How to Choose the Right Sales Commission Structure?

Your sales commission program is like a big jigsaw puzzle.

You arrange all those little pieces in the right order and the right place, you get the larger picture.

As easy as said, finding those right pieces is not an easy task. It requires your utmost focus and concentration.

One crucial piece of this big jigsaw puzzle is your sales commission structure.

When not selecting the right piece in the right position, it can distort your entire puzzle.

So here is an article for you to choose the right sales commission structure. We will walk you through understanding the sales commission structure, its importance, its various types, and how to calculate different structures.

We will help you understand how to choose the right commission structure and some best practices to enhance its operations.

So, let's begin the reading.

What are Sales Commission Structures?

Companies compensate their sales reps through different structures. These sales commission structures determine when and how commissions are earned, the time of payment, their form, etc. 

For example, some sales reps have only a fixed salary in their pay structure, while others have a commission-only pay. 

While a third group will have a mix of both where they earn a fixed amount by the end of the month and a variable commission based on their performance or sale.   

Companies choose how to compensate their sales force depending on their industry practices, company goals, budget availability, resource allocation, etc.  

Why is it important to choose the right commission structure? 

The right decision leads to the right results. 

Similarly, choosing the right commission structure will open the possibility for immense growth in various areas of operations. 

Here is a glimpse of why it's important to make the right decision in choosing your sales commission structure. 

The right commission structure: 

• Can motivate salesforce to perform their best. 
• Will help align individual performance and goals toward achieving company goals.
• Can attract top-performing sales reps to your company. 
• Ensures employee satisfaction and thereby improves retention. 
• Will ensure cost-effective management of budget and resources.
• Promotes desired behavior from employees. 
• With transparency and accountability will enhance employee morale and trust. 
• Can easily adapt to market and industry dynamics with ease. 

Thus, choosing the right commission structure can impact various areas of business operations. 

From attracting and retaining your sales force and ensuring employee engagement and satisfaction to enhancing motivation to achieve company goals and objectives.

Top 15 Sales Commission Structure Types to Choose

There is a pool of sales commission structures out there. Each has its own business needs and sales strategies. 

The choice of which suits your business operations is a very subjective decision based on your company, industry, market dynamics, etc. 

So here is a list of 15 sales commission structures to help you decide which best suits your needs and make the right choice: 

Straight Commission

Sales rep’s pay is based solely on the percentage of each sale with no base salary. 

Base Salary Plus Commission

Sales reps have a base salary which they earn at the end of each month along with commission based on each sale. 

Revenue Commission

Revenue commission is calculated based on the percentage of revenue generated from sales. 

Gross Margin Commission

Commission is calculated based on the profit margin made from the sale. 

Tiered Commission

Sales reps earn a higher commission rate as they keep on achieving higher milestones. 

Residual Commission

Sales reps continue to earn commission as a percentage of the recurring revenue. 

Draw Against Commission

Sales reps can avail themselves of their commission in advance for future sales. This will be then deducted from their future earnings. 

Multiplier Commission

Here sales commission rates are multiplied when sales reps exceed their specific criteria. 

Team-Based Commission

Commission is shared among team members to encourage team collaboration. 

Territory Volume Commission

Commission is calculated based on the total sales volume generated within a particular territory. 

Variable Commission

Commission rates change based on various metrics like time period, product type, sales volume, etc. 

Commission Per Unit

Sales reps earn commission based on each unit of product that they sell.

Profit-Based Commission

Commission is calculated as a percentage of the net profit made. 

Activity-Based Commission

Commission is calculated for completing specific sales activities. 

Accelerated Commission

Sales reps earn higher commission rates for sales that exceed set targets. 

All these structures have their own unique features and advantages. 

Depending on the company’s operations the ideal commission structure can be chosen, or it can be tailored to meet the sales and business needs. 

Calculation of sales commission

1. How to calculate 100% sales commission?

The final compensation in a 100% sales commission is calculated as a percentage of the sales they make. For example, a sales rep closes a deal worth Rs 1,00,000. Their commission rate is set as 10% of the total sales. 

‍The sales reps earn Rs 10,000 as commission. 

2. How to calculate base + sales commission?

In a base+commision structure, the sales rep has a fixed salary that he receives at the end of the month irrespective of their sales performance. Then a variable commission that depends on their deals and performance. 

‍For example, a sales rep earns a base salary of Rs 20,000 each month and their commission rate are set at 10% per sale.  They closed a deal worth Rs 100,000 this month. 

