Different Types of Sales Commission Structure

In the highly competitive modern business landscape, selecting the ideal sales commission structure is paramount. It’s the fuel that ignites your sales team’s motivation and drives their success. 

The Salesforce commission model is a blend of strategic compensation plans that align your team’s efforts with your business goals, serving as a powerful incentive for stellar performance. They are the key to not only motivating but also fairly rewarding your sales force.

Spreadsheets allow sales leaders to craft and analyze various commission scenarios with precision. They enable you to craft and analyze various commission scenarios with precision, ensuring both your sales team’s contentment and your company’s prosperity. 

In this article, we explore the art of selecting the perfect Salesforce commission structures, complete with a free commissions calculator to aid your journey to sales excellence. 

Keep reading to learn more! 

How to Design a Sales Commission Structure for Sales Reps?

Designing Salesforce commission structures is a critical task that can significantly impact your team’s motivation, performance, and the overall success of your business. To accomplish this, follow these key steps:

1. Align to Company Goals: Ensure that your commission structure aligns with your company’s overarching objectives (e.g.profitability, profit & loss, growth, client retention, etc.) and your sales process. Use it as a tool to guide your sales team in the right direction.
2. Motivate Desired Sales Behaviors: Fine-tune your commission rates and structure to motivate the behaviors you want from your sales team. Make sure the compensation plan encourages reps to focus on target customers, expand existing accounts, cross-sell complementary products, and engage in activities that contribute to your business’s success.
3. Reward Top Performers: Recognize and reward top-performing salespeople by incorporating elements like accelerators for outstanding achievements, commission caps for cost control, and quotas for consistent performance and growth.
4. Consider Role and Segment: Understand that one size doesn’t fit all. Tailor your commission structure to match the unique characteristics of various roles within your sales team. Inside sales, field sales, different product segments, and deal sizes may require different approaches for fairness and effectiveness.
5. Keep It Simple: Avoid complex commission structures that can confuse and demotivate your sales representatives. Strive for simplicity and clarity so that your team can easily understand how their efforts translate into payouts.
6. Model Financial Impact: Use spreadsheets to model the financial impact of your commission structure at various sales levels. This helps anticipate costs, make data-driven adjustments to commission rates, and strike a balance between incentivizing performance and managing expenses
7. Clearly Communicate: Meticulously document the commission plan details and provide comprehensive training to your sales reps. Clear communication ensures that everyone understands the rules, fostering effective teamwork toward common goals.
8. Review Periodically: The business landscape is dynamic, so periodically revisit and evaluate your commission structure’s effectiveness. Make adjustments as business needs evolve, ensuring that your compensation strategy remains aligned with your company’s objectives. 

Common Types of Sales Commission Structures for Sales Reps

Salesforce commission structures vary widely, with each offering unique advantages and drawbacks. In this section, we’ll explore some common types to help you find the best fit for your sales team’s needs.

1. Base Pay

Base pay is a straightforward type of sales commission structure where salespeople receive a fixed amount of money as their regular salary, regardless of their sales performance. It provides financial stability, ensuring salespeople have a consistent income even during slow sales periods. 

While it lacks the potential for big bonuses seen in other structures, it can be ideal for industries with long sales cycles or when the focus is on building customer relationships over immediate sales results. 

However, it may not always provide strong incentives for high-performance, as there’s no direct link between sales success and earnings in this structure.

2. Base Pay + Commission

In a Base salary plus Commission structure, salespeople receive a regular fixed salary (base pay) along with additional earnings (commission) based on their sales performance. This approach combines stability with motivation. 

The base pay ensures a consistent income, reducing financial uncertainty. Meanwhile, the commission rewards sales achievements, giving salespeople a reason to strive for higher sales numbers. It’s a win-win, as salespeople have a safety net, and the potential to earn more when they excel. 

This structure aligns interests, encouraging both steady work and striving for greater sales success, making it a common choice for many sales teams.

3. Residual Commission

Residual commission is a type of sales commission where salespeople continue to earn money from past sales they’ve made. Instead of just getting a one-time payment when a sale is made, they receive a portion of the revenue generated by that sale over time. 

