Commission Pay: How It Works, Types, Benefits, and Tips

A career in sales can offer many rewards, but it’s challenging work. The State of Sales report found that 53% of sales professionals say their job is harder now. If you want to keep your team motivated, commission pay is critical. When things get tough, the promise of extra income can be the incentive to take a deal across the finish line.

Looking for an overview of commission structures, the pros and cons, and how it all works? We’ve got you covered.

A commission is extra money paid for achieving a goal. It’s a performance-based reward for a successful effort. Commission isn't guaranteed and can vary depending on industry, the financial health of the business, sales goals, and marketplace conditions.

Commission pay is common in industries where performance-based goals are a central aspect of the role. That often means salespeople, but that's not the only role that uses commission. Typical jobs that use this pay structure include sales representatives, business development reps, and account executives. Sales reps promote and sell products or services for a company. Business development representatives are in charge of finding new business opportunities. And account executives are the primary point of contact for clients. They prepare presentations, run demos, and explain the benefits of the products or services offered.

First, you agree to the terms, which are usually included in a contract outlining the commission structure. This structure outlines targets, pay periods, pay frequency (monthly, quarterly, or annually), earning caps, eligibility, and additional sales incentives that can motivate sales reps. As a seller, you will have the chance to review the commission structure. Some businesses are open to negotiations, so be sure to research what other sellers in your industry are earning.

If you fulfill the requirements outlined in the commission plan, your employer will pay your commission as specified, in addition to your usual salary.

Calculating your commission pay should be clear and simple. You multiply your commission rate by the total sales amount you earned. Here's an example of a basic commission pay equation.

A sales rep earns a 10% commission rate according to their agreed-upon commission structure. If they make $100,000 in sales, they earn a commission of $10,000. This is what the calculation looks like:

commission rate (%) x total sales amount earned within pay period

Note that this is just one example of a commission calculation. Other structures have their own calculations. You can take the guesswork out of computing your pay by using a built-in commission calculator, like the one in Salesforce’s Sales Performance Management software. The calculator is customized to your pay structure.

You need to know the common commission pay options for your sector before negotiating your commission structure. This knowledge can help you choose the best sales compensation plan and improve your sales strategies to earn more. Here are some of the most common pay structures:

Formula: base salary + commission

A combination of guaranteed income plus commission. This approach works best with sales cycles that are hard to predict. The upside is you're guaranteed a base salary, which is helpful if you can't always reach your quota. On the downside, though, your base salary might not be enough income if you hit a rough patch.

Formula: deal value x commission rate (%)

Salespeople are paid only a percentage of the total deal's value. This approach works well for shorter sales cycles and independent salespeople who can tolerate higher risk. Commission is limitless unless the company sets a commission cap. Still, a commission-only paycheck depends entirely on performance, which can lead to lean times in tough environments.

Formula: client account premium x commission rate (%)

This is aimed at those with existing accounts and requires an established set of clients and recurring revenue. Instead of closing quick deals for as much as possible, salespeople are rewarded over the long term for maintaining customer relationships. However, a salesperson who seeks quick rewards might lose motivation without the excitement of instant earnings.

Formula: (tier 1 sales x tier 1 rate) + (tier 2 sales x tier 2 rate), etc.

A tiered commission plan increases commission rates as the salesperson hits progressive goals, motivating them to work harder. Essentially, the more you succeed, the better you do financially. But if tiers aren’t structured fairly, salespeople who routinely come in below the highest achievers may feel the system is rigged and stop trying to get ahead.

Formula: commission earned – draw amount

This structure involves giving an advance payment against future earnings to provide some form of regular income and financial security. It can be particularly helpful for newcomers to the team. Similar to the base salary plus commission structure, this setup offers a sense of financial stability. But for employers, commission draws might be unsustainable during tough sales periods.

Many people enter the sales world because it promises a lucrative career driven by their own talent and tenacity. Still, there are pros and cons of commission pay, depending on your skills and motivation.

• Maximized earning potential: Unless a company places a cap on your commission, you can close as many deals as possible, meet (or exceed) your quota, and your payout will reflect your hard work.
• Incentivized work ethic: Motivation increases when there's a promise of a reward. Commission pay can help boost your productivity by giving you something to work toward.
• Independence: When you work on commission pay, you have more control over your outcome. How you prospect, build customer relationships, negotiate, and maintain those relationships for future upselling or cross-selling is up to you.
• Company alignment and transparency: Since you were able to review (and negotiate) your commission pay structure, you have total transparency. You can clearly see your company's goals, the metrics you need to meet, and how your performance is measured.

