A career in sales can offer many rewards, but it’s challenging work. Our State of Sales report found that 69% of sales professionals say their job is harder now. If you want to keep your team motivated, commission pay is critical. When things get tough, the promise of extra income can be the incentive to take a deal across the finish line.

Looking for a review of the different types of compensation structures, as well as the benefits and disadvantages for everyone involved? We’ve got you covered.

What you’ll learn

• What is commission pay?
• How does commission pay work?
• What are common types of commission pay, and what are their upsides and downsides?
• Tips to make commission pay work well

What is commission pay?

A commission is extra money paid for achieving a goal. It’s a performance-based reward for a successful effort. Usually, this money is in addition to a base income. It isn’t guaranteed, and it can fluctuate quite a bit.

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How does commission pay work?

First you agree to terms, which are usually included in a contract outlining the commission structure. This covers targets and performance periods, which are usually monthly, quarterly, or annually. Once the performance period ends, the employer pays according to the agreed-upon structure.

Commission pay is common in industries where sales or performance-based objectives are key components of the job. Typical jobs that work with this pay structure include:

• Business development representatives. These are the people who find new business opportunities, usually through cold emails, cold calls, networking, and social selling. They generally earn a combination of fixed salary and variable commissions or bonuses. Two common commission setups are based on activities (which pay out a set amount for each call made, each opportunity created, or each meeting booked) or outcomes (which pay out a percentage of revenue based on the number of deals closed).
• Sales representatives. Sales reps promote and sell products or services on behalf of a company or organization. They pitch what the company produces to potential and existing customers, maintain existing customer accounts, and ensure a smooth sales process and customer satisfaction. It’s common for them to earn a commission based on the number of sales they make.
• Account executives. These professionals are the primary point of contact for clients. They prepare presentations, run demos, explain the benefits of the products or services offered, develop detailed proposals, negotiate agreements, and close deals. They are paid a commission when they close deals. The percentage they receive often depends on the company, industry, and size of the account.

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What are common types of commission pay, and what are their upsides and downsides?

Commission pay can take several different shapes — it’s not always just an added-on percentage. Common pay structures include:

Base salary plus commission

A combination of guaranteed income (an annual salary) plus earnings pegged to performance. This approach fits best with sales cycles that are hard to predict.

Formula: Base salary + commission

Example: You’re paid $60,000 in base salary each year, plus a 10% sales commission. If you sell $250,000 worth of products, your total for the year would be: $60,000 + ($250,000 x 0.1) = $85,000.

Upside: You can count on a certain amount of money coming in, which gives you a financial foundation. When times get tough, you’ll at least still be paid something.

Downside: Depending on your pay structure, your base salary may not be enough income if you hit a rough patch. At the same time, an overly generous base pay can lead to a lack of motivation to sell.

Straight commission

Salespeople are paid only a percentage of the total sales value. This works best for shorter sales cycles and for independent salespeople with a high tolerance for risk.

Formula: Sales value x Commission rate (%)

Example: If you sell $100,000 worth of product with a commission rate of 20%, your pay would be: $100,000 x 0.2 = $20,000.

Upside: Commission is limitless unless the company has a cap. It can be powerful motivation for your people to make it clear that the more successful they are at sales, the more they’ll earn.

Downside: A commission-only salesperson’s paycheck is completely determined by performance. That can mean lean times in a challenging environment, whether it’s their fault or not.

Residual commission

This is aimed at those with existing accounts and requires an established set of clients and recurring revenue.

Formula: Client account premium x commission rate (%)

Example: You have a client paying $10,000 in monthly premiums. Your 5% commission earns you $500 a month.

Upside: Instead of closing fast deals for as much as possible, salespeople are rewarded for maintaining relationships and keeping clients happy. Over the long term, customer loyalty trumps a quick win.

Downside: Salespeople who thrive on instant gratification might become complacent without the thrill of rapid earnings. If they’re too focused on maintaining their book, they may not hunt for new accounts.

Tiered commission

In this approach, commission rates go up as the salesperson hits progressive goals, motivating them to try harder.

Formula: (Tier 1 sales x Tier 1 rate) + (Tier 2 sales x Tier 2 rate), etc.

Example: A tiered commission plan might offer 8% for sales totaling $10,000. Once the rep surpasses that, they’re paid 10% until they hit $20,000, and 15% for any sales past that point. This could also be tied to the number of deals signed rather than a dollar amount.

Upside: The more your salespeople succeed, the better they do financially. That’s a strong incentive for them to go for the next level rather than resting on their laurels.

Downside: If tiers aren’t structured fairly, salespeople who routinely come in below the highest achievers may feel the system is rigged and stop trying to get ahead.

Draw against commission

This structure is an advance against future earnings and can give reps some financial security. It can be particularly helpful for newbies on the team and those facing challenging times.

Formula: Commission earned – draw amount

Example: Your pay structure includes a $4,000 draw against your commission. So if you bring in $5,000 in commission, your total earnings would be: $5,000 – $4,000 drawn = $1,000. (Note that draws can be recoverable, where the salesperson pays the draw amount back, or unrecoverable, where they keep it.)

Upside: Like the base plus commission structure, this setup offers a sense of some financial stability. It can be reassuring for salespeople to have a safety net.

Downside: For employers, maintaining the sales team’s morale can be outweighed by commission draws paid out in a tough sales climate. If the draws are unrecoverable, the company may suffer.

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Tips to make commission pay work well

In its many forms, commission pay can motivate sales teams, drive performance, and achieve business objectives. In my experience as managing director of Everybody Works in Sales, how you implement commissions is just as important as the types you offer. Here are some tips for inspiring your team with commission pay:

• Encourage salespeople to fuel their tactics with a purpose. If you’re not getting the results you want from your sales team, and they’re concerned about low commission pay, you might be tempted to “fix” it by setting an arbitrary rule, such as everyone making 40 calls a day. That’s a bit traditional and is unlikely to boost business or help your team make more money. It’s usually more valuable to encourage salespeople to pursue five social media connections or send five targeted emails than to impose high-volume demands. Train your salespeople on personalized tactics, such as sending a video or voice note that communicates tone, energy, and enthusiasm. “Work smarter, not harder” may be a cliché, but it’s solid advice.
• Listen to and then coach team members on getting more sales. More success means more commission pay, but managers sometimes underestimate what it takes to help salespeople develop their skills. Set weekly one-on-one meetings where you ask them how they’re doing and quietly listen for underlying challenges. Ask about their recent highlights and struggles. Then work on solutions with them. This attention can help your salespeople perform better and net more commission pay. Remember: It’s about monitoring and supporting, not micromanaging.
• Encourage cooperative learning rather than divisive competition. Commissions can breed resentment when fellow salespeople start comparing their earnings. If people on your team aren’t hitting goals or earning as much as others do, don’t dismiss them as hopeless. Instead, promote a culture where everyone learns from those who are doing well. Ask your successful salespeople to talk to the team about their routines and approaches. Have them recommend books and podcasts they’ve drawn tips and tricks from. Commission pay doesn’t need to be a race in order for you to spur a successful team.

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Build a motivational structure and hit your sales goals

Done right, commission pay motivates sales teams and drives business growth. By connecting compensation to performance, commission pay encourages sales reps to learn, improve, and make sure the company meets or exceeds its goals. It also fosters a culture of accountability, excellence, and customer focus. Down that road lies bigger and better results.