This structure rewards ongoing customer relationships and encourages salespeople to focus on long-term customer satisfaction. It’s like a continuous bonus for the initial sale, providing financial stability as these commissions can add up over time. 

However, it might require maintaining good customer relationships and service to ensure the commissions keep coming in.

4. Tiered Commission

The tiered commission is a sales compensation structure where salespeople earn different commission rates based on their sales performance. The more they sell, the higher the commission rate they receive. 

It’s like climbing a ladder – as you reach higher sales targets, you get bigger rewards. This approach motivates salespeople to push their sales efforts and aim for higher tiers to earn more money. 

It can be a powerful incentive, but it requires careful planning to set fair and achievable sales targets at each tier. Overall, the tiered commission encourages consistent performance and rewards sales excellence.

5. Revenue Commission

Revenue commission, often used in B2B sales, is a straightforward compensation structure where salespeople earn a percentage of the total revenue generated from their sales. It’s like getting a share of the money the company makes from the sale. 

This system directly ties earnings to the financial success of the business, incentivizing salespeople to focus on high-value deals and larger sales volume benchmarks. 

However, it may not account for profit margins or other factors, so careful consideration is needed to ensure it aligns with the company’s overall financial goals. Revenue commission is simple to understand and can motivate sales teams to chase bigger deals.

6. Gross Margin Commission

Gross Margin Commission is a sales compensation structure where salespeople earn a percentage of the profit margin generated from their sales, rather than the total revenue. It’s like receiving a share of the money left over after deducting the costs associated with making the sale. 

This approach encourages sales teams to prioritize deals that not only generate revenue but also maintain healthy profit margins. 

It aligns the interests of sales reps with the company’s profitability goals and motivates them to focus on high-value, cost-effective sales strategies. Gross Margin Commission is particularly effective in industries where profit margins can vary widely.

7. Commission Only

In a straight commission-only structure, salespeople earn their income solely through commissions based on the sales they make. There’s no fixed salary or base pay involved. It’s like getting paid only when you successfully sell something. 

While this can provide high earning potential for top performers, it also carries financial risks during slower sales periods because there’s no guaranteed income. 

Straight commission roles are common in industries like real estate and insurance, where the potential for big commissions exists, but success depends on individual sales skills and effort. It can be a motivating structure for those who thrive on performance-driven income.

8. Territory Volume Commission

Territory Volume Commission is a sales commission structure where salespeople earn commissions based on the total sales volume within their assigned geographic or market area, known as their sales territory. 

It’s like getting rewarded for the total sales made in your specific region. This approach encourages sales professionals to grow and maximize sales within their designated area, fostering competition among territories. It’s commonly used in businesses with multiple sales regions. 

Territory Volume Commission can be motivating as it directly ties earnings to the sales performance of a specific geographic area, giving salespeople a sense of ownership and responsibility for their territory’s success.

9. Draw Against Commission

A Draw Against Commission is a sales compensation structure where salespeople receive regular advances or “draws” against their future commissions. It’s like getting paid a regular salary upfront, but it’s essentially a loan that must be repaid through future commission earnings. 

This system helps provide financial stability, especially during slow sales periods when commissions may be low. However, sales reps need to generate enough commissions to cover these advances. If they don’t, they might end up owing the company money. 

Draw Against Commission is a way to balance steady income with performance-based pay, ensuring sales team have a reliable source of income while still incentivizing them to sell.

Common Types of Sales Commission Structures

Base Pay Commission Structure

Base Pay Structure offers salespeople a consistent fixed salary without additional earnings based on sales performance. It provides financial stability with a predictable income regardless of sales achievements.

Base Pay Commission Structure Example

Consider a salesperson with a monthly base rate of $3,000, regardless of their sales performance.

