If your company is in an industry like finance, you likely have a team of sales representatives, meaning you’ve got several different options for how to pay them.
Most employees get a base salary. But since sales reps are directly responsible for driving revenue, many companies pay them via commission, where they get a cut of the revenue earned. But what cut should they get, exactly?
There are several different types of sales commission structures out there, and we will cover 10 of the most common ones in this blog post. You can read through the list to see your options and choose the one that best suits your needs.
The sales commission structures we’ll cover include:
- Base salary plus commission
- Base salary only
- Straight-line commission
- Absolute commission
- Tiered commission
- Residual commission
- Multiplier commission
- Gross margin commission
- Draw against commission
- Territory volume commission
Read on to learn more about each one. Then subscribe to Revenue Weekly, our email newsletter, for more business and marketing tips!
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1. Base salary plus commission
Base salary plus commission is the first sales commission structure on this list because it’s the most popular. With this type of commission, you pay your sales reps a base salary in addition to a commission based on how much revenue they drive.
For example, you might pay your sales reps $25,000 per year, in addition to a 15% commission on each sale they drive. The benefit of this structure is that sales reps can earn more by working harder, but they also have a safety net to fall back on if they’re in a rough season and can’t drive many sales.
2. Base salary only
Base salary is exactly what it sounds like. With this structure, there is no commission — you pay your sales reps a set salary like you would any other employee.
The benefit of this structure is that it makes your budget less complicated. It can also benefit your employees by providing more stability without causing them to worry about ups and downs caused by fluctuating sales success rates.
However, it isn’t as good of a motivator as a commission. When the quality of their work doesn’t affect their pay, your sales reps won’t have an incentive to go above and beyond, so your sales may stagnate.
3. Straight-line commission
Straight-line commission, or straight commission, is the opposite of base salary only — it’s commission only. There is no base salary, and everything your sales reps earn is directly tied to how much revenue they drive for the company.
This has major upsides and steep downsides. On the one hand, it’s a great motivator — your employees can’t afford to slack off or they won’t make any money. Meanwhile, they have lots of incentive to go above and beyond so they can boost their bank account.
On the other hand, it can be scary and stressful for your sales reps to know that they’re at risk of earning mere pennies in the event that if they have an off month. That can hurt work ethic and ultimately make your employees less productive.
4. Absolute commission
Absolute commission, or revenue commission, is a sales commission structure that strikes a balance between salary and commission. Most commissions are percentage-based — so, someone who makes a $100 sale on a 10% commission would earn $10 from that sale.
With an absolute commission, the amount of money someone earns is a flat rate, and they earn that commission based on the number of sales they make — not the amount of revenue they drive.
So, if someone makes a $300 sale, they might earn a commission of $50. But they might earn that same $50 for making a $100 sale, or for a $600 sale. The amount of revenue the sale earns doesn’t affect the commission amount — it’s a set rate.
5. Tiered commission
Tiered commission is similar to straight-line commission in the sense that sales reps earn a certain percentage of the revenue they drive. The difference is that tiered commission includes set quotas. Once a sales rep exceeds their quota, their commission increases.
So, a sales rep’s starting commission might be 10%, and they’re working toward a set quota. If they fall short of that quota, they still get their 10% commission. But if they exceed their quota, their commission might jump to 15%. That guaranteed commission incentivizes them to go above and beyond without punishing them if they don’t quite make it.
6. Residual commission
Residual commission is a structure that rewards sales reps for earning new clients and retaining existing clients. This works best for companies that offer subscriptions rather than one-time purchases. Those are two different systems that require two different types of sales funnels:
So, if a sales rep makes a sale to a new client, they earn a commission for that sale, like usual. But let’s say that new client stays a client for several months. Each month that the client sticks around, the sales rep continues to earn a commission off the client’s subscription fee.
7. Multiplier commission
Multiplier commission, unlike the other sales commissions on this list, factors in each sales rep’s long-term value. It starts out as a normal commission rate, but each time a sales rep earns a commission, you multiply that commission by a particular number.
What number? Well, that’s up to you. Basically, you choose multipliers based on how efficient or valuable each sales rep has proven to be in the past. So, your best sales rep would probably have the highest multiplier on the team.
If two sales reps make the exact same sale, their initial commission is the same. But if one has a higher multiplier because they have a history of doing a particularly good job, they’ll end up earning more from that sale.
This strategy incentivizes employees to work hard consistently rather than slacking off sometimes and then picking up the pace only when they feel like earning more.
8. Gross margin commission
Gross margin commission is a sales commission structure where sales reps only earn a commission on the profit from each sale, rather than the total revenue. After all, it does cost you money to make sales. This structure excludes the portion of the revenue that’s cancelled out by sales expenses.
If a sales rep makes a $3000 sale and they have a 15% commission, a normal sales commission structure would result in them earning $450. But if it costs them $200 to make that sale, the total profits are only $2800. So, their 15% commission would only come out to $420.
9. Draw against commission
Draw against commission is a slightly unusual type of sales commission structure. It’s generally used for new employees who haven’t fully gotten the hang of things yet, and are therefore disadvantaged when it comes to making sales.
Basically, you pay your sales reps a set rate based on what you expect them to make. You pay it upfront, so they get that much money even if they don’t end up earning as much as you’d expected.
Now, here’s the thing — there are two types of draw against commission:
- Recoverable draw against commission is where, if a sales rep doesn’t earn as much as you’d predicted, they have to eventually pay back the portion of their commission that they didn’t earn.
- Non-recoverable draw against commission, on the other hand, doesn’t get paid back. They get to keep it regardless.
This structure isn’t usually used long-term, particularly if it’s non-recoverable. It’s generally used to provide a safety blanket for new hires until they settle in.
10. Territory volume commission
Territory volume commission is the last type on this list, and it’s where you pay commission based on the performance of a whole group.
You might pay a 10% commission to everyone on your sales team — but instead of everyone getting 10% of their individual earnings, they get 10% of the group’s average earnings.
Let’s say there are three sales reps. One drives $1000 in revenue, one drives $2000, and one drives $3000. With normal commission, the first sales rep would earn $100, the second $200, and the third $300.
But with territory volume commission, you divide the total $6000 by three — getting you $2000 — and then take 10% of that. So, each rep earns $200.
This method is good for ensuring equal pay across your team and encouraging team cooperation rather than competitiveness, but the drawback is that it’s bad for motivation. Since driving more revenue doesn’t help employees earn more, they won’t try. In fact, they could be encouraged to slack off and mooch off their coworkers’ success.
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Almost all the sales commissions in this post are based on how many sales your sales reps are driving. But the point is moot if you’re not driving any sales to begin with. Do you need help earning more revenue? If so, turn to WebFX — we’ve got you covered.
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Table of Contents
- 6 Sales Challenges Businesses Face and How To Overcome Them
- How to Build an Effective B2B Prospecting Process in 5 Steps
- How To Overcome a Sales Slump With These 10 Strategies
- Sales Analytics 101 [+ How to Run Your Own Sales Data Analysis!]
- 13 Sales Discovery Call Questions To Discover Buyer’s Pain Points
- How to Use Sales Analysis Reports to Optimize Your Process
- 7 Ways to Shorten Your Sales Cycle
- What Is Recurring Revenue, and How Do You Track It?
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