What is Sales Commission Structure?

Sales commission is the variable component of a total sales

compensation package, based on a sales rep’s individual goals and
performance. But, while the other piece of the comp package, a
sales rep’s salary structure, is fixed and fairly straightforward, the
makeup of the variable portion is one that allows for different
configurations based on the given sales solution.

So when it comes to the different types of commission structures,

the most common and simple approach is basing variable pay as a
percentage of a single sale’s revenue. If a widget sells for $1,000
with a sales commission rate of 5%, a sales professional would
collect $50 for each widget they sell.

When deciding between sales compensation models, what’s the

best way to structure?

Typical Sales Commission Structure

Examples
Standard sales commission structures include revenue, gross
margin, and tiered commission structures, along with multiplier
plans and those based on commission-only.

The above revenue commission model is your basic sales

commission structure, and works well in situations where pricing is
fixed, but again, it also greatly depends on the goals of the
business. For example, if a company is trying to gain market share,
enter a new market, or even block competitors from earning the
sale, they might be less concerned with profits and would prefer the
revenue plan. But quite often, this setup does not align with the
larger goals of the organization or the unique make-up of the sales
team.

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Sales Compensation Plans," to
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As such, it’s beneficial to have various sales commissions models

that support the unique skills and abilities of a sales team and can
motivate them to strive for the greatest financial reward. Knowing
the pros and cons of the different types of sales pay structures – and
choosing the right one – can lead to more fruitful results for each
sales team member, as well as the company’s bottom line. Here are
a few other options to consider:

Gross Margin Commission Plans

Anything based on revenue only has to do with the price tag of the
sale. Gross margin, though, involves both the price of the sale and
the costs associated with making that sale, to arrive at the profit of
each transaction.

With this commission pay example, if the company is selling widgets

for $1,000, and there is $500 in associated costs, then the
commission would be a percentage based on the remaining $500
profit.

When it comes to gross profit margin vs. revenue commission, the

main argument for gross margin is that each sale should benefit the
company’s bottom line. That’s the name of the game, right? If a
company is only focused on making the sale, there might not be any
resulting bottom line benefit, or even worse, there could be a
negative impact if the selling price is too low.

Tiered Commission Plans

Tiered commissions are designed so employees can earn greater

commission rates once they surpass a certain level of revenues. For
instance, if a reps is earning 5% on each widget sold up to $100,000
in total revenue, the tiered commission plan might allow for the rate
to increase to 7% once they surpass the $100,000 mark.

With this type of commission setup, high performers have additional

motivation to keep selling, and thus, could even branch out into
areas they wouldn’t have otherwise considered, such as upselling
new features, etc.

Multiplier Plan

The multiplier plan helps companies build custom-made comp

strategies, but it can be a tedious process. Multiplier plans are good
when sales leads want to implement multiple performance
measures to a rep’s incentive plan. It can start with the common
method of basing variable pay as a percentage of a single revenue,
but then multiplying it by a percentage factor of quota achievement.
Using multipliers can not only help reflect the sales cycle but also
fine-tune how sales reps can stay motivated.

Straight Commission or Commission-Only

Straight commission refers to the idea of employing “commission

only sales reps,” with earnings made up entirely of variable pay
(thus, there is no fixed salary component). While it can be argued
that the straight commission plan isn’t necessarily a specific sales
compensation structure, it’s important to address what it means to
be commission-only.

With such a plan, you’ll find your sales professionals are extremely
motivated to close their deals, but on the other hand, their work
also comes with more stress given the amount of risk involved.
Likewise, you’re also increasing the chance that the sale is closed in
a manner that doesn’t align with company goals. That said, there
are situations where straight commission makes the most sense
(perhaps with shorter sales cycles, or when there is the opportunity
for sizable commissions, etc.).

The Bottom Line

When it comes to the types of commission structures for sales reps,

and how to go about developing plans, the story is never black and
white. There are a number of other terms and ideas with which you
should also be familiar.

For instance, the “draw against commission” is essentially a

payment advancement that is subtracted from the final commission
result. If the received draw is $200, and you sell eight $1,000
widgets at 5% commission (for a total commission of $400), you
would be paid $200 because you already received the first $200 at
the beginning of the month.