Pros

• Financial Stability
• Lower Risk
• Attraction of Sales Reps Seeking Stability
• Employee Retention
• Simplified Administration

Cons

• Limited Incentives
• Potential Lower Sales Motivation
• Higher Fixed Costs

Ideal Sales Teams and Company Types –

• Ideal Sales Teams: Customer Support Teams
• Ideal Company Types: Businesses with Lengthy Sales Cycles

Base Pay + Commission Structure

Base Pay + Commission percentage combines a fixed base salary with additional earnings based on sales performance. It offers financial stability with the potential for additional income based on sales achievements.

Base Pay + Commission Structure Example 

Imagine a salesperson with a $3,000 monthly base salary and a 5% commission rate on $20,000 in sales. Their commission for the month would be $1,000. Thus, their total earnings for the month would be $4,000.

Note:

• To calculate Commission Earned, use this formula: =C2*D2
• To calculate Total Monthly Earnings, use this formula: =B2+E2

Pros

• Financial Stability
• Motivated Sales Reps to Close Deals
• Balance of Guaranteed Income and Performance-Based Rewards
• Talent Attraction and Retention
• Flexibility

Cons

• Fixed Costs
• Potential Complacency
• Complex Administration

Ideal Sales Teams and Company Types –

• Ideal Sales Teams: Inside Sales Teams
• Ideal Company Types: Small to Medium-sized Enterprises (SMEs)

Residual Commission Structure

Residual Commission Structure is a compensation model where salespeople continue to earn commissions over time for sales they made in the past. This model is often used in subscription-based or recurring revenue businesses.

Residual Commission Commission Structure Example 

Consider a salesperson that sells software subscription for $100 per month. They earn a 10% commission on the initial sale and continue to earn 10% of $100 for each subsequent month the customer remains subscribed.

Note:

• To calculate monthly commission, use the formula: =B2*100*10% + (SUM($B$1:B1)*100*10%)
• to calculate cumulative commission, use the formula: =SUM($C$1:C2)

Pros

• Ongoing Income
• Motivation for Customer Retention
• Reward for Building a Customer Base
• Predictable Earnings
• Potential for Long-Term Relationships

Cons

• Slow to Build Significant Income
• Dependence on Customer Retention
• Administrative Complexity

Ideal Sales Teams and Company Types

• Ideal Sales Teams: Account Management Teams
• Ideal Company Types: SaaS (Software as a Service) providers, Subscription-Based Businesses

Tiered Commission Structure

Tiered Commission Structure is a compensation model where salespeople earn higher commission rates based on achieving predefined sales targets or tiers.

Tiered Commission Structure Example 

Imagine a salesperson with three tiers:

• Tier 1: 5% commission for sales up to $10,000
• Tier 2: 7% commission for sales between $10,001 and $20,000
• Tier 3: 10% commission for sales exceeding $20,000

If they make $25,000 in sales, they earn 5% on the first $10,000 ($500), 7% on the next $10,000 ($700), and 10% on the remaining $5,000 ($500), for a total commission of $1,700.

Note:

• To calculate Tier 1 commission, use the formula: =IF(A2<=10000, A2*5%, 10000*5%)
• To calculate Tier 2 commission, use the formula: =IF(A2>10000, IF(A2<=20000, (A2-10000)*7%, 10000*7%), 0)
• To calculate Tier 3 commission, use the formula: =IF(A2>20000, (A2-20000)*10%, 0)
• To calculate total sales commission, use the formula: =B2+C2+D2

Pros

• Performance Incentives
• Encourages Sales Growth
• Rewards Top Performers
• Clear Sales Targets
• Motivation to Reach Higher Tiers

Cons

• Complexity to Administer
• May Discourage New Salespeople
• Potential for Sales Focusing on Tiers, Not Customer Needs

Ideal Sales Teams and Company Types

• Ideal Sales Teams: Sales team members with experienced members
• Ideal Company Types: Businesses with tiered pricing structures or diverse product lines

Revenue Commission Structure

Revenue Commission Structure is a compensation model where salespeople earn commissions based on the total revenue generated from their sales, typically a percentage of the revenue.

Revenue Commission Structure Example 

For instance, a salesperson earns a 5% commission on the total revenue generated from their sales. If they make $50,000 in sales, their commission would be $2,500 (5% of $50,000).

