Sales commission structures explained
A sales commission structure defines how a salesperson is paid for the revenue they generate. The main models are commission-only, base plus commission, tiered, and residual — each shifting risk differently between the company and the rep.
The main structures
Most compensation plans are a variation of four models.
- Commission-only — no base pay, a higher percentage per deal. Risk sits with the rep; cost tracks revenue for the company.
- Base plus commission — a salary floor with a lower percentage on top. Stabilises the rep, fixes cost for the company.
- Tiered — the percentage rises after a revenue threshold. Rewards over-performance.
- Residual or recurring — a share of renewal or subscription revenue, often for a fixed period.
How to set the percentage
Work back from gross margin, not revenue. Decide what proportion of the margin on a deal you can hand over and still fund delivery, overheads and profit.
Then adjust for who does the work: a rep closing leads you supplied should earn less per deal than one who sources their own, because the acquisition cost has already been paid.
Details that cause disputes later
Most commission arguments are about definitions, not percentages. Agree these in writing before the first deal.
- Paid on invoiced revenue or on cash collected?
- What happens on refunds, chargebacks and cancellations?
- Who owns the commission when a deal takes two people to close?
- Are renewals commissionable, and for how long?
- How and when are payments made?
When commission-only makes sense
Commission-only works when the deal value is large enough to pay a specialist well from a single sale, and the offer is proven enough that a competent closer can genuinely sell it. It works badly on low-margin offers or unproven products, because good closers will not take the risk.
FAQs
Frequently asked questions
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