Whether you work in sales or are considering a career change to a sales-related position, you should understand how commission structures work. Because most salespeople are paid on a commission basis, what and how much they sell affects their annual household income. In this article, we define a typical commission structure for sales SAAS, as well as provide a template and examples.
What is Sales Commission Structure?
In the sales industry, a commission structure specifies how companies compensate their sales associates. Various sales commission structures result in varying levels of pay. Commissions may be paid weekly, biweekly, or monthly. Most are paid at the end of the period, but some may be delayed if employers must wait for client payments before paying you.
Importance of an Efficient Sales Commission Structure
Fairness and accuracy are important considerations for businesses when developing an effective sales commission structure. Sales associates who believe they are being fairly compensated are more likely to stay with a company rather than leave for better opportunities. Effective structures include a good mix of salary and commission, as well as quotas that can be met. The way a company compensates its salespeople can impact profitability while also attracting and retaining the best sales force.
Sales Commission Structure Template
A typical sales commission structure template is a spreadsheet that allows you to calculate your commissions and compare various commission structures. Creating a sales commission structure template gives your company a better idea of how much money it can expect to make. This will assist you in budgeting for new hires and long-term growth.
A sales commission structure template can be used to calculate your commission plan in Excel. It includes instructions for creating a commission plan based on employee levels as well as other important information to consider.
Using a standard sales commission structure template is a typical way to understand your compensation and how commission levels affect your pay.
Simplifying Sales Commission Structure Template
With a sales commission structure template, you can easily simplify the sales commission process for your company. It will handle all the complicated calculations, payroll, and other paperwork associated with setting up a sales commission structure.
A sales commission structure is a method of compensating your team members. A straight commission split and an A/B split are the two most common types of sales commission. With this template, you can quickly determine which one is best for your company.
A sales commission structure template can help you simplify your sales process. You don’t need to know what your commission rates should be in each of your different territories if you can create a template that does all the work for you.
How to Use Sales Commission Structure Template
A commission structure template is a document that details the steps for each employee as well as the pay rate for each level in your company. It is typically created by one or more senior employees to assist others in understanding how they can best contribute to growth.
When designing a commission structure, consider including different levels such as key account managers (KAM), regional directors, and so on.
A sales commission structure template can help you manage your sales team effectively. A commission structure template is a tool that assists you in determining how much you will pay your sales representatives based on their performance regarding goals and quotas.
Using a sales commission structure template is an efficient way to ensure that you are properly structured. This ensures that your company follows all tax laws and regulations, protects the company from potential claims of unequal pay, and builds trust in the company.
Sales Commission Structure Examples
There are numerous structures that may be suitable for your company’s requirements.
While there are many models to choose from, don’t feel obligated to use any one of them. Keep in mind that most businesses will end up taking a hybrid approach, “mixing and matching” aspects from many of the following models to best suit their own sales teams.
Types of Sales Commission Structure and Examples
Businesses use a variety of sales commission structures depending on their services or products. Typical sales commission structure examples include:
#1. Base salary plus commission
A sales rep is paid a set monthly or annual salary regardless of performance in a base salary + commission model. They will also be able to earn a commission on each sale they make.
Because the base salary is usually insufficient to make a comfortable living, sales reps are incentivized to work hard to meet their commission goals. A base salary plus commission is an excellent combination of financial security and financial incentive.
Base salary plus commission example:
A sales rep’s base salary is $2,000 every two weeks, regardless of how many sales he makes. He also receives 10% of the proceeds from each sale.
The sales representative sold $5,000 in products in March. In March, he will be paid $4,500 ($2,000 per month plus 10% of his $5,000 in sales).
#2. Commission only
Sales representatives are not paid a base salary in a commission-only model. Their only source of income is the number and value of transactions they complete. This model has both advantages and disadvantages. On the one hand, it may be appealing to some businesses, particularly those with shorter sales cycles and/or higher-value deals. It’s also beneficial for cash-strapped startups because they only have to pay out when new customers are acquired.
