use It
This strategy is most often employed to help direct sales reps' focus. If a business needs to improve its numbers for a specific activity, it might use an absolute commission plan that revolves around it.
Sales Commission Rates Example: Absolute Commission
A salesperson working with an absolute commission plan might receive a flat $500 commission for every new customer they acquire — regardless of deal size.
This structure is easy for sales reps to understand and deliver on. The more intuitive your commission plan is, the more likely it is to motivate your team to perform.
5. Straight-Line Commission Plan
A straight-line commission plan rewards salespeople based on how much or little they sell. As the name implies, it's rooted in a straight correlation — a trend that typically holds true even after reps meet their quota. It's one of the better ways businesses can encourage underperformers to meet quota. At the same time, it doesn't slow overperformers down.
When to Use It
A straight-line commission plan works best for organizations that want to incentivize reps to reach their full potential.
Sales Commission Rates Example: Straight-Line Commission Plan
Like a sales rep working within a relative commission plan, a salesperson working within a straight-line commission plan would receive compensation proportional to how much of their quota they hit.
The difference is that commission earnings would keep coming even after they meet their quota. So, if a rep has a quarterly commission of $10,000 and exceeds quota by 10%, they would receive $11,000 in commission.
To make the most of this plan, businesses need to have the resources necessary for an uncapped commission structure.
6. Tiered Commission Plan
A tiered structure encourages reps to put in extra effort by providing higher commissions as they hit substantial sales milestones. Here, reps could be paid increasing commissions as they meet their quota, exceed their quota, and continue to close more deals than they’re expected to.
When to Use It
A tiered commission plan is ideal for organizations with salespeople who consistently reach (but don’t exceed) their goals. It also offers a little more control on commission rates than the straight-line commission plan.
Sales Commission Rates Example: Tiered Commission
With a tiered commission plan, a rep might receive:
- 5% commission on all sales up to $50,000
- 7% on sales between $50,000 and $100,000
- 10% on sales $100,000 and above
Tiered commission structures need careful alignment between different parts of the business. For example, say a specific product or type of client brings in higher-value deals. In this situation, other teams must be ready to meet potential increased demand in those areas.
7. Territory Volume Commission Plan
With this commission structure, salespeople work with clients in clearly defined regions. Then the team operating in each specific territory gets paid on a territory-wide, team-oriented basis versus one revolving around individual sales.
When to Use It
A territory volume commission plan suits businesses that have presences in multiple territories. It's ideal for team-based organizations who are wanting to fortify specific service areas.
Sales Commission Rates Example: Territory Volume Commission
If a team of five manages to generate $750,000 in sales within their territory at 10% commission, they would split it and receive $15,000 each.
This sales commission plan relies on teamwork and shared responsibility for relationship maintenance. If your team has a long purchase cycle with many touchpoints to close a transaction this strategy could be a good fit.
8. Recoverable Draw Against Commission Plan
With a recoverable draw against commission plan, a sales rep receives their commission in advance. It usually comes out at the beginning of a pay or sales period in the form of a predetermined lump sum. At the end of that sales period, that lump sum or "draw" comes out of that rep's total earned commissions.
When to Use It
A recoverable draw against commission plan is typically used to get reps off the ground in some capacity. It often compensates newly hired, ramping reps as they onboard. It could also be a good choice for a rep getting acclimated to a new territory.
Sales Commission Rates Example: Recoverable Draw Against Commission
With this commission plan, a sales rep might receive a draw of $5,000 at the beginning of a given month. If they only reach 90% of their quota, they'd pay $500 of that $5,000 back to their employer.
This strategy guarantees some income to sales reps as they ramp up in a new territory or role. At the same time, the recoverable aspect of this commission can be confusing.
For example, some employers might want to recover this draw right away or cap these payments. Others will wait a set period of time to collect. It's important to make decisions on recovery timing early on to maintain strong employee relationships.
