The percentage of commission companies choose to pay their sales representatives directly impacts profits and sales success. Most of the time, having high-rate commissions is a productive strategy in business development. Employees choose to pay more to attract the best sales reps. There are different types of commissions you should know about to choose what is best for you.
| Commission Structure | Main Benefit |
|---|---|
| Straight Commission | Simple and easy to understand |
| Tiered Commission | Encourages salespeople to hit higher sales targets |
| Draw Against Commission | Provides a guaranteed income for salespeople |
| Residual Commission | Rewards salespeople for maintaining long-term customer relationships |
| Hybrid Commission | Combines different commission structures to suit the needs of the company and sales team |
Commission draw model
This system mixes only-commission OTE and base salary plus commission models. A rep with a right to draw $1000 and earn $800 in commission will get the entire amount of commission as well as $0. He earns $800 in commission and will get the entire amount of commission as well as $200. It is the draw amount.
This OTE structure is a complex metric. However, companies often use it because it is good for beginners in sales who need time to adjust. However, an employer who experiences bad sales a few times in a row can end up in debt to the company. It’s because all the money paid in advance should be returned.
100% system
One of the most widely used structures of payment in sales is the 100% commission plan. It involves paying only according to a rep’s progress in work. It does not have a base salary, and the money you will get depends on your sales achievements.
This structure allows you to earn a higher income if you wish to work as much as possible. However, employers often choose jobs with a fixed amount of money for the base salary. It guarantees a salary even if they are not highly efficient at selling.
Territory commission structure
This type focuses on the income for a certain region as a whole. All the reps work as a team, and the commission from their work is split up evenly. It can seem that this model creates equality in the team but in reality, reps who work harder carry most of the weight. The other disadvantage is that this structure requires leaders who will manage the whole team’s work. Therefore, the territory type is not a popular sales payment system.
Base salary and commission
Suppose a business uses a 100% system. In that case, it can struggle to find new people for sales positions. It’s because only experienced workers can feel secure in that type of job. As a result, many businesses opt for a structure that includes both a base salary and a commission. With this system, the company agrees to pay a fixed sum of money to employers. It’s regardless of their performance and gives additional money for each sale.
Even if it seems that companies will lose money by paying a fixed salary, this system can be advantageous for both parties. The base salary is often low and does not fill the needs of reps, so they still stay motivated to work harder for more money. At the same time, there is a guarantee that you will not be out of payment in the case of an unprofitable day in sales.
Tiered system
A salesperson’s job is to keep their team motivated and strive for new goals. A tiering payment structure is a successful strategy. It ensures that reps want to work efficiently to earn more money or avoid losing them. This system is based on benchmarks that represent different percentages of commission.
For example, you may generally earn 5% in commission. Still, you can pass this mark and earn 7% in commission or more. In some cases, businesses use the same structure to address underperformance. If an employer does not meet expected goals, they lose money.
The example below assumes all sales receive the same commission rate but that it changes depending on whether certain targets are met.
| Base | Sales per month | Commission rate | Commission | Earnings |
| 6,500 | 0 | 10% | 0 | 6,500 |
| 6,500 | $15,000 | 10% | $1,500 | $8,000 |
| 6,500 | $25,000 | 10% | $2,500 | $9,000 |
| 6,500 | $35,000 | 10% | $3,500 | $10,000 |
| 6,500 | $45,000 | 15% | $6,750 | $13,250 |
| 6,500 | $55,000 | 15% | $8,250 | $14,750 |
| 6,500 | $65,000 | 15% | $9,750 | $16,250 |
| 6,500 | $75,000 | 15% | $11,250 | $17,750 |
| 6,500 | $85,000 | 20% | $17,000 | $23,500 |
| 6,500 | $95,000 | 20% | $19,000 | $25,500 |
| 6,500 | $105,000 | 20% | $21,000 | $27,500 |
| 6,500 | $115,000 | 20% | $23,000 | $29,500 |
Base salary only
This type of salary is rarely used in sales because it fails to motivate reps for better performance. Suppose everyone gets the same amount of money for different performances. In that case, there is no reason for salespeople to aspire to close more deals. However, suppose the job of employers in the company is focused more on consulting than on selling. In that case, this strategy is the best option. In this case, all employers will be satisfied with their payment.
Revenue structure
This type of commission structure concentrates not so much on the profits as on how big the sales deals are. For example, the deal for $1000 will be estimated at 10% of commission, and the deal for $2500 will make 25%. The more expensive the item you sell, the higher your salary.
This system is widely used for selling products at fixed prices. It also ensures that top reps will get the payment they deserve. Moreover, it is good for businesses that want to enter new markets for more deal opportunities.
Gross margin model
This model is related to the profit from each sale the rep makes. Simply put, a product that costs $2000 and is worth $1500 in expenses will give a salesperson a percentage of the remaining $500. Reps sometimes give a lot of discounts to make more deals. They will be reluctant to do so within this system, and the company will not lose profits from products. A gross margin model motivates salespeople to sell products at prices that will give them the best profits.
Residual structure
All businesses are interested in sustaining long-term customer relationships and finding new clients. A residual model motivates salespeople to work on establishing continuing agreements with clients. In this system, reps get a commission if the company profits from long-run revenues.