Example of commission only:
Every sale a salesperson makes earns her a $500 commission. There is no minimum or maximum commission that the rep can earn.
#3. Revenue commission
This is one of the typical sales commission structure
A revenue commission model pays sales reps a commission based on a percentage of the total amount a deal brings in.
This model does not account for any other costs associated with the transaction (marketing, customer support, etc.). In other words, it’s not about profit—about its long-term goals and overall cash flow. This model works well for fixed-priced goods and services.
Example of a revenue commission:
Marble countertop slabs are sold for $25,000 each by a sales representative. On each sale, she receives a 5% revenue commission. She receives a $1,250 commission for each countertop slab she sells.
#4. Gross margin commission
The gross margin commission is the inverse of the revenue commission. A commission is paid based on the profit a deal generates for the company under this model. This commission structure encourages sales representatives to push higher-ticket items while discouraging them from offering discounts.
Example of gross margin commission:
A $50,000 manufacturing machine component is sold by a salesperson. The component costs $30,000 to manufacture, and the company profits $20,000 on each sale. The sales rep is paid a 10% commission on the sale’s profit. He receives $200 in commission if he sells one product (10% of the $20,000 profit).
#5. Draw against commission
The drawback to the commission model is a little more complicated. Guaranteed pay has an aspect that holds sales reps accountable and incentivizes them to work hard for their commission.
A draw against commission is a type of advance payment given to a representative in order to hedge their own performance. In some cases, the draw is more of a loan than payment and must be repaid in full.
Example of a draw against commission:
In a pay period, a salesperson is expected to earn $6,000 in commission. At the start of that pay period, she receives a $3,000 “draw.” If she meets her goal of $6,000, she will receive an additional $3,000 at the end of the pay period. If she falls short of her sales target but earns more than $3,000, she will be paid the difference between the draw and her earnings. Furthermore, if she does not match the $3,000 draw, she will owe the company the difference between the $3,000 and what she actually earned at the end of the pay period.
#6. Tiered commission
A tiered commission model allows sales representatives to earn higher commission rates as they meet certain quotas.
For example, a sales representative may be paid an 8% commission until they close 100 deals. They begin earning an 11% commission rate after the 100th transaction. This can also be done on a monetary basis.
Example of a tiered commission:
A sales representative earns a 3% commission on all revenue generated, up to $100,000. If their revenue exceeds $100,000, they will receive a 5% commission on all revenue between $100,000 and $199,999. Any revenue in excess of $200,000 earns the sales rep a 10% commission.
#7. Multiplier commission
Multiplier commissions can be difficult to understand. It’s the most personalized of the standard “templates,” but working out the details can be worthwhile — this model is highly motivating for many sales reps.
Example of a multiplier commission:
A sales representative is paid a 5% commission rate. That rate is then multiplied by a certain percentage depending on how close they are to meeting their quota (hence the name of the commission plan).
If they are anywhere between 0% and 75% of the way to meeting the quota, they will receive 80% of their commission rate—the multiplier here is 80%. This multiplier increases the rep’s commission by 4% until they reach 75% of their quota.
If they meet 76% to 90% of their quota, the rep will receive 90% of their commission — 4.5%. Reps who hit 90%-100% of their quota earn 100% of their 5% commission.
#8. Base pay only
A base pay-only model is uncommon in sales, but it is still worth considering. The definition is straightforward: reps are only paid a standard salary and are not compensated for the deals they close.
As you might expect, this model isn’t very motivating—why work extra hours to close that six-figure deal if you’re not going to be rewarded for it? Having said that, it can sometimes work well for businesses that rely heavily on inbound marketing.
Example of base pay only:
Regardless of how many sales they make or how much revenue they bring in for the organization, all junior sales reps receive $2,000 in salary twice a month. Regardless of how many sales they make or how much revenue they bring in for the organization, all senior sales reps receive $3,000 in salary twice a month.
#9. Residual commission
A sales rep will earn a certain percentage of commission if their customer continues to bring money into the company after the initial deal is closed with a residual commission. For example, if a customer renews their contract after the original one has expired, the sales representative who closed the deal will receive a commission when they re-sign.
