As a business grows, so does its product portfolio. And its selling motions. As a result, the path to quota becomes more nuanced. That means a more complex comp plan, often including tiered commission structures. While this complexity is often necessary to meet the needs of a growing company and its sales teams, it’s challenging to implement — there are lots of moving parts.

Don’t worry; we’ve got you covered. Read on for a breakdown of tiered commission structures, from their benefits and drawbacks to the essential steps you must follow to implement them.

What you’ll learn:

• What is a tiered commission structure?
• Best practices for designing a tiered commission plan
• What types of teams and companies should use tiered sales commission structures?
• Examples of tiered commission structures
• The pros and cons of tiered commission structures
• The ROI of a tiered commission structure

What is a tiered commission structure?

A tiered commission structure is a type of sales commission plan that offers different commission rates for different levels of performance. Higher levels of performance earn higher rates of commission. This structure is designed to motivate salespeople at every stage of a financial period, and throughout every stage of a sales cycle, by increasing their commission rates as they close more and more deals.

A tiered commission structure can be used in conjunction with base salary or on its own for commission-only reps.

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Best practices for designing a tiered commission plan

Designing a tiered sales commission plan requires diligence to ensure it is effective and fair for your entire team. Here are a few key considerations to keep in mind when you set out to build a tiered commission plan.

Set clear and measurable goals

Your compensation plans begin with the sales goals that will guide your rewards. It’s important to set clear and measurable sales goals that align with the company’s overall revenue goals, and to clearly communicate them to all sales reps so they understand what is expected of them.

Offer competitive commission rates

The commission rates you offer should be competitive with industry standards and, as noted above, aligned with the company’s revenue goals. This will ensure that sales reps are motivated to sell more and that your company is able to achieve its revenue targets.

Define your performance tiers 

The performance tiers of your compensation plans should be clearly defined, and your sales team should have a clear understanding of what they need to do to advance to the next commission tier. Reaching each tier should be challenging but achievable, progressively increasing in both difficulty and reward for the reps who manage to reach them.

Consider the product or service being sold 

The commission rates you offer should be aligned with the type of product or service being sold. For example, if the product or service has a high profit margin, it makes sense to offer higher commission rates, as the company is generating more money from each individual sale.

Balance team and individual incentives 

Your commission structure should balance team and individual incentives. That way, you can promote a sense of teamwork while also incentivizing individual achievement. For example, you might supplement a tiered commission structure for individual reps with a team commission bonus that all reps receive if the team hits a collective revenue target.

Regularly review and adjust your plans 

Your commission plan should be reviewed regularly to ensure that it is effective and balanced. Adjustments may need to be made based on changes in the market or the company’s revenue goals.

By following these best practices, companies can design a tiered sales compensation plan that motivates reps to close deals and also helps your organization achieve its revenue goals.

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What types of teams and companies should use tiered sales commission structures?

While tiered commission can work for companies of all sizes, it is especially effective for those that sell high-ticket items, such as real estate, luxury cars, or powerful technology. This is because tiered commission incentivizes continuous sales effort, even after the close of high-value deals that yield large commissions. With more earnings possible, sales reps who close a few massive deals will still be motivated to keep selling so they can reach an elevated commission tier.

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Examples of tiered commission structures

How you set up tiered commission is largely dependent on your goals, products, and how your sales team is best motivated. However, here are a few examples that show common applications:

Example 1: Step commission plan

One common exmaple of a tiered commission structure is the step commission plan. This example starts with a basic revenue-based commission model. From there, this plan includes several tiers that each represent a range of total possible sales amounts. Gradually increasingly commission rates are applied to each level.

For example, a salesperson may receive a 5% commission rate for deals up to $50,000, a 7% commission rate for deals between $50,000 and $100,000, and a 10% commission rate for deals above $100,000.

This example shows a plan you might implement if you’re trying to motivate reps to close bigger deals.

	Closed Won Revenue	Commission Rate	Commission Earned
Deal 1	$27,000	5%	$1,350
Deal 2	$68,500	7%	$4,795
Deal 3	$119,400	10%	$11,940

Example 2: Tiered commission plan based on deals closed

Another example of a tiered sales commission plan is one based on the number of deals a rep closes. This type of plan is intended to incentivize reps to keep closing deals even if they hit quota.