Pros

• Directly Tied to Company Revenue and Upsells
• Aligns Sales Goals with Business Objectives
• Encourages Salespeople to Pursue High-Value Deals
• Easily Measurable Performance
• Motivates Sales Growth

Cons

• Potential Focus on Larger Deals at the Expense of Quantity
• May Not Reward Efforts for Lower-Priced Products
• Can Create Pressure for Consistently High Sales

Ideal Sales Teams and Company Types

• Ideal Sales Teams: Sales teams targeting high-value or enterprise-level customers
• Ideal Company Types: Businesses with a focus on high-revenue deals or premium products and services

Gross Margin Commission Structure

Gross Margin Commission Structure is a compensation model where salespeople earn commissions based on the gross margin of the sales they generate. Gross margin is calculated as the difference between the selling price of a product or service and the cost of goods sold (COGS).

Gross Margin Commission Structure Example 

For example, a salesperson earns a 15% commission on the gross margin of their sales. If they sell a product for $1,000 with a COGS of $600, the gross margin is $400 ($1,000 – $600). The salesperson’s commission would be 15% of $400, which is $60.

Note:

• To calculate the Gross Margin, use the formula: =A2-B2
• To calculate the Commission, use the formula: =C2*15%

Pros

• Rewards for Profitable Sales
• Encourages Salespeople to Focus on High-Margin Products
• Aligns with Company Profitability Goals
• Motivates Cost-Efficient Selling
• Can Promote Long-Term Customer Relationships

Cons

• Complex Calculation Method
• May Discourage Sales of Low-Margin Items
• Potential for Disputes Over COGS Determination

Ideal Sales Teams and Company Types

• Ideal Sales Teams: Sales teams dealing with a mix of high and low-margin products/services
• Ideal Company Types: Businesses with a range of products/services with varying margins

Commission Only Structure

Commission-Only Structure is a compensation model where salespeople receive no fixed base salary and earn their income solely through commissions based on their sales performance.

Commission Only Structure Example 

A salesperson earns a 10% commission on each sale they make. If they make a $5,000 sale, they earn $500 in commission. With no base salary, their income is entirely dependent on their sales.

Pros

• High Incentives for Performance
• Potential for Unlimited Earnings
• Minimal Fixed Costs for Employers
• Self-Motivation and Entrepreneurial Spirit
• Attracts Highly Driven Salespeople

Cons

• Financial Uncertainty
• Risk of Income Fluctuations
• May Attract Less Experienced Salespeople

Ideal Sales Teams and Company Types

• Ideal Sales Teams: Independent Sales Contractors, Startups with Limited Budgets
• Ideal Company Types: Businesses with Limited Resources, High-Commission Products or Services

Territory Volume Commission Structure

Territory Volume Commission Structure is a compensation model where salespeople earn commissions based on the volume of sales within a specific geographic or market territory they manage.

Territory Volume Commission Structure Example 

Imagine a salesperson responsible for a particular region. They earn a 5% commission on all sales made within their designated territory. If the total sales in their territory for a month amount to $100,000, their commission would be $5,000 (5% of $100,000).

Pros

• Encourages Territory Growth
• Rewards Salespeople for Expanding Market Presence
• Clear Sales Targets for Specific Regions
• Motivates Focused Sales Efforts
• Can Foster Regional Expertise

Cons

• May Lead to Competition Among Salespeople for High-Volume Territories
• Potential for Neglected Territories
• Complex to Administer for Large Sales Teams

Ideal Sales Teams and Company Types

• Ideal Sales Teams: Territory Sales Teams, Regional Sales Teams
• Ideal Company Types: Businesses with Distinct Market Regions, Multi-territory Sales Operations

Draw Against Commission Structure

Draw Against Commission Structure is a compensation model where salespeople receive an advance or “draw” against future commissions. They are paid a fixed amount regularly, typically monthly, and their commissions earned are deducted from this draw. Once their commissions exceed the draw, they begin earning additional income.

Draw Against Commission Structure Example 

Consider a salesperson who receives a monthly draw of $3,000. If they earn $2,500 in commissions that month, they still receive the full $3,000 draw. However, if they earn $4,000 in commissions the following month, they would receive the excess $1,000 as additional income.