Example of a residual commission:
A SaaS salesperson signs a two-year contract with a new client. The customer pays the company $3,000 per month for the software under the terms of the contract. The sales rep who sold the software earns a 5% residual commission, which translates to $150 per month for the duration of the contract.
Sales Commission Structure SAAS
Whatever SaaS sales commission structure you choose, the following rules will help you make better decisions. These are industry standards, and adhering to them will keep you out of trouble. Let’s look at the principles you should consider before finalizing your SaaS sales commission structure:
- Salesperson salary = 50% base + 50% commission for SaaS salesperson – You can apply this principle, which is common among SaaS companies, especially if you are a startup.
- Commissions are only valid for new subscribers – Have you come across SaaS companies that offer LTV-based commissions? That is more about being unfair than being wrong. This is why. The sales team is in charge of bringing in new customers. Customers who are new and expensive. The marketing and customer success teams are in charge of retention.
- Quotas should be 5x OTE (On Target Earnings) – If you’re wondering, OTE is your sales rep’s base salary plus the expected bonus if he exceeds the quota. In other words, it is the full salary of your sales representative.
- Avoid discounts – If you don’t want to appear insecure and want to demonstrate the true value of your software, don’t include discounts in your strategy. Your sales reps should also understand that lower-priced deals have an impact on their commission size. Sales teams in SaaS companies primarily work with large corporations for whom a 10% or 15% discount makes little sense. All they want is a finished product.
What is a typical sales commission structure?
The typical industry average for sales commission structure is 20% to 30% of gross margins. Sales professionals can earn as little as 5% of a sale, while straight commission structures allow for a 100% commission.
What is a good commission percentage for sales?
Between 20% and 30%
Sales commission rates range from 5% to 50%, but most businesses pay between 20-30%. Start by estimating how much it would cost to hire people under different sales commission structures—both full-time employees and independent contractors—to find the right fit that aligns with your sales goals.
What is a common commission structure?
Variable pay as a percentage of a single sale’s revenue is one of the most basic and widely used sales commission structures. Reps earn a flat percentage for each sale under this incentive structure. For example, suppose your company sells a $100,000 product with a 5% commission rate.
What is a sales commission plan?
A sales commission plan is a financial incentive used to motivate salespeople to meet their sales targets. The goal is straightforward: to increase sales and business by incentivizing salespeople to exceed their comfort level.
What is a 70/30 compensation plan?
A 70/30 pay split allocates 70% of the total target compensation to base salary and 30% to target incentive. Pay ratios range from 50/50 to 85/15. For “high influence” sales jobs, use a more aggressive pay mix, and for “low influence” sales jobs, use a less aggressive pay mix.
What are the three types of commission plans?
The three types of commission plans are as follows:
- Straight commission.
- Graduated commission.
- Piecework commission.
What is the formula for commission?
A commission from a sale. Companies typically pay out a percentage of total sales revenue. The commission is calculated as follows: commission = total sales revenue * commission rate. This equation can also include base pay by simply adding it to the commission earned.
Final Thoughts
Choose a plan that will motivate your team the most when looking for a sales commission structure to take your team to the next level. What matters most to your team? Are you aiming for top performers or a specific market share? Are you a small business looking to expand or a large corporation looking to tighten its margins?
Once you’ve determined that, you can determine whether a base salary plus commission, tiered commission, draw against commission, gross margin commission, residual payments, or other plan is best for your company. Finally, consider using sales commission software to streamline and transparent the process.
Sales Commission Structure FAQs
Is commission paid on gross or net sales?
The commission is typically based on the total amount of a sale, but it may also be based on other factors such as a product’s gross margin or even its net profit.
What are 3 sales compensation methods?
Sales management can choose from three basic compensation plans: salary, commission, or combination (salary plus incentive).
How do you structure sales compensation?
Base Salary + Commission Plan
The base salary plus commission plan is the most common sales compensation pay structure. This structure pays reps a fixed annual base salary as well as commission. They benefit from the security of a consistent income as well as the economic incentive to sell.
