What Is the Best Structure for Sales Commission?

What Is the Best Structure for Sales Commission?

September 4, 2020

When you search “best sales commission structure,” there are over 100 million results that come up on Google. I know, baffling. I am equally baffled when I search “best fruit” and Google comes up with 2.4 billion results rather than just showing me a picture of a watermelon.

So, why is it so hard for Google to tell me what the best comp plan for my sales team is? It’s because what’s “best” just depends on who you are and what you’re trying to achieve. The ideal SaaS sales comp plan probably looks very different from the ideal used car sales comp plan. 

We’ll review three common sales commission structures to help you think through effective comp plan options for your team. Based on our data, we have found that teams typically leverage one of these three structures.

Base Salary + Fixed Rate Commission

The base rate plus commission model is one of the most common sales commission structures. It means that your sales reps are guaranteed a base salary, and they are also awarded a fixed percentage of the sales that they make, or a fixed sales commission rate. 

For example, let’s say you’re offering a base salary of $100,000 and a fixed rate commission of 10% on revenue generated by the sales rep. If a sales rep generates $200,000 in revenue, she would earn $20,000 in revenue and receive total compensation of $100,000 (base) + $20,000 (fixed rate commission) for that year.

Base salaries enable your sales reps to make some earnings regardless of sales performance providing them with stability and leading to lower employee churn. The commission provides that necessary incentive for sales reps to push your product or service. 

At first glance, you may think that the benefit of lower churn is not meaningful. However, a 2018 report by the Bridge Group found that the churn rate for sales reps has increased significantly in the past few years. The average tenure of a sales rep is only 1.5 years. Now ask yourself how long it takes the average employee to get fully onboarded to your team and subtract that from 1.5 years. Additionally, ask yourself how effective team members are in their first year on the job. A bit alarming, isn’t it?

The average churn rate for sales reps has increased significantly to 1.5 years.

 - Bridge Group 

If you are convinced that offering a base salary is right for your team, you may want to consider making the base salary just below what would be considered an adequate income for an employee. This helps to ensure that sales reps will still be motivated to supplement their base salary with commission. 

Best for:

  • When you’re an established business and you want to reduce turnover. 
  • Industries that often use this structure include technology, manufacturing, and insurance.

Straight Commission

For sales reps with a straight commission structure, 100% of earnings come from sales. For example, let’s say a sales rep has a commission rate of 40% on revenue generated and brings in $800,000 in revenue for the year. His compensation would be $320,000 for the year (i.e. 40% of $800,000). This structure is usually implemented for independent sales reps.

Some companies do implement the straight commission structure for full time reps, but they usually require reps to hit a minimum amount of sales before they can receive this type of payout.

The straight commission structure can be a win-win for business owners and sales reps if:

  1. The business cannot afford to hire full-time sales reps — a straight commission structure means that sales reps are classified as independent contractors.
  2. Sales reps want full control over the hours they work and the amount that they can make.

In a straight commission model, the percentage awarded to a sales rep is often higher than it is for companies that offer base salary plus commission. This higher percentage can be very appealing to sales reps who are confident in their ability to sell your product or service. You’ll often hear polarizing responses from sales reps who either strongly prefer the base pay plus commission model or the straight commission model. Those who value stability often prefer the former while those who prefer to feel 100% in control of their own financial destinies often prefer the latter.

Due to its simplicity, the straight commission model is popular for setting up referral programs with affiliate marketers, contractors and external sales partners.

Best for:

  • When you’re a new business or early stage startup that's not yet equipped to hire full-time employees. 
  • Also works well for industries with contingent sales such as real estate or retail.

Tiered Commission

A tiered commission structure is a way for companies to recognize top performers and also push your sales reps further by adding incremental goals with even higher payouts. There is also the added benefit of leveraging a quota system to ensure that sales reps are producing a minimum amount of value for your business.

Here’s how it works:

  • An employee’s commission rate may be 5% for the first $10,000 in sales.
  • However, for all sales above $10,000, the rate may jump to 10%. 
  • This incentivizes the sales rep to try to make at least $10,000 worth of sales. 

A somewhat more punitive way to structure tiered commissions is to reduce the commission earned on any amount less than the desired quota. For example, if the quote for Henry is $10,000 but he only sells $8,000 (i.e. 80% of his quota), then the company may choose to pay him only 80% of his commission.

For more information on the different impacts of commissions and quotas, see our previous blog post.

Best for: 

  • When growth is a top priority and you want to award incremental sales within a period. 
  • When you want each sales rep to secure a minimum amount of sales.

Are you ready to set up your sales compensation plan?

Setting up the best commission structure depends on your business goals and what motivates your team. Whether you're a SaaS business or a car manufacturer, you'll likely experiment to learn what’s effective at motivating your team. Make sure to ask yourself these 3 key questions before rolling out your sales rep comp plan:

  1. Does my plan incentivize high performance across the team?
  2. Does my plan ensure that reps will be financially secure even if they have a tough month or quarter? (A baseline level of guaranteed stability will ensure that reps are focused on exceeding expectations rather than worrying about making rent.)
  3. Does my plan encourage behaviors that are aligned with the long-term strategy of the firm?

If you have a flexible commission solution that allows for automated tracking and reporting across teams, easily updating and rolling out new commission plans, you can quickly see which plan maximizes company and team performance. If your current commission solution doesn’t allow that, we’d love to show you how CaptivateIQ can help!