• Stress: Sales has a high turnover rate due to the pressure to meet quotas. This stress increases when the market is rocky due to outside factors like recessions. Consistently earning an average sales commission pay often requires a specific skill set. Not everyone has resilience in the face of rejection or a high tolerance for risk.
• Income insecurity: Slow periods are inevitable. To better prepare for financial uncertainty, maintain a realistic budget and use sales forecasting to predict future earnings.

Commission pay structures determine your potential earnings from sales and how to achieve them, all outlined in your sales plan. These structures include your commission rate, any caps, and measurable performance metrics. Let's look at an example of a seller and see how their payout changes when applying different commission pay types.

Let’s use the following scenario across our commission pay examples: A sales rep works for an SaaS company that sells CRM software specializing in sales automation. The deal value for the tech they sell is a flat $10,000. They earn a base salary of $100,000 annually (before taxes). For every new client they sign, they receive a 10% commission.

• Base salary plus commission: If they sign 10 clients at $10,000 each for the year, their earnings would be $100,000 plus $10,000 in commission pay — $110,000.
• Straight commission: In this scenario, the rep isn't given an annual base salary. To make at least $100,000, they would need to close 100 deals.
• Draw against commission: With this structure, the rep doesn't get a base salary but gets advance pay that they have to pay back. Let's say the company provides a $1,000 advance every month to give the rep a bit of reliable income. If they close 50 new deals in the year, the commission earned would be $50,000. However, if the draw is recoverable, they would have to pay back the year's $12,000 in advances, bringing their total commission pay to $38,000.
• Residual commission: This example needs to factor in the client account premium (the additional percentage awarded when they renew). Let's say it's 2% annually. If the rep closes 10 new deals in one year and then has six renewals plus 13 new deals the following year, their pay over time would look like this:
  • Year 1 commission pay: $100,000 (base salary) + [(10% rate x $10,000 deal value) x 10 deals] = $110,000
  • Year 2 residuals: (2% residual rate x $10,000 deal value) x 6 renewals = $1,200
  • Year 2 commission pay: $100,000 (base salary) + [(10% rate x $10,000 deal value) x 13 deals] = $113,000
  • Total year 2 pay: $113,000 + $1,200 = $114,200
• Tiered commission: Let's say the tier commission rates per quarter are that tier 1 applies to the first five deals at a 10% rate; tier 2 covers the next 5 deals at a 15% rate; and all deals after that are tier 3 and earn a 20% rate. The earnings for, say, 12 deals in a quarter would break down like this:
  • Tier 1 commission: 5 deals × $10,000 each × 10% rate = $5,000
  • Tier 2 commission: 5 deals × $10,000 each × 15% rate = $7,500
  • Tier 3 commission: 2 deals × $10,000 each × 20% rate = $4,000
  • Total commission for quarter: $5,000 + $7,500 + $4,000 = $16,500.

In its many forms, commission pay can increase your motivation, drive performance, and help you achieve business goals. Here are some tips to make commission pay work for you:

Focus on finding a sales performance management software that can integrate into your CRM. The software helps connect the dots between your customer data and effective sales strategies. You’ll be able to hit sales goals while keeping an eye on your commission payout. Human error and redundant admin tasks are taken out of the picture, which allows you to focus on selling.

A strong sales culture encourages everyone to learn from top performers. Look for a team where successful reps are eager to share their strategies and best practices. An environment of cooperation, where people support one another, creates a positive working environment. It's a culture built on support and a little bit of healthy competition so the entire team can achieve its goals and boost everyone's commissions.

Look for a compensation structure that is transparent and motivating. Don't just focus on the commission rate; ask how it's calculated. Find out if it's a tiered commission that rewards higher sales volume, or if it includes residual commissions that pay you for client retention.

Your success depends on the value of what you sell. Before accepting an offer, make sure you truly believe in the product or service. Is it solving a real problem for customers? Is the market ready for it? Selling something you believe in helps you stay authentic and confident.

A strong commission structure does more than just pay you — it fuels your success and helps you reach your goals. When a company ties your earnings directly to your performance, it promotes a culture of accountability and excellence. Ultimately, a great commission plan isn't only about money; it's the foundation for achieving bigger results and a more fulfilling career.