How to create a sales commission plan

Sales commission structures can be a real headache. It's like throwing money out the window and watching your best talent walk away. Picture this: your sales team works hard to close deals, but when it comes to getting paid, it's a chaotic mess. 

Late payments, incorrect calculations, and endless confusion; It's enough to make anyone want to throw in the towel and run for the hills.

An organized sales commission structure bridges the gap between employee motivation and company profitability by creating a transparent, fair, motivating system. This setup ensures your sales reps get paid right and on time for their hard work.

This article covers different types of sales commission structures and highlights how to create a payout plan.

What is a sales commission structure?

A sales commission structure outlines how much and when a business pays its sales team.  Some companies offer a flat rate per sale, while others use a percentage of the sale price. 

Think of it as a reward system—the more sales you make, the more you earn. It motivates sellers to pursue more lucrative deals or upsell to customers. This financial reward encourages a proactive and results-oriented approach in the sales team.

Why is an effective sales commission structure important?

Sales commission structures incentivize employees by directly linking their total compensation to their performance, encouraging them to acquire new clients and upsell to existing customers. This system motivates salespeople to achieve higher commissions and aligns their interests with the company's growth objectives.

Here's a note: 51% of sales leaders changed jobs in the previous two years. High turnover translates to lost opportunities, reduced productivity, and increased hiring costs.

Let's look at the flipside now. A research paper, "The Impact of Compensation Structure on Salesperson Perceptions and Behaviors: Insights From the Sales Literature," shows salaried salespeople often feel more satisfied and loyal to their employers than those on pure commission. 

This means a salary-based system might lead to less turnover, saving on recruitment and training.

Plus, a more experienced team will likely be more skilled and customer-focused. How? They'll be better at building relationships and understanding clients' needs. This, in turn, leads to more sales and customer retention.

8 types of sales commission structures and templates

You need a structure that suits your business and motivates your team. Here are eight common types of sales commission structures with templates for guidance. 

1. Straight commission

100% commission, also known as straight commission, is a sales compensation structure where salespeople earn money solely from the commissions on their sales. This means no base salary—your earnings depend entirely on your performance.

This commission-only comp plan is common in industries with high-value products or services, like real estate, car sales, or high-end retail.

The pros are clear for businesses: it's cost-effective, as they pay only for results (and no taxes or benefits). It encourages a highly motivated sales force, as earnings are tied directly to performance. But, it can also lead to high turnover if salespeople don't succeed.

Salespeople have unlimited earning potential and flexibility. If you're good at your work, you can earn significantly more than a fixed salary. But no sales mean no income, which can lead to financial instability, especially in slow periods.

100% commission is high-risk, high-reward—for both the business and the salesperson. It's best for industries where sales skills directly translate to high earnings and for individuals who thrive in a performance-driven environment.

Calculation Template: The commission rate is [X%] of the total sale value.

2. Base salary and commission

Base salary plus commission is a popular sales commission structure where you, as a salesperson, get a guaranteed base salary plus an additional commission. This commission is typically a percentage of the sales you make. 

It gives salespeople a safety net with the chance to earn more based on their performance.

This structure is great for businesses that want to provide financial stability to their sales team but also motivate them to close more deals. It's best for industries with longer sales cycles, like in real estate or car sales.

Here’s why it works: the structure encourages salespeople to push harder, knowing they'll earn more for each sale. It also reduces the risk of paying high salaries when sales are low. 

But, managing the pay structure and ensuring fairness can be tricky. Some salespeople may become too comfortable with their base salary and not push themselves to earn more, even if the base is rarely high enough to be a long-term solution.

Calculation template: The base salary is [X], and the commission rate is [Y%].

3. Tiered commission

The tiered commission is where the commission rate increases as the salesperson achieves higher sales targets. This structure motivates salespeople to exceed targets. 

The structure is great for businesses that want to promote high sales volumes, especially in industries with shorter sales cycles like retail or e-commerce. 

Greater competition drives teams to work harder and earn more. This structure also allows companies to adjust commission rates based on market conditions or product demand. But it also creates uneven earnings among salespeople. Those already good at selling may get higher rewards, which can lead to disparities and potentially harm team cohesion. 

Although this structure encourages sales, it leads to a focus on quantity over quality. A salesperson may focus on more sales without considering customer needs or long-term relationships, which isn't sustainable.

Calculation Template: The base salary is [X], and the commission rate tiers are as follows:

• Tier 1: Sales up to $10,000 at Y%

• Tier 2: Sales between $10,001 - $20,000 at Z%

• Tier 3: Sales between $20,001 - $30,000 at A%

• Tier 4: Sales above $30,000 at B%

4. Gross-margin commission

A salesperson's commission is based on the gross margin of the products they sell rather than just the total sales amount. This means the commission is calculated based on the profit made on each sale, which is the sales price minus the cost of goods sold.

