5 sales commission structures: Pros, cons, and how to choose the right one
Pick the right commission structure to keep sales agents motivated and improve your bottom line.
By Cristina Maza, Contributing Writer
Last updated March 13, 2022
There’s no getting around it—money matters to employees. According to research by TINYpulse, 43 percent of workers would leave their jobs for a 10 percent salary increase. Salespeople are no different. When My Indo Airlines reduced commissions for its sales team, agents became discouraged by the change, and sales decreased across the board.
A sales commission involves giving agents a percentage of every new sale they make. It’s an additional compensation that many companies offer to reward top performers and to incentivize employees to increase their sales numbers. Indeed, commissions are among the most effective motivation tactics for sales teams—for good reason. Agents are more likely to work harder when they know that they can earn more if they close more deals.
But not all sales commission models are structured in the same way. Some involve base salaries, while others only offer additional pay after agents cross a certain revenue threshold. Consider each sales commission structure below to find one that aligns with your team size and industry, and you’ll be well on your way to keeping agents motivated.
If you implement a commission-only structure, your sales agents will only earn money when they make a sale, and their level of compensation will be based entirely on the sales they close.
This commission structure keeps agents especially motivated because their entire income depends on making sales. They’ll work hard to close as many high-value deals as they can. Agents will also have total control over their income and be able to clearly gauge their performance on the job.
What’s more, your company won’t have to pay a sales agent if they aren’t bringing in revenue, so your sales department can stay profitable (assuming you’ve set commission levels that are reasonable based on your business costs).
On the other hand, this sales commission structure can be precarious for agents if they happen to go through a dry spell. So, companies that implement this compensation structure may experience high turnover as sales team members leave to find more security. These departures will likely mean spending money to find new hires, and you may have smaller applicant pools due to the lack of income security.
A commission-only structure could also create a cutthroat environment, where sales agents are willing to make a sale no matter the cost. You could end up with pushy sales agents who are more concerned with making money than with representing your company in the best way possible.
Where does this model work?
The commission-only model is usually good for startups that don’t have enough resources to pay agents if they aren’t making any sales. This structure may also work well for companies with short sales cycles or when sales agents can make substantial commissions from just one sale.
One sector that tends to use this model is the real estate industry. Brokers often earn money only when they sell a house, but the commissions are big enough that it’s worth their time and energy.
This sales commission structure can work in the travel and insurance industries, too, for similar reasons. A travel agent may sell a luxury package tour and an insurance agent may sell a more expensive plan, for example. Many of the agents in these types of roles are also working on a short-term contract basis or as independent contractors.
Base salary + sales commission
This commission structure includes a base pay for each sales agent, plus a commission for every sale made. Your agents may receive a relatively low base salary but make a 5-percent commission on each sale, for example, allowing them to raise their earnings substantially when they close a lot of deals. You can decide on the base salary and commission percentage that works for your company.
The base salary and commission model avoids some of the pitfalls of the commission-only structure because your sales team has the security of a guaranteed salary. At the same time, it still provides them with the incentive to go out and make as many sales as possible.
With a base salary, sales professionals will also be more likely to build rapport with potential clients because they won’t be in as big of a rush to make a sale. Giving salespeople additional time to nurture leads and cultivate relationships could benefit your company’s bottom line in the long run.
Sales agents may even be more motivated to take care of internal tasks that aren’t directly related to making a sale, like updating databases, attending team meetings, and answering emails.
One of the drawbacks is that the sales commission rate may not be as high as it would be in a commission-only structure. This might make your sales agents less driven because they have a base salary to fall back on. The model may also cost your company a little bit more upfront, as you’ll have to pay team members even if they aren’t making sales right away.
Where does this model work?
The base salary and commission structure can work for almost any business. But it works especially well for companies that have one core offering or that don’t have much variability between the items they sell. For example, a small software company that sells one primary product that’s roughly the same price for every customer.
Essentially, your commission structure should be straightforward to determine because you’ll need to calculate commissions regularly. So if you’re going to implement this model, make sure you have enough resources to handle the slightly extra administrative work and to provide your sales agents with a base pay plus commission.
Base salary + bonus
This sales commission structure provides a base salary for your agents and a big bonus when they reach a specific sales target. For instance, your sales agents might receive an additional $1,000 every time they sell $10,000 worth of products within a specific time frame.
This model will relieve you from paying a commission for every sale but still incentivizes your agents to keep striving toward their sales goals. It’s also a more straightforward structure to calculate and budget for each month than a base salary and commission structure. There’ll be less variability between what the different sales agents are making.
Sales agents may lose their motivation once they earn their bonus. Or, if you have a tiered bonus system—where agents’ commission rate increases after they reach certain benchmarks—they could get discouraged if they’re continuously stuck between tiers.