For example, a rep might earn 5% commission for the first five deals they close, 6% for the next five, 7% for deals for the next two, and 8% for any additional deals.

The example illustrated below shows how much commission a rep may earn if they were to close 12 deals out of their 15-deal quota.

	Deal Size	Commission %	Amount Earned
Deal 1	$14,300	5%	$715
Deal 2	$12,500	5%	$625
Deal 3	$16,300	5%	$815
Deal 4	$21,400	5%	$1,070
Deal 5	$14,200	5%	$710
Deal 6	$13,000	6%	$780
Deal 7	$16,500	6%	$990
Deal 8	$18,400	6%	$1,104
Deal 9	$13,200	6%	$792
Deal 10	$17,300	6%	$1,038
Deal 11	$21,200	7%	$1,484
Deal 12	$14,200	7%	$904

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Example 3: Threshold commission plan

A third example of tiered commission structure is the threshold commission plan. In a threshold commission plan, the commission rate increases after a certain point. For example, a sales rep may receive a 5% commission rate for all sales, but once they hit their quota, any additional deals will earn the rep 10% commission. This type of tiered system is often used in an effort to incentivize reps to continue working hard even after reaching their quota but reduces the complexity involved in a tiered plan based on deals closed or deal size.

In the example below, the rep has a quarterly quota of $475,000. You can see that once the rep crosses that threshold, their commission rate increases.

	Deal Size	Total Sales	Commission %	Amount Earned
Deal 1	$37,000	$37,000	5%	$1,850
Deal 2	$53,000	$90,000	5%	$2,650
Deal 3	$49,500	$139,500	5%	$2,475
Deal 4	$67,100	$206,600	5%	$3,355
Deal 5	$25,000	$231,600	5%	$1,250
Deal 6	$78,500	$310,100	5%	$3,925
Deal 7	$53,900	$364,000	5%	$2,695
Deal 8	$42,100	$406,100	5%	$2,105
Deal 9	$74,600	$480,700	10%	$7,460
Deal 10	$48,200	$528,900	10%	$4,820
Deal 11	$27,500	$556,400	10%	$2,750
Deal 12	$63,300	$619,700	10%	$6,330

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The pros and cons of tiered commission plans

Now let’s take a look at some of the most common advantages and disadvantages of using a tiered commission structure.

Pros

Tiered commission plans tend to be more motivating than plans that offer one flat commission rate. This is particularly helpful towards the end of a quarter or year when motivation may start to wane.

By offering higher commission rates for higher levels of performance, you can incentive sales reps to not only work harder but consistently work hard, even after they’ve hit certain targets.

A tiered commission structure can also help to combat sales turnover and keep top-performing sales reps happy and engaged. Uncompetitive pay is one of the top reasons sales reps say they want to leave their jobs. Sales reps who consistently over-achieve will have a reason to stay with a company that offers commission tiers, as their exceptional performance will translate to increased earnings potential.

Cons

One potential disadvantage of a tiered commission structure is that can emphasize volume over quality.

For example, if an outbound SDR team is compensated for the number of meetings they book, a tiered commission structure might encourage a quantity-over-quality mindset. This incentivizes them to book as many meetings as possible, rather than with prospects who are the right fit.

Compared to a flat-rate commission plan, tiered commission structures also have more variables to keep track of, which can make them more difficult to design, implement, and manage. New companies who don’t have access to incentive compensation management tools might find it more challenging to manually track a tiered commission plan.

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The ROI of a tiered commission structure

The return on investment (ROI) of a tiered commission structure can be significant if implemented properly. A well-designed tiered commission structure can motivate sales representatives to sell more, leading to increased revenue for the company.

In addition, a tiered commission structure can help you identify top-performing sales reps, who will receive recognition and rewards for their exceptional work. This can help to retain top talent and reduce employee turnover – which saves costs on recruiting and onboarding in the longterm.

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Carefully consider a tiered commission structure

While a tiered commission structure can produce incredible results, it’s important to assess the administrative cost and workload of implementing this type of program. If you’re planning to use a tiered commission structure, carefully analyze your existing commission management infrastructure and make sure it’s powerful enough to support a more complex program. Also make sure you have the tools in place to manage it effectively.