The vast majority of sales reps are extrinsically motivated. Which is just a fancy way of saying: they looooooove money.
So your sales commission plan is key to attracting, retaining, and engaging your reps. As we continue through today’s labor shortage, this is as important as ever.
But there’s no one right way to compensate your reps. Different compensation plans incentivize different behaviors:
- Plans that are commission-heavy will attract highly aggressive reps who will shoot first and ask questions later, while plans that are base-heavy will attract less aggressive reps
- Sellers who are incentivized to bring in first-time sales will almost always bring in lower-quality customers and could see high churn rates
- Plans with a tiered structure incentivize reps to go after fewer, larger deals rather than many smaller ones
There’s a lot to consider here. So let’s walk through 11 types of sales commission plans so you can get a clear idea of which option will best suit your organization.
Commission plans are just one way to impact rep behavior. Learn about how coaching intelligence helps you see the whole picture and help reps own their performance improvement.
Types of Sales Commission Structures
Before we dive too deeply into the various types of sales commission plans, let’s look at the various ways that you can calculate a rep’s commission.
1. Revenue Commission Structure
The simplest and most common commission structure is variable pay as a percentage of a sale amount. So let’s say the rep earns 15% commission on sales and brings in a $10,000 deal, they would earn $1,500 on that deal. These plans typically work really well for smaller teams and organizations with less complex product or service offerings.
2. Gross Margin Commission Structure
The gross margin structure is very similar to the revenue commission structure, but the commission is based on the gross margin rather than the sale amount. So if you had a $10,000 deal that cost $1,000 to produce, the rep would receive 15% X $9,000 = $1,350.
3. Tiered Commission Structure
Tiered commissions help incentivize salespeople to surpass certain levels of revenue sold. Under this plan, a rep could make 5% commission on all sales up to $100,000 total, 7% for sales up to $300,000 total, and then 10% for sales over that amount. These plans typically work best for larger, more established sales teams, where dramatic growth and scalability is the main goal.
4. Draw Against Commission
Draw against commission plans are a bit more complicated. The rep receives a guaranteed amount paid with every paycheck, similar to a loan or cash advance. Then if the rep earns above a certain amount, they are required to pay back the draw.
So let’s say a rep receives $500 but makes no sales, they keep the $500. But if they make $2,000, they would pay back the $500, netting $1,500.
This type of plan helps new reps during their on-ramp, and during times of uncertainty.
5. Multiplier Commission Structures
The multiplier commission plan combines basic revenue commission with percentage factor of quota achievement. So let’s assume that a rep has a $300,000 quota, and that they earn 5 + 2% for the first third, 5 + 4% for the second third, and 5 + 6% of the final third of that quota. They would make $7,000 on the first $100K, $9,000 on the second $100K, and $11,000 of the third $100K.
Types of Sales Compensation Plans
Now that we’ve walked through a number of commission structures, let’s take a look at how those function in some common sales compensation plans.
1. Base Salary Plus Commission
The most common type of sales compensation plan rewards the rep with a fixed salary and a commission on top. In most cases, the ratio is 60% fixed with 40% variable, although this can vary based on how you want to incentivize your reps.
2. Straight Commission Plan
Although it is less common, straight commission plans are popular among certain types of reps. Under this plan, the rep receives no base pay, but the commission is usually a higher percentage of the sale (as high as 40% in some cases). You’ll almost always attract highly aggressive reps with this plan, but it provides little stability and incentive for the rep to stick around.
3. Relative Commission Plan
Under a relative commission plan, the rep earns commission based on how much quota they hit versus the exact revenue amount, as well as a base salary.
4. Absolute Commission Plan
In an absolute commission plan, reps receive compensation for hitting set goals and performing certain activities. These activities can include acquiring a certain number of SQLs, new customers, or even hitting certain activity levels like call counts. These plans are most effective in directing reps’ sales focus and providing incentives around certain areas where reps may be struggling.
5. Straight-Line Commission Plan
A straight-line commission plan ties commission to quota. For instance, if a rep earns 50% of quota, they receive 50% of their commission; if they hit 150%, they earn 150%. This commission plan incentivizes underperforming reps to meet quota, and incentivizes reps at all levels to achieve their full potential. However, this type of commission plan only really works when you have the resources to support what is essentially an uncapped commission structure.
6. Territory Volume Commission Plan
Under this plan, reps are paid on a territory-wide, team-oriented basis. This plan involves aggregating the commission across all sales and distributing them among the team. This plan works specifically for team-based organizations looking to fortify service in specific territories.
How to Pick the Best Commission Structure for Your Team
As you probably figured by reading this article, there’s no such thing as a one-size-fits-all sales commission model. Finding the one that will work best for your team and organization depends on a number of factors:
- Figure out which behaviors you want to incentivize. Depending on how you want your salespeople to behave and what you want your organizational culture to be, certain types of commission plans will work better than others.
- Keep your sales goals front and center. If your commission plan incentivizes “churn-and-burn” tactics, but you want to build up a loyal, dedicated customer base, you’re not going to see the results you’re looking for.
- Test new commission structures on new hires. If you’re unsure whether a particular approach will work, give it a shot. Turnover is very common in sales, and what’s worked in the past may not work right now.
But a word of warning: sales commission plans aren’t the only tool you have to change rep behavior. Only by tracking, analyzing, and coaching rep behaviors can you see change that significantly impacts your bottom line.