How To Decide On A Commission Structure

Everybody looks forward to payday, and sales reps are no different. The kind of pay they get, however, can do a lot to motivate them, boost their productivity and even lead them to close more deals.

Unlike other employees, those working in sales are accustomed to receiving compensation that gives them an extra incentive to win customers. Commissions allow reps to have more opportunity to earn based directly on their efforts. This makes a lot of sense, given their role connected to generating revenue.

Not all commissions are alike, of course, in part because not all companies are in a position to pay their sales reps the same way.

For startups that are just getting off the ground, there may be little to no commission, and reps are offered some equity in the company in addition to a salary instead.

Small to midsize businesses might need to be creative depending on their rate of growth, their forecast and the average deal size they’re attempting to close.

In the largest enterprises, there may be more of a standard approach to commission structure based on the industry or vertical market.

Commission structures need to be thought through carefully because they can affect a company’s ability to attract the right sales talent and, more importantly, to keep them.

The best sales reps are often highly driven and entrepreneurial in nature, so if the commission structure you’re offering appeals to them, your company will benefit from their efforts to maximize their earnings. And if they use a CRM, their chances of success are even greater.

Here are some of the commission structures that are most often used across many different businesses and that sales reps may ask about during an interview:

1. Base salary plus commission

This is one of the simplest and most common commission structures for companies of all sizes. The employer is giving the rep some income they can count on, but offers a financial reward for every sale they make.

A base salary plus commission can suggest the company values the rep as they would any other employee, but wants to give them a chance to excel depending on the kind of performance they deliver.

This structure is sometimes not used across the board with a sales team but offered to entry-level reps, who move to a different kind of commission as they become more experienced and increase their win rates.

2. Tiered commission

All companies have their revenue targets they want to hit, and a tiered commission structure allows reps to have something similar, where they can work toward an increasingly higher income.

A good example of a tier might be a level of revenue the rep has to reach before the percentage of their commission goes up. Depending on the cost of the products and services in question, even a tier that increases their commission by a few percentage points could make a big difference to their bank account.

Reps often like this structure because it lets them focus on highly specific goals they can usually achieve, as long as they’ve been given the right training and the products resonate with customers. Employers may find it helps reduce turnover on the sales team too, because it’s clear to reps what will happen if they continue to move from one tier to another.

3. Revenue commission

Sometimes the size of a deal will vary widely depending on the volume of products a customer orders, whether multiple products are bundled together, whether they add in extra services as part of the deal and so on. Then there are companies where it’s as simple as a standard price for every product or service.

This is where the revenue commission structure makes sense, because it simplifies the math considerably. If a product costs $2,000, for example, the company might offer reps a five per cent commission rate.

There is still a lot of opportunity with this approach for sales people to make a considerable amount of money. It may even stimulate some healthy competition within a team.

In some cases you may need to think about gross commission rates as well — for instance, if reps will need to pay to travel or other expenses in order to win customers.

4. Full commission

This is sometimes half-jokingly referred to as the “eat what you kill” commission structure. It means a rep’s entire income will be based on what they sell, or a 100 per cent commission rate.

In some organizations where the selling process is driven in volume through e-commerce, or where the products and services are in high demand, a full commission structure will seem like a gold mine to reps.

It means, however, that they’re operating without any kind of safety net to fall back upon. That can be a big risk for less-experienced reps, but for others it can represent more of a partnership with the business.

Final thoughts

There are several other variations to commission structures. Some are very simple, where there is no commission structure at all and reps are paid a standard salary like everyone else.

In other cases there are highly complex “commission draws,” that pay reps the same amount but sometimes offer an advance that has to be repaid if they learn less than the draw amount.

Unless you’re creating a brand new product category, chances are there are other companies like yours where some kind of common commission structure has been established. Do a little research to find out what they are, so you’ll understand what reps with experience selling your kinds of products and services will expect.

Also, be prepared to change commission structures or introduce new ones as your business model evolves, as you expand into new markets or even as you try to bring on new kinds of sales talent.

Most importantly, make sure reps realize that while a commission is tied to a sale, every sale is tied to the quality of the customer experience you offer. If they keep putting customers first, they’ll likely thrive no matter what kind of commission structure you’ve put in place.