These three scenarios only scratch the surface on the different kinds
of commission plan models that can be considered. The long and
the short is that one plan doesn’t fit all and the most successful
organizations are implementing a hybrid mix of these plans to map
both to their own corporate objectives, as well as to inspire the best
performance from their sales reps and teams.

How to structure your sales

commissions (with examples)

Sales commissions are typically structured around a sales rep’s

goals and peak performance, but how you reward their hard
work can vary depending on your industry and preferences.
For example, selling a car might involve a placement fee
commission structure, while selling pharmaceuticals may come
with a territory or tiered commission structure. There are
plenty of options to choose from, but it can be hard to discern
which works best for your sales reps.
Although there are no hard-and-fast rules for commission
structures or a hard science behind them, the real goal is to
find what motivates your team while benefiting your bottom
line at the same time – without setting unrealistic goals. Here’s
how to structure your own sales commissions – with examples.

Base salary plus commission

Offering employees a base salary and commission ensure they
can cover their living expenses while still incentivizing them to
perform and keep productivity high. Some companies even
offer a high salary and a low commission to ensure their
employees’ success and potential loyalty. However, the type of
product or service you sell may also not work well with a high
commission structure. For example, a company that sells high-
end industrial products a few times a year may need to offer
their employees a solid base salary to stay motivated and keep
their cash flow steady.

The base salary and commission you offer your employees can
vary, but a good rule of thumb many companies follow is to
offer a mix of 30% income from base salary and 70% from
commission. However, if you don’t have many competitors in
your space, you could try a 50:50 mix.

It’s also worth considering what your employees are motivated

by before offering a base and commission structure. After all,
not everyone is incentivized strictly by money and may instead
want the stability of a high salary and additional perks. Some
employees are more motivated by flexible time or a fantastic
company culture that values their contribution.

Commission only
Companies that want to ensure their employees are highly
motivated and only compensated when they convert sales
should look to a commission-only structure. This type of
situation can work well for both businesses and employees
alike. Businesses only pay when sales are added to their
revenue and bottom line. This ultimately ensures that the
business has the money to pay their sales representative.
Meanwhile, employees can work as long or as hard as they
want to exceed their financial goals and keep scaling their
careers.

Some businesses are a better fit for a commission-only

structure than others. For example, realtors typically only
receive a commission when they sell houses and are also
required to pay part of their earnings back to the parent
company they work with. According to Bankrate, the standard
real estate agent commission on a transaction is 6% of the
property’s sale price with the buyer’s agent and the seller’s
agent splitting the money. You can structure a similar
commission-only structure for your company, but make sure
your sales team can live off of their earnings and that
commissions are processed quickly.

Capped commission
Capped commissions put a limit on the amount of
commissions a sales agent can earn. In most cases, that means
if an agent can only earn $100,000 in commissions, they will
not earn any extra for selling more products. As a result, a
capped commission can be a somewhat controversial
compensation model, as some companies feel it will deter
their best performers in the long run.

Capped commissions can also be seen as a negative for high-

performing salespeople who want the freedom to earn as
much as they are capable of. But this type of commission
structure can also give your team a big boost in their finances
by offering them the chance to earn big until they reach that
cap.

However, some industries like real estate may use a

commission cap with a modification. In the above example of
Keller Williams, 64% of the commission goes to the agent,
30% goes to the Market Center as a variable cap, and 6% goes
to Keller Williams but is capped at $3,000. This all means that
realtors can retain more of their commission in the long run. In
this case, the commission they are paying out is capped, as
opposed to what they are earning themselves.

Tiered commission
Some salespeople are motivated to crush their quotas and
sales goals and hit new financial success. You should tap into
their momentum and come up with a commission that
motivates them to keep exceeding their goals. In this case,
instead of simply offering them a commission-only structure,
you can further incentivize them with a tiered commission and
give them a reason to keep pushing themselves.

Here’s how that might look for your own company. On

any sales your team earns of up to $25,000, your company
could extend a commission offer of 2%. When they hit $25,001
to $50,000, you can increase their commission to 2.5% or 3%
to keep their motivation high to keep exceeding their quotas
and goals. Insurance agents, solar panel dealers, and security
system sellers are all examples of positions that typically come
with a tiered commission structure.

