May 5, 2022

Commission Plan Types

Commission Plan Types

David Zimpfer
May 5, 2022

Competitive and effective sales commission and compensation plans are essential for  attracting and retaining top talent. Creating a compensation plan with generous sales commissions has been  proven to be a motivating force for sales teams to hit goals and accelerate account growth.   With careful consideration and strategic design, you can develop a plan to inspire your team to perform at  their highest level. In this paper, we’ll explore some of the elements you’ll need to consider and plan for.

Commission Structure

One of the first considerations for compensation is deciding on the structure of the sales commission you pay your salesforce. Structures can vary depending on your company’s sales and products. Here are some common structures:

1. Commission Only

This is a straightforward arrangement: make a sale, earn a commission. The flip side of this is, no sale, no commission.  Since the company is not paying a salary, the commission rate paid is generally high and often attracts high producers.

Example: A salesperson makes either a percentage, say 10%, or receives a flat fee, say $500 for every sale made.

2. Base Salary Plus Commission

This is one of the most common commission structures.  It provides a sales rep with a base salary and a commission rate. The percentage makeup of each can vary, but a typical ratio is 60:40, where 60% is base salary and 40% is commission. This plan best serves as an incentive for high performance.

Example: A salesperson makes a $5,000/month salary, with 10% for $5,000 in commission sales, or $500.  If the salesperson sells $20,000 in one month, they will earn $2,000 commission dollars on top of their $5,000 base salary.

3. Tiered Commission

In a tiered commission model, a certain percentage of commission is paid up to a predetermined sales volume, and once that volume is met, a higher commission rate is paid.  There can be multiple tiers in a plan. This plan motivates the sales rep to exceed goals and close deals.

Example: A 3 tier plan would have a base commission of 5% for the first $100,000 in sales.  For the next $100,000-$200,000 in sales, the commission is 7%.  Sales above this amount is paid at a 10% commission rate.

4. Base Salary

This is a straight salary paid with no consideration for sales volume. This is generally used in servicing a sales transaction where little customer development is required. In this structure, there is no incentive to upsell or increase sales or services.

Example: All the salespeople make the same amount, $5,000/month, no matter how many sales they make.

Determining the best sales structures for your business largely depends on what behaviors you want to incentivize and how they fit into your company culture and product needs. If you take a transactional approach to sales and customers, you will undoubtedly choose a structure that is very different from one in which you want to build a loyal, long-term relationship with your customer base. 

On-Target Earnings

The next step in determining your compensation is establishing your  On-Target Earnings (OTE), which is the salesperson’s annual salary. The OTE is the base salary plus the commission earned on sales. Many factors play into determining the OTE, such as seniority, geography, competition, and industry. Consulting your HR group is a good first step in establishing a fair and equitable OTE for your sales team.

Commission Plan Metrics

Determining commission metrics is  critical to having a successful compensation plan and happy salespeople. Here are some factors to consider when assigning weight to your commission structure:

  • Revenue from new business vs. revenue from existing customers
  • Average lifetime value (LTV) of a customer
  • Deals won vs. deals lost
  • Cost of selling vs. revenue earned
  • Market penetration
  • Growth over time
  • Customer strategic value

Sales Commission Summed Up

There are a lot of moving parts to consider in designing and implementing a successful sales commission plan, and it may seem overwhelming at times. But with the right tools and with careful  planning, execution, and monitoring, you can make it seem effortless, and even make it an enjoyable experience.

Finicast can give you that experience with a customizable end-to-end commission calculation solution. Finicast will allow you to get started easily and calculate commissions using any of these commission structures and metrics. As your sales team grows and the commission structure becomes more complicated, Finicast can easily scale your commission calculator. If you need to pull in data from your CRM, ERP systems or collect information from different individuals within your company, Finicast can easily accommodate any sort of data transfer or collection. Furthermore, you can even use Finicast for auditable approvals from each commission-receiving member on your sales team.

Please contact us at Finicast to see Finicast in action!