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How to choose the best sales commission structure to motivate your sales team and boost revenue

01/09/2022 by
The Marketing Team
A sales commission structure impacts revenue, employee retention and overall business growth. This guide explores common sales commission structures, industry benchmarks and best practices. Learn how to choose, optimise and adjust a commission model to drive long-term success. A quick guide to understanding the best sales commission structure for your business A sales commission structure defines […]
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A sales commission structure impacts revenue, employee retention and overall business growth. This guide explores common sales commission structures, industry benchmarks and best practices. Learn how to choose, optimise and adjust a commission model to drive long-term success.

A quick guide to understanding the best sales commission structure for your business

A sales commission structure defines how businesses reward reps for closing deals. The right commission model boosts revenue, improves retention and motivates high performance. Options include straight commission, tiered commission and residual commission. Each option suits different industries, sales cycles and business goals. A well-planned commission structure ensures fair pay and long-term growth.

Why the right commission structure matters

A commission structure shapes how a business rewards its sales team. The right setup boosts revenue, keeps sales reps engaged and builds a high-performance culture. A poor commission structure can lead to high turnover, low morale and missed targets.

Choosing the best commission model depends on factors like industry, sales cycle length and profit margins. A well-planned commission structure balances company goals with rep motivation.

How the right commission structure boosts performance

An effective commission plan has three key benefits:

  • Drives revenue growth – A competitive commission rate encourages reps to close more deals.
  • Improves retention – Higher earnings keep top sales professionals loyal to your business.
  • Builds a strong sales culture – A fair and clear commission plan fosters motivation and teamwork.

Without the right commission model, businesses risk high turnover, disengaged reps and inconsistent performance.

Key factors that shape a commission structure

Each commission structure must fit the company's goals and industry. Consider these factors when designing a sales compensation plan:

1. Industry type and sales cycle length

  • Fast-moving industries like retail use simple commission structures.
  • B2B industries with long sales cycles need higher base pay and performance-based bonuses.

2. Profit margins and operational costs

  • High-margin businesses can afford higher commission rates.
  • Low-margin businesses must balance rewards with profitability.

3. Individual vs. team-based sales efforts

  • Businesses with independent sales reps use straight commission models.
  • Companies with team-based sales structures may offer territory volume commission.

Comparison of high vs. low commission structures

Factor High commission structure Low commission structure
Earnings High potential income Stable but lower pay
Motivation Strong drive to sell May lack performance push
Risk Inconsistent earnings Predictable salary
Retention Keeps top sales talent Less attractive to high performers

A strong commission structure ensures fair pay and business growth. Choosing the right commission structure will keep your sales team’s success on track.

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A diverse team of professionals in a modern office discussing different sales commission structures on a whiteboard. They appear engaged and collaborative.

10 typical sales commission structures explained

A sales commission structure determines how businesses pay their sales team. The right commission model can drive revenue and motivate reps. Below are 10 typical sales commission structures, each with its pros and cons.

1. Straight commission

Reps earn commission on every sale with no base salary.

Pros:

  • High earning potential for top sales reps
  • Best for businesses with short sales cycles

Cons:

  • Inconsistent income may discourage new hires
  • Not ideal for industries with long closing times

2. Salary plus commission

Reps earn a base salary plus a commission rate on sales.

Pros:

  • Provides income stability
  • Attracts a wider talent pool

Cons:

  • Lower total commission potential
  • Higher cost for employers

3. Tiered commission

Reps earn higher commission rates when they exceed targets.

Pros:

  • Encourages top sales talent to outperform
  • Rewards high achievers without upfront salary increases

Cons:

  • Can demotivate low performers
  • Complex to manage without clear tracking

4. Residual commission

Reps earn ongoing commission on every sale they close, often in subscriptions or contracts.

Pros:

  • Encourages long-term client relationships
  • Provides passive income over time

Cons:

  • Requires patience before earnings accumulate
  • Can be difficult to calculate and track

5. Draw against commission

Reps receive an advance, later deducted from earned commission.

Pros:

  • Ensures stable income, even in slow months
  • Good for industries with seasonal sales

Cons:

  • Reps may end up owing money if sales are low
  • Can create confusion if not clearly structured

6. Gross margin commission

Reps earn commission based on the profit from a sale, not just the total price.