9. Non-Recoverable Draw Against Commission Plan
A non-recoverable draw is more or less a fully guaranteed commission stipend. Like its recoverable counterpart, it starts with a firm giving its reps a predetermined lump sum. But with a non-recoverable plan, reps aren't expected to pay any of that money back.
When to Use It
This plan isn't particularly sustainable or motivating. It's typically used as a short-term measure during times of company, industry, or broader economic uncertainty to ensure that sales reps have a stable source of income.
Sales Commission Rates Example: Non-Recoverable Draw Against Commission
With a non-recoverable draw against commission plan, a sales rep's employer would give the rep $5,000, assuming they'll hit quota. If they don't, the employer can't recoup that draw.
This strategy can help a business maintain long-term beneficial relationships with employees during stressful times.
10. Residual Commission
A residual commission structure is based on the long-term value of individual accounts. With this structure, salespeople who close deals continue to receive commission from those accounts on an ongoing basis — so long as they continue to generate revenue. This particular structure can have higher stakes than most.
On one hand, salespeople can build a breadth of solid, productive income streams over time. On the other, losing an account — for reasons that might have nothing to do with the salesperson who landed it — can mean a sizable commission hit that might be hard to recover.
When to Use It
This structure is best for businesses that build long-term relationships with clients, like ad agencies or consulting firms.
Sales Commission Rates Example: Residual Commission
A sales rep who works within a residual commission plan might bring in a large account. If that account pays a recurring payment of $5,000 per month, a rep making 7% commission would earn $350 per month in residuals from that client.
This strategy is useful for both client and employee retention. It also incentivizes consistent follow-up, upselling, and cross-selling with current customers.
This ultimate guide to sales compensation provides even more detail on sales commission structures and compensation plans. And it will help you find which structure will work best for your company and sales team.
Average Sales Commission Rates by Industry
Averages for salary and commission allow sales leaders to see how their sales commission plan compares to the rest of their industry. It also lets salespeople see how their sales compensation plan stacks up.
The wages below are from the BLS Occupational Employment Statistics (OES) survey. These wages reflect the median average pay for each industry. The commission rate will depend on the company and the commission structure they choose.
Median pay: $62,890
These kinds of sales representatives sell goods for wholesalers or manufacturers to businesses, government agencies, and other organizations. Their job security and livelihood are often almost entirely intertwined with the volume of merchandise they can sell. Their commission structure tends to reflect that. These reps are often paid with absolute or base salary plus commission plans.
Median pay: $49,840
Insurance sales agents contact potential customers to sell different kinds of insurance. Agents spend time directly interfacing with clients, completing paperwork, and preparing presentations. They also fulfill other customer-facing and administrative responsibilities. Commission for this brand of sales is generally paid on a base salary plus commission basis. Commission percentages tend to vary by the type of insurance agents are selling.
Median pay: $52,340
Advertising sales agents sell advertising space to businesses and individuals. They often work across a variety of industries and media, including advertising agencies, radio, television, and Internet publishing. Advertising sales agents often have strict quotas and receive a commission for meeting or exceeding them.
Median pay: $48,770
Real estate brokers and sales agents help clients buy, sell, and rent properties. Every state requires real estate sales professionals to be licensed. That could mean completing courses or passing a state-specific exam. They’re often self-employed, so many have the flexibility to define their own commission structure.
Median pay: $93,260
Securities, commodities, and financial services agents buy and sell securities or commodities in investment and trading firms. They can also provide financial services to businesses and individuals. Some advise customers about stocks, bonds, mutual funds, commodities, and market conditions. These salespeople often charge flat-rate commissions either per share or per trade.
Median pay: $71,110
This category of sales encompasses salespeople in positions and industries in a wide variety of service-based businesses, including business support, technical consulting, electronics, telecommunications, computer systems and electronics, and software as a service. It excludes advertising, insurance, travel, and other categories. Given the wide range of industries and companies encompassed in this category, it can be hard to identify its most common commission structure.