In industries where profit margins vary significantly among products like retail or wholesale, gross-margin commission structures are ideal. It's also a good fit for companies at a mature business stage, where maximizing profitability is more important than quickly increasing sales volume. 

It boosts the bottom line and improves strategic selling. For salespeople, the potential for higher earnings is a clear advantage, especially if they're skilled at selling high-margin items. 

But there are also cons. Salespeople might overlook lower-margin products and might also have a hard time understanding the model's cost structures.

Calculation Template

• Base salary: [X]

Commission rate tiers based on gross margin:

• Tier 1: Sales up to $10,000 at Y%

• Tier 2: Sales between $10,001 - $20,000 at Z%

• Tier 3: Sales between $20,001 - $30,000 at A%

• Tier 4: Sales above $30,000 at B% 

5. Revenue commission

Revenue commission is a straightforward commission structure where salespeople earn a commission percentage of their revenue. It's great for businesses where sales directly impact revenue, like retail or B2B. A commission structure like this is ideal for products or services with clear, fixed prices. 

Businesses love it because sales efforts align with revenue goals, and budgeting is easy, but it might not incentivize upselling or selling more complex products. 

For salespeople, the simplicity is a big plus—you know exactly what you're earning per sale. The model may work for simple sales, but it won't motivate complex sales requiring long-term relationships since it doesn't account for the effort.

Calculation Template:

• Commission rate: [X%] of the total revenue generated.

• Base salary: [X]

6. Relative commission plan

A relative commission plan is a hybrid of quota-based and revenue-commission structures. In this model, salespeople’s sales quotas and commission caps are set, but their earnings fluctuate based on how much they achieve.

For example, if they hit 80% of their sales target, they only receive 80% of their base salary plus the commission earned at that level.

Commission structures like these are a good fit for companies with fluctuating sales targets or industries with longer sales cycles, like B2B or enterprise sales. It's also great for businesses with multiple sales products or services, as it incentivizes selling a variety of offerings.

Here’s the problem: the structure may not work well if the base salary is too low, as the salesperson may not earn enough to cover living expenses during slower sales periods. Also, if commission caps are too low, top-performing salespeople may feel limited in their earnings .

Calculation Template:

• Commission rate: [X%] of the total revenue generated.

• Base salary: [X]

• Quota: [$X] or [X%] of total revenue

• Commission cap: [$X] or [X%] of total revenue

7. Absolute commission plan

An absolute commission plan rewards sales reps for all their sales activities, not just closed deals. This can include tasks like booking meetings or product demos and generating leads.

It's a holistic approach that focuses on all aspects of the sales funnel and encourages reps to continuously work towards achieving their targets by providing a balanced mix of rewards and incentives. 

Here’s the downside: since the commission is based on activities rather than revenue generated, there may not be a direct correlation between sales performance and earnings. Salespeople may also feel pressure to inflate their numbers to earn more commission, leading to unethical behavior.

Calculation Template:

• Commission rate: [$X] for each completed task or [X%] of total revenue generated from all sales activities

• Base salary: [$X]

8. Territory volume commission plan

The territory volume commission plan is a unique sales strategy where sales reps are rewarded based on the total sales volume within their assigned territory. 

It's not just about individual sales—it's about the collective performance of a specific geographic area or market segment. 

This plan is ideal for businesses with a clear territorial division of sales areas, especially those in pharmaceuticals, consumer goods, or technology industries.

Calculation Template

• Commission rate: [$X] for every [X%] increase in total sales volume within the assigned territory

• Base salary: [$X]

How to create a sales commission plan

Sales compensation plans depend on many factors, including your business goals, team structure, and your budget. 

There’s no one-size-fits-all approach to this. What might work for one organization might not suit another. A combination of several sales commission plans might even work for you.

When creating a sales commission plan, consider these:

1. Align your company’s sales goals

Think of it this way: your commission plan is a roadmap guiding your sales team members to your business's destination – higher sales and growth. 

Work out the details to make your commission structure. For example, if you’re expanding into new territories, consider the potential of those territories or how established your competitor is in that region versus your product/service capabilities. 

A subpar territory might not yield as many commissions as a thriving one. In the same way, a salesperson hitting quotas but earning decent commissions would not be happy if their colleague earned outsized pay just because their territory was good.

To get this alignment right, ask yourself these questions:

• What are our primary sales objectives? (Increasing overall sales, breaking into new markets, upselling to existing customers, etc.)