So, their final payout will be 

3. How to calculate tiered sales commission?

Tiered sales commission offers a higher commission rate as sales reps achieve higher milestones. A typical tiered commission structure might look like this: Tier

Sales Revenue

Commission Rate

‍For example, a sales rep made a total sale of Rs 1,50,000 with 3 deals of Rs 50,000 each. 

The commission for the first deal was estimated at a rate of 5%.

With the second deal, the sales rep achieved the tier 2 milestone and thus the commission rate was calculated at 7%.

Subsequently, the third deal’s commission rate was 10% as the sales rep exceeded the tier 3 expectations. So the final commission payout will be 

‍Tier 1 commission 

‍Tier 2 commission

‍Tier 3 commission 

‍Total Commission= Rs 2500+ Rs 3500+ Rs 5000= 11,000. ‍

4. How to calculate gross margin commission?

Gross margin commission is calculated as a percentage of the total profit made from the sale. 

‍For example, a sales rep closed a deal of Rs 100,000. The cost of the sold product is at Rs 50,000. So the gross margin can be calculated as

‍The commission rate is calculated on this gross margin. If the commission rate is set at 10%, then the total commission earned is

5. How to calculate residual sales commission?

Residual sales commission refers to the incentive a sales rep earns for recurring revenue.

 For example, a sales rep sold software for Rs 10,000. According to their SaaS commission plan, they will receive a commission rate of 10% for this sale. Whenever the customer renews the contract, he gets a commission of 5% on the recurring revenue. 

So the initial sales commission they will receive is

‍The next year, the customer paid a subscription fee of Rs 5000 to renew the contract. The residual commission the sales rep will earn is

‍Which Sales Commission Structure is Right for You?

Every commission structure is right for you when you know how to make the best use of it according to your business structure and operations. 

However, certain features of a commission structure are better suited for a particular industry and its requirements. 

For example, a tiered commission structure is perfect for real estate or pharmaceutical industries where sales reps are expected to sell more units of product and exceed their sales quotas. 

While a residual commission structure is a better suit for the SaaS and Insurance industry. Here business success depends on customers renewing their contracts periodically. 

Hence sales reps are encouraged to improve their customer relations and ensure repeated sales for which they are incentivized and receive recurring commission. 

In short, 

• Understanding your industry, 
• it’s way of rewarding, 
• the market dynamics and 
• competitor standards,
• the specific requirements of your salesforce 

all play a crucial role in deciding the right commission pay structure for you.     

How to implement a sales commission plan?

The success of your sales commission plan lies in how efficiently you can implement the program. 

For this effective implementation, you need to take care of some areas of operations. 

• To begin with, educate your salesforce. Communicating the features and eligibility of the commission plan will ensure its successful implementation. 
• Regularly track its effectiveness. Incorporating incentive tools like Kennect will help in tracking the effectiveness of the commission plan among the salesforce. 
• Objective monitoring of the commission plan and making due adjustments accordingly will help in achieving the desired results. 
• Effective implementation also comes by ensuring legal and ethical compliance by adhering to employee labor laws and maintaining fairness and transparency.   

Taking these steps will help in effective implementation, boost sales performance, foster a positive work environment, and lead to business success and growth.  

Sales Commission Structure Best Practices

Every industry has a certain established way of doing things. Proven methods and effective techniques. 

When it comes to sales commission structure, here is a checklist of best practices that you can follow to ensure success and efficiency.  

Follow these practices and see the positive impact it has on your overall sales operations. 

Average Sales Commission Rates by Industry

The average sales rep commission rates are determined by a series of factors. 

The industry, market trends, competitor standards, the sales rep experience, the sales cycle complexity, market penetration, the overall sales process, etc. This is just the tip of the iceberg of reasons that determine the commission rates. 

To get a brief overview of the Average Sales Commission Rates by Industry, click here. 

In whichever industry you belong to, the ratio between the revenue generated and the commission received is balanced. 

It is in striking this balance that companies motivate their sales reps, ensure consistent sales performance, and drive overall sales growth and success. 

Final Thoughts

The right commission structure brings the right results. 

It can motivate your salesforce. It can boost their performance. It can enhance their engagement and satisfaction. It can attract and retain top talents. It can optimize your overall sales operations. 

But! 

The effort you put into bringing all these positive changes will be unsuccessful if you don't take a smarter approach to implementing and managing your sales commission structure. 

And what is that smarter approach? Obviously, the choice is to incorporate a sales automation tool. 

A tool that can supercharge your incentives. A tool that can automate your entire sales incentives process. A tool that saves you time and ensures accuracy. A tool that removes spreadsheets and errors. 

A tool that offers efficiency.

Kennect offers all the above and more. For more information Book A Demo with Us.