Say you give a $1,000 bonus for every $10,000 worth of products sold and a $2,000 bonus for every $20,000 worth of products sold. Your sales reps who consistently make between $15,000 and $18,000 worth of sales could feel deflated and start dragging their feet after making that first $10,000 sale. This could cause you to miss out on business opportunities.
Where does this model work?
The base salary and bonus model can be adopted by many different types of companies, but it is frequently used in industries like technology, wholesale and manufacturing, and financial services. In these sectors, the structure works because agents are focused on selling a large number of products instead of on making one-off sales—it’s easier to provide one big bonus after a sales agent has successfully sold a high volume of products.
Suppose an agent knows that they must sell 30 refrigerators to a chain of restaurants to reach their bonus. In that case, the agent will strive to meet that specific target. This will benefit your bottom line more than if the agent were receiving a commission after selling just a single refrigerator.
The tiered commission model is similar to the base salary plus commission model. But in this case, the commissions are doled out after a sales agent reaches a specific goal, such as selling a certain number of items or meeting a particular revenue target. Many companies choose to create several sales commission tiers so agents are motivated to reach the next benchmark.
This structure is also different from the base salary and bonus model because instead of receiving a lump sum after reaching a benchmark—like $1,000 for selling $10,000 worth of goods—agents receive a certain percentage of all sales until they reach the next tier. In most cases, the percentage of the commission will increase every time the agent reaches a new tier.
For example, an agent may earn an 8-percent commission until they reach $50,000 in revenue. Once they attain that goal, their commission may increase to 10 percent until they hit $100,000.
The tiered commission model will encourage team members to continue closing deals even after they’ve reached their sales targets, which will help you meet your business goals. This is true for many sales commission models, but raising the commission according to different tiers provides an additional boost of motivation. Your agents will likely strive to sell more so they can move up levels.
Your sales payroll will fluctuate as more agents advance in their roles. Businesses that aren’t prepared to pay commissions in the near future or during a specific period of time could be caught off-guard when sales agents start meeting benchmarks. So, ensure you have the resources to cover the additional compensation for your high-performing agents.
Where does this model work?
The tiered commission structure works well for larger, well-established sales teams. Businesses like Apple and Coca-Cola, for example, have the resources to pay sales agents a higher commission if they close more deals and exceed quotas.
This is also an ideal model if you want to inject a little more enthusiasm into your team and ramp up sales—your agents may feel more inspired to overperform so they make it to the next tier.
Gross margin commission
The gross margin commission structure accounts for the expenses associated with creating a product. So in this model, your sales agents earn a percentage of the company’s profit from each sale rather than a percentage of the sale itself.
Imagine that your sales agent sold a product worth $2,000, but the profit from that item was only $500. In that case, the agent would receive a percentage of the $500 profit rather than the $2,000 sale.
This model helps you ensure that you aren’t doling out more money than you’re making. It also gives your sales agents a clearer sense of the value of each potential customer and sale, so they’ll know to prioritize higher-value transactions.
The gross margin commission structure could limit an agent’s willingness to offer a discount or other incentives to win an account. While it’s not always advisable to give discounts, sometimes it is necessary to win the trust of a new client or to convince a prospect to give your company a chance. If your agents have fewer incentives to offer deals, they could miss out on the opportunity to build a long-term relationship with a potential customer.
Where does this model work?
This commission structure is frequently used in industries where the cost of the products isn’t fixed or stable. Your sales agents will strive to raise the price when negotiating with potential customers because they know that they’ll make more revenue as a result.
The gross margin commission model is also ideal for companies looking to grow their sales team and to expand and scale their business.
Which sales commission model is right for my company?
Take this short quiz to gain a better understanding of which sales commission structure might be the best fit for your business. After you’ve completed it, look at the answer key to see which model you should consider.
1. What stage is your company in?
b) Recently established but stable
c) Recently established but growing
d) Well-established and stable
e) Well-established and growing rapidly
2. What industry are you in?
a) Real estate or another industry with a short sales cycle
b) Software or another industry with one core product
c) Wholesale or another industry with a large volume of products
d) Consumer goods
e) Service industry
3. What is your primary short-term goal?
a) Make as much money as possible to establish ourselves as a company
b) Continue to sell my core product and maintain a loyal clientele and staff
c) Get my agents to sell a higher volume of products
d) Increase my company’s growth quicker
e) Increase the amount of profit my business makes per sale
If you picked mostly…
a: Commission only
b: Base salary + commission
c: Base salary + bonus
d: Tiered commission
e: Gross margin commission
The right compensation structure will help your business thrive
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