• How do we define and measure sales success? (Number of new clients, revenue growth, customer retention rates, etc.)

• What behaviors do we want to encourage in our sales team? (Building relationships, focusing on high-value clients, etc.)

• How frequently should we review and adjust our sales goals and commission structure? (Quarterly, annually, etc.)

• How long are the sales cycles in our industry? (Short-term, long-term, etc.)

Get an overview of your company's sales goals and objectives before creating a commission plan to align it with your business direction.

2. Divide the different roles in the sales team into buckets

There are different sales commission plans for different roles. For example, a regional manager's sales commission plan would differ from one for an account manager. 

To set the right sales commission plan for each role: 

• Chart down the different roles in your sales team and identify the responsibilities of each role. Divide the roles into three buckets—entry, mid-experience, and senior.

• Spend time understanding their responsibilities. For example, Account executives have a higher responsibility for closing deals than sales development representatives (SDRs).

• Assess each bucket's impact on the sales process. People in different roles might have different responsibilities and work towards a common goal, so it's important to understand how their contributions align with your overall sales objectives.

• Set achievable yet challenging goals for each bucket based on their impact on the sales process.

Longanecker also recommends, “When creating or updating your commission model, it’s important to engage the sales team and get alignment on what is going to change. You don’t need to make everyone happy, but you should at least involve everyone on the sales team to make sure they’re heard. Don’t be afraid to make adjustments if things aren’t working.”

3. Align with the industry

Check in with what your industry is paying in commissions so you don’t under or over-pay commissions.

According to Mailshake, the latest sales commission averages for industries are:

• Advertising: $31,373 (32%)

• Financial sales: $108,406 (32%)

• Insurance sales: $101,889 (33%)

• Real estate: $136,086 (28%) 

• Retail sales: $70,116 (36%)

The average sales-to-commission ratio also varies per industry. Depending on the market, some sectors, like independent contractors, may take an aggressive approach based on a 100% commission pay structure and no base salary. 

On the flip side, industries that focus on customer education, like pharmaceuticals, observe a 75:25 salary-to-commission ratio.

Identify the base pay for each role based on your company goals and recurring revenue. From there, map the cap on the commission you are willing to pay.

4. Identify on-target earnings

To arrive at a sales commission plan, you need to know how much you can afford to pay a salesperson or account executive. In other words, set an OTE. 

On-target earnings (OTE), is the total commission a salesperson would receive on attaining their sales target. OTE consists of base pay, a fixed amount, and the sales commission, which is variable based on the sales performance. On Target Earnings (OTE) = Base Pay + Sales Commission for 100% of sales quota

For example, if the base pay is $30,000, and the maximum sales commission is $10,000, the on-target earning would be $40,000.

This means, the salesperson would receive a fixed amount of $30,000 irrespective of the sales, and an additional up to $10,000 if they’ve reached the sales targets.

Base pay = $30,000

Sales commission = $10,000

On Target Earnings = Base pay + Commission = $40,000

Make sure your OTE matches the industry's base pay and commission standards. For example, the OTE for an SDR in the SaaS industry from San Francisco is typically between $50,000 and $80,000 per year.

5. Decide the KPIs for your sales team

Aidan Snee, the founder and CEO of Inside Sales Solutions, explains, “work out what you can afford and hope that the figure is more than you need to motivate them. Then choose which performance metrics you need to base the incentives on.”

Consider what motivates everyone on the team, from the top performers to the low performers.

For example, research highlights:

• Overachievement commissions motivate top performers

• Quarterly bonuses encourage low-performers

Snee also goes on to warn, “Be very careful to dig into each possible scenario — you need to ensure you’ll still be happy if they over-deliver on the performance metrics you've incentivized and come up short in other areas.” 

The LC Firm’s Greg Livengood shares how to align a sales commission plan with the KPIs for an account manager:

Option 1: MBO-based plan

Sales commission structure: “Do not offer a variable compensation plan and instead provide a healthy salary and include an MBO based on a KPI such as a TPS survey making sure the assigned accounts feel well served.”

KPIs set: “Allow the Account Manager to focus on addressing customer issues and ensuring the customer renews their business.”

Option 2: 30%+ Incentive for Upsell

Sales commission structure: “If you do decide to pay based on a variable plan, I recommend setting the variable pay to 30% or more compared to base pay for the plan to be able to motivate the account manager as well as justify the administrative effort.” 

KPIs set: “A typical measure is based on upsell amount. I typically hesitate to include a renewal measure in the plan since securing renewals should be a core part of the job (see Option 1 if renewals seem to be the main responsibility).”