Pros:

  • Encourages reps to sell higher-margin products
  • Aligns earnings with company profitability

Cons:

  • Harder to calculate
  • Less appealing to reps who focus on volume

7. Territory volume commission

A group of sales reps earns a commission percentage based on total sales in a region.

Pros:

  • Encourages teamwork
  • Ideal for businesses with large markets

Cons:

  • Hard to track individual performance
  • Can create conflicts over effort distribution

8. Revenue-based commission

Reps earn commission as a percentage of total sales they generate.

Pros:

  • Simple and easy to track
  • Scales well with company growth

Cons:

  • Does not reward profit margins
  • Can encourage discounting to close deals

9. Profit-based commission

Reps earn commission based on net profit rather than revenue.

Pros:

  • Encourages smart pricing strategies
  • Aligns rep earnings with business success

Cons:

  • Can discourage reps from pursuing lower-margin deals
  • Harder to calculate

10. Multiplier commission

Reps earn bonuses based on performance in key metrics like client retention or upselling.

Pros:

  • Encourages well-rounded sales behaviors
  • Customisable to fit company goals

Cons:

  • Complex to set up and manage
  • May require advanced tracking tools

Comparison of sales commission structures

Commission structure Best for Challenges
Straight commission High-performance sales roles Income instability
Salary plus commission New or risk-averse reps Lower overall earnings potential
Tiered commission Motivating high achievers Can discourage low performers
Residual commission Long-term client relationships Delayed earnings
Draw against commission Seasonal industries Risk of debt for reps
Gross margin commission Companies focusing on profitability Harder to calculate
Territory volume commission Team-based sales environments Unequal effort distribution
Revenue-based commission Simple, scalable businesses Does not account for profit
Profit-based commission Profit-driven businesses Complex to track
Multiplier commission Encouraging multiple sales goals Requires careful metric selection

Each commission structure has strengths and weaknesses. The right commission structure depends on your business goals, sales team’s skills and industry trends.

Choosing the right commission structure for your sales team

The commission structure you choose affects sales performance, retention and business growth. The right plan depends on your industry, sales process and team size. A well-designed commission structure ensures fair pay while motivating your sales team.

Key considerations when selecting a commission structure

1. Business size and industry norms

  • Large companies may offer lower commission rates but provide job stability.
  • Startups and small businesses often use higher commission rates to attract top sales talent.
  • Industry standards affect the commission percentage. Some sectors expect high base pay, while others favour pure commission models.

2. Sales cycle length and customer lifetime value

  • Businesses with short sales cycles can offer straight commission to drive volume.
  • Long-cycle industries like B2B or real estate may use draw against commission structures for income stability.
  • If customers make repeat purchases, a residual commission plan can reward reps for long-term relationships.

3. Competitive landscape and compensation expectations

4. Balancing fixed salaries vs. commission-heavy plans

  • Salary-based plans work well for consultative sales roles.
  • Straight commission plans suit aggressive, high-volume sales environments.
  • A mix of salary and commission on every sale offers both stability and motivation.

Example: How a mid-sized SaaS company optimised its sales structure

A mid-sized SaaS company struggled to keep high-performing sales reps. Their original compensation structure included a low base salary and flat commission rates. Reps felt unmotivated, and turnover was high.

To fix this, the company switched to a tiered commission model. Reps earned a higher commission rate after reaching set targets. This change:

  • Increased motivation – Reps pushed harder to earn higher commission rates.
  • Reduced turnover – Salespeople stayed longer due to better earnings.
  • Boosted revenue – The company saw a 20% increase in total sales.

The right commission structure depends on business needs. A mix of fixed pay and rewarding commission opportunities can drive success.

A female sales representative in a professional setting analysing commission rate and total sales on her laptop

How to determine the right commission rate

A commission rate affects how much a sales rep earns and how much a business pays in sales compensation. The right rate keeps reps motivated while ensuring profitability. Setting it too low reduces motivation. Setting it too high can hurt profit margins.

Different industries use different commission structures. Some pay higher commission rates to attract talent. Others rely on base salaries with smaller bonuses.