Territory volume
If your sales team tends to work with the same clients in a
particular area, you should look into a commission plan that
both benefits and protects them. For example, businesses with
a rich network and plenty of clients to choose from may
benefit from a territory volume-based commission plan. This
type of commission structure allows teams to focus on
growing their networks and working together as a
team. Salespeople are then paid based on territory-wide sales
instead of individual sales.

A territory volume should come with an attractive commission

and a desirable territory. According to Time to Hire, one model
for territory volume commissions is a 25% commission on
gross revenue with an exclusive territory. An insurance agency
or B2B business selling tools and supplies directly to other
businesses may work well with a territory volume strategy. The
upside to assigning a territory is that it offers protection so
that others can’t poach hard-earned customers. The downside
is that a sales rep who worked hard to build up their customer
base will suffer if those clients leave the territory and resettle
elsewhere.

Placement fees
Some industries and positions may fare better with a
placement fee commission structure than others. Car dealers
often work on this type of compensation model. The sales
personnel could earn a flat placement fee of $300 per car sold.

Although the placement compensation model can work well

for expensive products that require a high level of customer
service interaction, it can also be highly competitive. Every
time a car dealer across the street raises their placement, your
team could decide to leave and sign with them. Turnover can
be high with companies that use placement commission
models. On the other hand, this model can also work well if
you’re offering the highest commission among your
competitors. The real goal is to treat your sales team well,
offer a healthy commission, and stay one step ahead of your
competition.

Collaborative
Although there are best practices for structuring your sales
commissions, there is no single best way to do it for your
company. It’s also wise to see how the commission structures
in your industry and area are set up by competitors so you can
stay competitive and attract and retain top talent. And aside
from what your competitors are doing, every business and its
employees are also motivated by different commissions or
lifestyle perks like flexible schedules. That’s why turning the
sales commission into a collaborative process can help you
determine the best fit for your company.

Take the time to sit down with your team and talk through
what motivates them the most and how you can incorporate
this into your commission structure. You may find it’s not
simply money, but the chance to work their way into the best
territory or product line. Or you may decide they want
uncapped commissions to see just how far they can take
their sales success. Not only will you walk away with a better
understanding of how to properly compensate your
employees, but they’ll appreciate feeling a sense of ownership
in the process.
Excel Formula to Calculate
Commissions with Tiered Rate
Structure

 Jon Acampora

 May 15, 2013

In this post I will explain how to calculate a dollar or percentage commission
payout in one cell using the SUMPRODUCT function. Calculating
commissions on a tiered rate structure can be difficult because you are trying
to determine the cumulative payout based on different rates at each tier, and
the achievement amount might fall in between one of the tier ranges.

If your commission plan tiers are not cumulative, then you might want to
checkout my article on how to calculate commissions with VLOOKUP. This is
a simpler calculation then the one presented below.

Tiered Rate Table

The following is an example of a tiered rate table for sales commissions. The
first column contains the tiered ranges of Quota Attainment and the second
column contains the Payout % for each tier. If the sales person (rep) achieves
sales that are at the top end of each tier, then they will receive the full payout
amount in the Total Payout column. For example, if the rep sells 40% of their
quota then they will receive 20% of their commission. If they sell 60% of
quota, they will receive 35%, and so on down the table.
The difficult part is when the attainment amount falls in between the ranges.
What if the rep sells 50% of his/her quota? The rep would receive 20%
payout for the first 40% of quota, and an additional 7.5% payout for the last
10% of quota. The last 10% of quota attainment is calculated by finding
the payout rate at each tier. So the total payout on 50% of quota would be
27.5%.
Typically we would have to calculate the payout at every tier and then sum the
payout amounts to get the total amount. Or we could use some complicated
IF statement to determine the payout all in one formula. But there is an easier
way…

The Solution
You can download the sample workbook below to follow along.
The SUMPRODUCT function can be used to calculate the entire payout. First
we have to calculate the differential payout rate for each tier. The
differential rate is the difference between the payout rates at each tier.
The payout rate at each tier is the total percentage of payout in the tier,
divided by the total percent of attainment possible in the tier. This is basically
the amount paid for each percentage increase in attainment in each tier. In
the image below the Payout Rate for the 0%-40% range is 0.50. This means
that for every 1% attained, the payout will be 0.50 of the 20% total payout.