Sales commission plan examples

Example SDR sales commission plan 

Let’s consider the role of an SDR in the SaaS industry. An SDR’s primary job involves outbound sales prospecting — cold calling, cold emails, following up with prospects, etc. Utilizing a SaaS based CRM can streamline these tasks, making it easier to track and manage outreach efforts. Then, pass those leads to the account executive to close the deal. At the end of the day, the expectation is to bring in new opportunities for the business.

Commission plan example: 

• Responsibility: Sales Approved Leads (SALs)

• KPIs/Goals: Number of SALs

• On-Target Earning: $65,000 per year [70:30 = $45,500: $19,500 ]

• Sales Target: 10 SALs per month

When we take the base salary and commission ratio as 70:30, the SDR would roughly earn $3800 of base salary every month, with the remaining $1600 as variable pay. 

Scenario 1: The SDR wins 10 monthly SALs, attaining 100% of their sales target.

Monthly SAL Target = 10

Actual SALs generated = 10

SAL Attainment % = 100% * (SAL Attainment)

= 100% * (10/10)

= 100%

Final Variable Pay = 100% of $1,600 = $1600

Scenario 2: The SDR under-achieves. The variable pay decreases depending on the percentage of attainment. 

Monthly SAL Target = 10

Actual SALs generated = 8

SAL Attainment % = 100% * (SAL Attainment)

= 100% * (8/10)

= 80%

Final Variable Pay = 80% of $1,600 = $1280

Scenario 3: The SDR over-achieves. The variable pay increases depending on the percentage of attainment. 

Monthly SAL Target = 10

Actual SALs generated = 12

SAL Attainment % = 120% * (SAL Attainment)

= 100% * (12/10)

= 120%

Final Variable Pay = 120% of $1,600 = $1920

Note: You can cap the attainment percentages to limit the maximum commission you can provide. 

You can also add more layers on top of this basic commission plan. For example, you could combine this structure ( base + commission ) with the tiered commission structure. Or, you can introduce quantitative elements such as average deal size, pipeline contribution, etc. 

Let’s take another example: 

• Responsibility: New opportunities for the business

• KPIs/Goals: Number of SALs, pipeline contribution

• Sales Target: 8 SALs per month, $8,000 pipeline generation

Depending on your business, you can assign weightage for the KPIs. In this case, let’s consider a weightage of 70:30 between SALs and pipeline generation.

Example Scenario 4: 

Monthly SAL target = 8

Monthly pipeline target = $8,000

Actual SALs generated = 10

Actual pipeline generated = $10,000

SAL Attainment % = 70% * (SAL Attainment)

= 70% * (10/8)

= 87.5%

Pipeline attainment % = 30% * (pipeline actual / pipeline target)

= 30% * (10,000/8,000)

=37.5%

Total attainment % = 87.5% + 37.5% = 125%

Final Variable Pay = 125% of $1,600 = $2000

Example AE sales commission plan 

The role of an AE in the SaaS industry is more evolved than an SDR. In addition to finding new opportunities, an AE must close the deals brought in by the SDRs. So, besides the commission plan discussed above, you could include additional incentives.

For example, you could provide commissions for closing multi-term contracts, on-site implementation, or cross-selling another product.  

Commission plan example: 

• Responsibility: Revenue contribution.

• KPIs/Goals: Revenue attainment

• On-Target Earning: $90,000 per year [70:30 = $63,000 : $27,000 ]

• Sales Target: $15K MRR

When we take the base salary and commission ratio as 70:30, the AE would roughly earn $5,200 of base salary every month, with the remaining $2,250 as variable pay. 

Scenario 5:

Monthly Target = $15,000 MRR

Actual attainment = $11,000 MRR

Implementation commission = 10%

Attainment % = 100% * (monthly target/actual attainment)

= 100% * (11000/15000)

= 73.33%

Final commissions = 73.33% + 10% = 83.33%

Final Variable Pay = 83.33% of $2,250 = $1874

Note: You could also include a cap on the times you provide additional incentives during a particular period.

Understanding the scenarios and nuances of sales commission structures is essential for businesses aiming to optimize their sales team’s performance and incentivize success. From flat-rate models to tiered or hybrid models — each commission structure has its merits and considerations. 

As organizations navigate the complexities of choosing the right commission structure, the importance of also having the right supporting tech stack cannot be overstated. A robust CRM solution acts as the linchpin, providing comprehensive management and insight into employee performance and customer relationships.

Learn how you can effectively drive productivity and revenue growth with a comprehensive, AI-powered solution like Freshsales today.