Median pay: $34,970
Several different kinds of salespeople fall under this category, including professionals in telecommunications, residential building construction, and subscription programming. Like the previous one, the wide range of industries and companies encompassed in this category makes it hard to pin down a standard commission structure.
Median pay: $31,920
Retail sales refers to reps that sell merchandise (such as clothing, furniture, or appliances) in a retail brick-and-mortar environment. These environments include everything from general merchandise stores to dealers specializing in specific wares such as sporting goods or musical instruments.
Since success is often dependent on foot traffic rather than sales activity, retail salespersons are often compensated by a base salary only. However, retail environments with high-ticket items often pay flat commission rates.
Median pay: $38,840
This category of sales encompasses salespeople in positions and industries that don’t fall into any of the industries above. This can include roles at automobile dealerships, in non-depository credit intermediation, and with food and beverage retailers. The range of roles that fall into this category is broad, so the variety of the commission structures used tends to be as well.
Before agreeing to accept a sales job at a company, you should have a clear outline and understanding of its commission structure and compensation plan. The sales commission agreement should tell you everything you need to know about the commission and salary you're going to make.
What is a sales commission agreement?
A sales commission agreement is a document that includes the terms of a salesperson's employment. This document:
- Outlines their commission structure
- Details the nature of the employee-employer relationship
- Establishes a time frame for employment
- Specifies the employee's commission percentage
A sales commission agreement is prepared by an employer and agreed upon by a new employee — and both parties must have a thorough understanding of what's in it.
As we've touched on, a sales commission plan can take on a lot of forms — so new hires need to know exactly how they'll be compensated for their efforts. Beyond that, employers have to establish and document clear terms of employment to protect themselves from legal recourse if an employee has an issue with the commission structure they're working within.
In short, it allows both the salesperson and their employer to agree on compensation, commission, and job responsibilities. Here are the key elements to include in a sales commission agreement.
This section gives the okay for the salesperson to sell products or services on behalf of their employer. The employer often limits the selling by restricting the regions or territories in which the offerings are sold and prohibiting the rebranding and reselling of their products.
The salesperson must agree to use documentation and tools that are approved by the company to keep track of their sales activities. That might include resources like CRM databases, software, or forms.
3. Non-Compete Clause
A non-compete clause requires the salesperson to refrain from representing or selling on behalf of a competitor for a period of time after leaving their employer.
4. Non-Disclosure Clause
The non-disclosure clause ensures that the employee agrees to refrain from sharing confidential information or intellectual property.
5. Commission Structure
This is where you share the details of the commission structure. After reading this section, the employee and employer should have a clear understanding of:
- The compensation structure (such as commission, performance incentives, bonuses)
- When a commission is earned
- When commissions are paid
- Consequences of cancellations, refunds, or default of payments from customers
Both the salesperson and their employer agree to the details of the sales commission agreement by signing and dating the document.
For additional recommendations and insight, consult your legal team or seek out the advice of a lawyer to help you carefully craft your sales commission agreement.
Sales Commission Agreement Templates
If you need some help developing a sales commission agreement or strategic business plan, these templates are a great way to get started.
Edit and customize this sales commission agreement template to fit your needs. This template can be signed by your recipients, and you'll be able to track the document's opens and views.
This sales commission agreement template builder will help you outline the working relationship between employee and employer. It includes general information (like address and phone number), commission structure, documentation, and non-compete and non-disclosure clauses.
With this fill-in-the-blank sales commission agreement, you're able to quickly plug in the details for your document. And it includes a progress bar to show you how much more of the agreement needs to be completed.
Thoughtfully Plan Your Commission Structure for Long-Term Success
With a well-planned sales commission structure, you'll attract top employees and retain them. And clearly outlined compensation plans will make it easier for employees to understand expectations and earn their commission. This puts your business in a great position for future growth.
Editor's note: This post was originally published in January 2020 and has been updated for comprehensiveness.