Sales positions typically feature commission pay, in which income is based on performance.  Commission pay appeals to true salespeople because top-performing salespeople hunger for the opportunity to earn huge incomes as their sales increase.  A commission structure rewards their competitive drive within themselves.  Mere salary does not feed a salesperson’s inner hunter and leaves the salesperson hungry and dissatisfied because salespeople are never satisfied with the status quo and always drive to do better. 

Commission structures vary greatly depending on the industry.  According to the BLS Occupational Employment Statistics (OES) survey, the 2019 sales commission averages are: 

• Engineering:  $112,780 
• Securities, Commodities, and Financial Services:  $93,090 
• Wholesale and Manufacturing, Technical and Scientific Products:  $92,980 
• Insurance:  $67,780 
• Advertising:  $64,660 
• Real Estate:  $62,060 
• Retail:  $29,360 

Generally, the more technical knowledge required to succeed, the higher the commission rate.  Additionally, location also impacts the commission structure. 

What are the 7 most common commission structures? 

Base Salary Plus Commission: 

With this plan, salespeople are provided a base salary plus commission, where the general standard is 60% is fixed and 40% is variable. 

Straight Commission Plan: 

Salespeople are paid directly from the sales they earn, only.  There is no base pay. 

Relative Commission Plan: 

Commission is earned when a target or quota is set.  For example, if a salesperson has a quarterly quota of $250,000 and a $25,000 commission.  If they meet 90% of the quota, they will receive 90% of the commission.   

Absolute Commission Plan: 

Commission is paid only when certain activities or goals are achieved.  For example, for each new customer a salesperson acquires, the salesperson could receive $500. 

Straight-Line Commission Plan: 

Commission is based on how much or little they sell.  Therefore, if they reach 90% of quota, they get 90% commission.  However, if they exceed their quota, their commission increases. 

Tiered Commission Plan: 

Higher commissions get paid at higher sales milestones. 

Territory Volume Commission Plan: 

Commission is paid out based service areas or regions, rather than based on individual sales. 

Before calculating your commission structure, you must be able to answer the below questions because the answers will help you define SMART sales goals, performance measures, and payout formulas. 

• What are your competitors’ commission structures?  You must do your research to see how your competitors set up their commission structures, especially if you use a tiered structure or variable commission rate. 
• What are your company’s sales goals and sales budget? 
• How much should you pay and how much should they sell? 
• How long is the average sales cycle for your product or service? 
• Are you offering benefits, bonuses, or incentives of any kind? 
• Is the commission structured to motivate salespeople to work hard? 
• What is the average revenue per sales or average price point? 
• What is the salesperson’s role?  i.e., lead generator, canvasser, account manager, etc. 
• Does the salesperson provide support and training to the customer post-sale? 
• Is it a one-time sale or is there an opportunity for upsells and repeat business? 
• Does the salesperson handle customer service or do other team members handle customer service? 

What are four financial pieces you need to know before creating a commission structure? 

• Gross Sales Profit:

The Gross margin is a percentage.  It is total sales less the cost of goods divided by revenues.  For example, if $100,000 is generated in sales with $40,000 spent on the cost of goods sold, the gross margin is ($100,000 - $40,000) / $100,000 = 0.60 or 60%.  The commission is then calculated as a percentage of the margin. 

• Cost of Goods Sold Percentage of Sales Revenue: 

If the cost of goods sold percentage of sales revenue is high, it can be indicative of inefficient procurement, production, and manufacturing processes.   

• Budgeted Sales Expense Percentage:

Typically, 10 to 20 percent of revenues should be spent on sales, but a new product or service launch can boost the costs to 30 percent.  However, high-growth technology businesses spend 25 to 45 percent of revenues on sales. 

• Sales Revenue Goal: 

You need to set revenue goals that improve gross or net profit.   

Now you have all the data to generate your commission structure. 

What is the next step?   

1. Use a sales compensation planner.  This will help you calculate how much revenue you can expect and how much reps will be paid.   
2. Define the sales goals.  Are you looking to grow revenue?  Increase cash flow?  Increase average contract length?  Increase average deal size?  Increase percentage of repeat customers?  Increase retention rate?  Increase upsells or cross-sell rate?   
3. Choose your compensation plan.  (Refer to the compensation plans outlined above.) 
4. Decide when you will pay your salespeople.  For example, will your salespeople be paid when a customer signs a contract?  When you receive the customer’s first payment?  Upon project completion?  Every time a customer pays?  When deal goals are reached? 
5. Choose a software that makes commission transparent to your salespeople.  They want to see what they earn as they earn it. 
6. Set up quotas for your team and individuals. 
7. Show salespeople through examples and charts how they can earn their commissions. 
8. Expect Revisions and Evolutions. Remember that your sales compensation plan should be able to adapt and evolve with your business.  Like any part of your business strategy, it should evolve over time. 

You are not alone in having to create a sales commission plan on your own.  There are a variety of different resources that you can use, including MPWRSource.   

If by chance you still believe that commission is an ineffective way to pay salespeople, reflect on this quote by Grant Cardone, founder and CEO of Cardone Enterprises, “Everything in life is a sale and everything you want is commission.”