Factors affecting commission percentages

1. Product pricing and average deal size

  • High-ticket items often have lower commission percentages. A higher commission rate on large deals could cut into profits.
  • Lower-priced products often use a pure commission model to encourage volume sales.

2. Sales rep experience level and role complexity

  • Entry-level reps may receive a base salary with a lower commission rate.
  • Senior reps or those in complex sales roles often earn a higher commission rate due to their expertise.

3. Competitor commission trends

  • A company’s sales commission should stay competitive to attract and retain talent.
  • If competitors offer a higher commission, businesses may need to adjust their commission structures.

Industry average commission rates

Industry Typical commission rate Notes
SaaS 10-30% High base salary, long sales cycles
Retail 3-10% Volume-based commission model
Real estate 1-3% High-value transactions
Finance 1-10% Based on deal complexity
Manufacturing 2-10% Often combined with bonuses

The right commission structure depends on industry, rep experience and deal size. A standard commission rate ensures fairness while keeping the business profitable.

Matching commission plans to business goals

A commission plan should support business goals and drive sales team performance. The structure you choose affects revenue, rep motivation and retention. A strong plan balances short-term targets with long-term growth.

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Overview of commission plan models

Different commission models suit different business needs. Choosing the right one ensures fair pay and strong performance.

1. Individual vs. team-based structures

  • Individual commission plans reward reps based on personal sales. This structure works well for high-performance roles with independent targets.
  • Team-based commission structures distribute earnings among a group. This model encourages collaboration and works best for businesses with territory volume commission setups.

2. Short-term vs. long-term incentive plans

  • Short-term plans focus on immediate sales. These work well for retail or businesses with short sales cycles.
  • Long-term incentives reward reps for ongoing performance, like in real estate or SaaS, where deals take time to close. Residual commission plans fit this model.

3. Fixed vs. performance-based bonuses

  • Fixed bonuses offer stable payouts when reps hit targets. These suit industries with longer deals, where income stability matters.
  • Performance-based bonuses reward reps for exceeding goals. Businesses can use tiered commission structures to push sales beyond minimum quotas.

Aligning commission models with business growth

To pick the right commission structure, consider:

  • Business goals – Do you need fast growth or long-term retention?
  • Sales behaviours – Should reps focus on volume, high-value deals or repeat customers?
  • Profitability – Can the business afford a higher commission rate without reducing margins?

The right commission structure drives revenue, keeps reps engaged and aligns with company goals.

Optimising commission structures for long-term success

A commission structure must evolve with a business. If a plan fails to motivate reps or align with company goals, sales and retention suffer. Regular reviews help businesses adjust commission models to maintain performance and profitability.

Reviewing and adjusting sales commissions

A commission structure isn’t set in stone. Businesses should review plans to ensure they drive revenue and keep reps engaged. Key reasons to adjust include:

  • Low motivation – If reps underperform, they may need a higher commission rate or a well-structured commission plan.
  • Industry shifts – Market changes can impact pricing and profit margins, requiring new commission structures.
  • Unbalanced earnings – If top performers earn too much or too little, the commission structure you choose may need adjustment.

Using performance analytics to measure effectiveness

Tracking the right sales activities helps assess a commission model. Businesses should monitor:

  • Revenue growth – A strong sales commission structure should boost total sales until reaching targets.
  • Sales rep retention – A fair commission structure ensures reps stay motivated and loyal.
  • Profit margins – A gross margin commission structure keeps earnings in line with business goals.

A sales representative shaking hands with a client after closing a deal, with a tablet on the desk displaying a commission tracker reflecting earnings growth.

Common mistakes to avoid

A commission structure should motivate reps and drive revenue. A poorly designed plan can reduce motivation, cause confusion and fail to support business goals. Avoiding common mistakes helps create an effective commission plan.

Setting commission too low

A low commission rate can reduce motivation and push reps to leave. If earnings do not reflect effort, reps may move to competitors offering higher commission rates.

You can help prevent this by:

  • Researching industry benchmarks to set fair commission percentages.
  • Offering rewarding commission opportunities to attract and keep top sales talent.
  • Balancing fixed salaries with commission on every sale to ensure stable income.

Overcomplicating the commission structure

A confusing commission model frustrates reps and slows productivity. If reps struggle to understand how they earn, they may lose motivation.