Note:

• To calculate the Payout, use the formula: =IF(C2>B2, C2, B2)
• To calculate the Carryover/Excess, use the formula: =C2-B2

Pros

• Provides Financial Stability
• Minimizes Income Fluctuations
• Attracts Salespeople to Commission-Heavy Roles
• Helps in Talent Retention
• Encourages Consistent Sales Efforts

Cons

• Potential Repayment Obligation
• Complex Tracking and Administration
• Can Create Dependency on Draws

Ideal Sales Teams and Company Types

• Ideal Sales Teams: Sales roles with variable sales cycles
• Ideal Company Types: Industries with seasonality or variable revenue patterns

How to Measure the Effectiveness of the Sales Commission Structure?

Measuring the effectiveness of salesforce commission structures is crucial for optimizing sales team performance and achieving business objectives. In this section, we’ll explore key metrics and methods to gauge the impact and efficiency of your commission plan.

1. Track Sales Metrics Before and After 

To assess your commission plan’s impact, track KPIs before and after implementation, including revenue, sales volume, profit margins, and individual performance. 

Coefficient offers an extensive library of free B2B sales dashboards to help you visualize these metrics at a glance. 

2. Analyze Compensation Costs

To assess your commission plan, check total expenses, including base pay and bonuses, against sales revenue. If costs greatly outweigh revenue, it could signal an ineffective structure. Adjustments might be necessary for better alignment with business goals. Improve your sales commission plan’s effectiveness.

3. Review Quota Attainment

To check your commission plan’s effectiveness, review sales targets against actual performance. If many meet or exceed sales quotas, it’s motivating. If not, adjust the structure for better goal alignment and incentives. Regularly monitoring quota attainment keeps your plan on track to encourage desired sales team performance.

4. Consider Sales Rep Retention

Think about sales rep retention. If many salespeople leave, it can cost your business. High turnover suggests the commission structure might not be motivating or rewarding enough. A well-designed sales incentives plan keeps talented salespeople, ensuring stability and growth.

5. Review Sales Forecasts

Review sales forecasts by comparing predictions with actual results under the commission structure. If forecasts consistently match or exceed actual sales, it indicates an effective structure. If there’s a big difference, consider adjustments for better motivation. Regular scrutiny helps align the structure with business goals and accurate sales predictions.

6. Conduct Periodic Reviews

Periodic reviews are crucial to gauge your commission structure’s effectiveness. Regularly assess if it matches business goals and motivates the sales team. Review metrics, costs, quota achievements, sales rep retention, and sales forecasts at set times. This ongoing assessment helps you adjust the structure as your business changes, ensuring it keeps motivating your team and achieving sales goals.

7. Model Modifications

Modeling changes is vital for improving a sales commission structure. Use spreadsheets or software to test alterations before applying them. This helps you see how changes might affect costs, sales results, and overall success. 

By modeling, you make smart decisions that align with your goals and benefit your sales team. It prevents surprises and ensures adjustments boost motivation, performance, and profits, making it a valuable part of your evaluation and improvement process.

How to Calculate Sales Commissions in Google Sheets?

Calculating sales commissions in Google Sheets can be a straightforward process when you have the right tools. 

For a deeper dive, check out our comprehensive guide and a ready-to-use sales Commission Calculator for Google Sheets. It comes with step-by-step instructions and a pre-built template to help you calculate commissions effortlessly and accurately.

Streamline Sales Commissions Management with Coefficient

Competitive sales compensation plans are essential in driving your sales team towards success, with their performance having a direct influence on your bottom line. 

For sales organizations, ensuring the right commission structure is crucial, especially in a platform as intricate as Salesforce.

However, establishing typical sales commission rates or determining an individual rep’s commission can be a daunting task. That’s where Coefficient steps in, simplifying the complexities. It streamlines sales commission management, offering a wide range of free templates that help sales managers save time and maintain accuracy. 

And why stop there? Install Coefficient for free today to experience how it simplifies complex sales reporting tasks for yourself!