Incentives play a crucial role in a sales organization’s success. Today, markets are transforming at record paces, and Forrester reports that 65% of leaders are facing more pressure than ever to hit increasing performance targets. Ensuring your compensation drives the right sales behaviors to reach your goals is essential—especially when change is happening so quickly. There are a multitude of ways you can make sure you hit your numbers, but one of the most tried-and-true is an effective sales commission structure.
What is a Sales Commission Structure?
Traditional sales commission plans are made up of two main parts: fixed base salary and variable compensation. Base salaries are designed to pay a fixed amount and are fairly straightforward. Sales commission structures, another key component in your incentive plan, determine how reps will be paid and indicate which behaviors salespeople will be rewarded for.
Using sales commissions as a part of your compensation plan allows for different configurations based on the given sales solution. Because of their variable nature, they can be a strong tool to motivate performance throughout your sales team.
To help you determine which is best for your company, we’re breaking down the most common sales commission structures and when you should use each.
Types of Sales Commission Structures
Revenue Commission Plans
One of the simplest and most commonly used sales commission structure is variable pay as a percentage of a single sale’s revenue. Here is an example at the most basic level. Imagine your company sells a certain product for $100,000 with a sales commission rate of 5 percent. For each one they sell, your reps would collect $5,000.
When to use this commission structure: Revenue commission plans work well for smaller sales teams and situations where the focus is on a singular product or service where pricing is fixed, but greatly influences the success of your business.
Gross Margin Commission Structures
Another simple sales commission structure is the gross margin plan. These commission models consider the profit of each transaction, including the price of sale and the costs associated with making that sale.
Here’s how that commission gets broken down. Let’s revisit our example from earlier: a company sells a product for $100,000, and imagine that there are $10,000 of associated expenses with that sale. The company would then see a $90,000 profit on that deal. At the 5% commission rate, a rep would earn $4,500, based on the $90,000 profit.
When to use gross margin plans: This sales commission structure can help ensure bottom-line profitability, while motivating reps. It is a good plan to use as you begin to grow your sales team and scale your business.
Tiered Commission Plans
Tiered commission plans are designed so that employees can earn greater commission rates as they surpass certain levels of revenues. For example, imagine a rep earns 5 percent on each product sold up to $100,000 in total sales. A tiered commission plan might increase that rate to 7 percent once the rep surpasses $100,000 in total sales. At $300,000, the commission rate may increase again as the rep hits additional sales thresholds.
This type of commission structure helps maintain motivation over a period of time and encourages reps to over-perform because their rewards increase the more they sell. High performing reps have additional motivation to continue selling and earn higher commission rates. Thus, sales reps are enticed branch out into areas and chase opportunities they might have otherwise overlooked.
When to use this commission structures: Tiered commission plans are a great next step in scaling your sales team and business. Because they are designed to promote over-performance, they can be extremely effective compensation models for driving revenue.
Draw Against Commission
Another simple sales commission structure is a draw against commission, which acts as a "guarantee," paid with every sales paycheck. The draw is usually a predetermined amount that functions similarly to a loan or cash advance, which depending on the incentive setup, reps may be required to payback.
For example, let’s say reps are guaranteed a $500 draw on day one. In that first month’s paycheck, they would receive $500. The following month, they earned $2,000 in commission. If the draw is recoverable, meaning it is required to be repaid, the rep’s commission payout would be adjusted to $1,500 to cover the draw.
When to use a draw against commission: This commission structure has two common use cases: 1) to help ramp a newly hired rep, and 2) during times of uncertainty. Draws can provide ramping reps additional income until they are able to work at full capacity, and when there are outside factors impacting business, such as economic disruption.
Multiplier Commission Structures
The multiplier commission plan allows companies to build custom-made compensation strategies, but it can be a tedious process to design and implement. The multiplier commission plan starts with the typical sales commission structure, but then it's multiplied by a percentage factor of quota achievement. Using multipliers can not only help reflect the sales cycle but also help motivate sales reps to over-perform.
When to use this commission plan: Multiplier plans are beneficial when sales leaders want to use multiple performance measures in a rep’s incentive plan. They help drive specific sales behaviors to prioritize the most important deals for reps to go after.
Straight Commission or Commission-Only Plans
Straight commission plans refer to paying reps on a commission-only model, with earnings made up entirely of variable pay (thus, there is no fixed salary component). Some argue that the straight commission plans aren't necessarily a specific sales compensation structure. However, it's important to address what it means to be commission-only.
Under a commission-only plan, sales reps are extremely motivated to close their deals, but on the other hand, their work also comes with more stress given the amount of risk involved, which can increase the chances of sales burnout.
When to use commission-only structures: Although it is not commonly used, there are certain situations where straight commission plans make the most sense, such as shorter sales cycles or when there is an opportunity for sizable commissions, etc.
How to Determine the Best Sales Commission Structure for Your Sales Organization
There are several ways to build out your sales commission structures, and like many planning tactics, there is not a one-size-fits-all solution. Consider the following questions when determining the best sales commission structures for your organization.
- What are our company’s goals and objectives?
- What is a realistic estimate of performance based on our sales resource capacity?
- How can we motivate each role successfully based on their different responsibilities?
- Are we driving the right behaviors with our incentives?
- Are our sales commission structures encouraging reps to perform beyond their quotas?
Answering these questions gives you the basis of information you need to develop your incentive plans. With this information in hand, you can better determine which structure best suits your team and will drive the best performance.
When it comes to determining the right commission rates, again, there isn’t one perfect amount. Finding the right rate to pay reps determines on your industry, a salesperson’s role, geographic locations, and more. Here are a couple of best practices that can help you find the right number:
- Benchmark against industry data: One of the top reasons sales reps leave a job is for a higher-paying opportunity. A database like Xactly’s 15+ years of sales performance insights allows you to benchmark incentives within different industries, compare them against your own, and determine the most successful strategy for your team.
- Tailor incentives to sales roles: Different roles have different responsibilities. You can’t expect managers and their reporting reps to achieve the same results because their jobs are different. The work that a business development rep does is different from that of an enterprise account executive or sales engineer. Their sales commission structures should reflect that. (Learn more about the best compensation plans for different roles here).
Improving Sales Compensation Planning & Performance
Finding the right sales commission structure is essential to drive top-tier performance. However, there is more to successful sales compensation than choosing the right sales commission structure. Companies should be continuously analyzing their incentives and optimizing their plans. And to survive in today’s turbulent markets, organizations need to be able to answer key questions like these:
- Do we have the best plan in place to achieve our goals?
- How can we build upon the success of past performance and incentives?
- Are there areas of weakness within our existing commission structures we can improve?
- Are we paying reps competitively compared to our industry competitors?
- If a top performer leaves, do we have the capacity to hit our goals still?
Gaining this level of visibility requires a digital transformation. It’s not something that organizations can afford to wait on. Forrester research shows that the most successful companies are able to pivot plans in the face of disruption. Currently, only 27% are able to do that successfully.
Sales Performance Management (SPM) helps companies turn their data into useful insights to inform strategic decision making and ensure they’re always on the best path to reach goals. It gives leaders confidence in their planning, deeper visibility into performance, and the ability to proactively adapt plans instead of scrambling to react when disruption hits.
Learn more about the importance of continuous planning and why Forrester Consulting says it’s a critical strategy for organizations to drive success in today’s fast-paced markets—watch the on-demand webinar, “Forrester Research: The New Sales Imperative.”