You can help prevent this by:

  • Keeping the commission structure you choose simple and easy to track.
  • Using straightforward commission formulas that clearly show earnings.
  • Aligning sales activities with the payout structure to avoid confusion.

Failing to align commissions with company goals

If a commission structure does not support business targets, it can encourage the wrong sales behaviours. For example, a revenue-based commission may lead to excessive discounts to close deals.

You can help prevent this by:

  • Ensuring the commission structure for your sales team rewards profitable deals, not just volume.
  • Adjusting the sales commission rate to align with company profitability.
  • Regularly reviewing performance data to measure commission structure effectiveness.

A strong sales commission structure motivates reps, supports growth and ensures long-term success. Avoiding these mistakes keeps your sales team engaged and productive.

Frequently asked questions about sales commission structures

What is the right sales commission structure for my business?

The right sales commission structure depends on your industry, sales cycle and team size. A business with short cycles may use a straight commission model, while one with long cycles may prefer a salary plus commission plan. The actual commission depends on pricing, profit margins and rep performance.

What are the most common sales commission structures?

The common commission structures include straight commission, salary plus commission, tiered commission and residual commission. Other options include gross margin commission, draw against commission and territory volume commission. Each suits different business needs and outside sales teams.

What are the different types of sales commission models?

There are many sales commission structures, each with unique benefits. Businesses can choose from straight commission, tiered commission, profit-based commission, multiplier commission and more. The type of commission structure should align with company goals and rep motivation.

How does a sales rep benefit from a tiered commission plan?

A tiered commission plan increases earnings as sales reps receive higher percentages for exceeding targets. This structure rewards high performers, motivating them to close more deals.

How does gross margin commission work?

A gross margin commission pays reps based on profit rather than revenue. This plan encourages reps to sell high-margin products. The total commission would depend on the difference between sale price and cost.

What is residual commission and when should businesses use it?

A residual commission plan pays reps for ongoing revenue from past sales, such as subscriptions or contracts. This model suits businesses with repeat customers or long-term service agreements.

Why does the sales cycle impact commission plans?

The sales cycle affects how often reps close deals. Short cycles allow for commission every time a sale happens. Long cycles may require base pay or draw against commission to ensure steady income.

What is draw against commission and how does it help sales reps?

A draw against commission plan gives reps an advance on future earnings. This ensures income stability but can lead to repayment if sales are low. Employers might pay each sales rep a set amount upfront, deducting it from future commissions.

How does territory volume commission work?

A territory volume commission plan pays a group of reps based on total regional sales. This encourages teamwork and is ideal for field sales and large-scale businesses. The impact on sales rep performance depends on effort distribution.

How do commission models fit into a sales structure?

The structures in the sales process must align with business goals. The commission model chosen should reward key behaviours, whether that’s closing deals, retaining clients or selling high-margin products.

How do businesses track the success of their commission structures?

Sales leaders should monitor revenue growth, rep retention and profit margins. If a plan fails, adjustments may be needed. If commission structures aren’t driving results, a new plan can help.

What should businesses in Australia consider when setting commission plans?

In Australia, businesses must follow wage laws and industry standards. Commission plans should ensure fair pay while driving performance. Offering specific sales targets and structured bonuses can help businesses stay competitive.

The ten structures discussed offer flexibility for different industries. Choosing the right plan ensures a balance between motivation and profitability. Businesses should track the number of sales, earnings and team performance to refine their strategy.

Final thoughts: building a sustainable and effective commission structure

A strong sales commission structure drives revenue and keeps reps motivated. The right commission structure balances company goals with fair pay.

Key takeaways

  • Choose a commission model that suits your industry, sales cycle and team size.
  • Set a commission rate that rewards effort while protecting profit margins.
  • Keep the commission structure you choose clear and easy to track.
  • Use tiered commission or residual commission plans to boost long-term performance.
  • Regularly review sales commissions to ensure they stay competitive.

How to get started

  • Analyse your sales structure and team performance.
  • Compare different sales commission structures to find the best fit.
  • Align your commission plan with business targets.
  • Test and refine the commission model over time.

A well-structured commission plan keeps reps engaged and helps businesses grow. Regular reviews ensure the commission structure stays effective.

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