Payout Rate =([tier attainment max] – [tier attainment min]) / ([payout % this
tier] – [payout % previous tier])

Rate Curve
The payout rate is also known as the rate curve. The rate curve is displayed
below, and you can think of the payout rate as the slope of the curve at each
tier.

Differential Rate
The differential rate is calculated by taking the difference between the
payout rate in the current tier and the payout rate in the previous tier.
Differential Rate = [payout rate Current tier] – [payout rate Previous tier]

This is used in the cumulative calculation of the payout percentage. As the

attainment moves up into multiple tiers, the amount of attainment left in each
tier is multiplied by the differential rate. The sum of all these is the total
payout.
 SUMPRODUCT Explained
The SUMPRODUCT formula for Total Payout is:
=SUMPRODUCT( (Attainment > [Tier Min]) * (Attainment – [Tier Min]) *
[Differential Rate] )

Variables in brackets [] refer to entire column in rate table.

The following splits the SUMPRODUCT formula into multiple columns and
rows for a clearer visual of how the formula is calculating the total payout.

1. Attain > Tier Min: Returns a “1” if the attainment is greater than the

attainment tier minimum. If attainment is 90%, then the condition is true for the first 4

rows and a value of 1 is returned.

2. Attain – Tier Min: Finds the difference between the total attainment and

attainment tier minimum. This is necessary because we are multiplying it by the

differential rate. So in the first row we are taking the entire attainment of 90% and

multiplying it by the diff rate of 50%. Each subsequent row is taking the leftover

attainment for its tier range, and multiplying it by the payout rate that is leftover for its

tier (the diff rate).

3. Diff Rate: The differential rate for each tier.

4. Product: Column 1 * Column 2 * Column 3

5. Sumproduct: Sum of the Product column. The total payout on 90%

attainment is 87.5%
SUMPRODUCT Visualization
The following is a visual example of the Product column plotted on the rate
curve. Sometimes it is easier to understand when you see it visually. The
SUMPRODUCT formula finds the total payout in each tier based on the
remaining balance of attainment multiplied by the payout rate in that tier. This
is basically a continuation of the rate curve at each tier to the total attainment
of 90%. In the chart below you can see that the dark grey lines follow
the rate curve at each tier and then continue on the same curve to the
90% attainment (green) line.
1. For the first tier it is (90%-0%) * (50%-0%) = 45%. 50% is the payout rate for

tier 1, and 90% is the total attainment.

2. The second tier is (90%-40%) * (75%-50%) = 12.5%. The 90%-40% is the

remaining balance of attainment for tier 2, which is 50%. 45% (tier 1) + 12.5% (tier 2)

= 57.5%

3. Tier 3 is (90%-60%) * (200%-75%) = 37.5%. The sum of the first three tiers is

95% (45%+12.5%+37.5%), which is higher than the actual payout of 87.5%.

4. Tier 4 is (90%-80%) * (125%-200%) = -7.5%. The negative product is a

result of the payout rate being less in tier 4 than tier 3. Or, the slope of the rate curve

is flatter in tier 4 than tier 3. That brings the total payout back down to 87.5%.

Negative Differential
This negative differential rate in tier 4 is important to note. Not only does it
make for a confusing calculation, it also tells you that the rate of
compensation is not as great in tier 4. For each additional percentage point of
attainment, the sales rep is compensated at a lowerrate than tier 3. This
might mean that there is more emphasis for the rep to attain sales on their
quota in tier 3. And the monetary motivation is not as great for attainment in
tier 4.
Negative differential can also mean that the rate curve is poorly designed. If
the goal is to achieve 100% attainment of quota, then it is probably best to
increase the payout rate (rate curve slope) in each tier up to 100%. This
design would give the rep more motivation (higher payout rate) as he/she gets
closer to achieving their goal of 100% attainment.

Apply Formula to a List

Now that we are able to calculate the payout in one cell using one
SUMPRODUCT formula, we can apply the formula to a whole list of
employees in a table. See the Total Payout % column on Sales Table tab of
the example file. This is the major benefit of this formula. The entire
calculation can be handled in one cell and it is easily transferable to
other models. There are no hard-coded variables in your formula, or ugly IF
statements.

Download
Tiered Commission Rates using SUMPRODUCT.xls (101.4 KB)
Here is a file that uses whole number (units or dollars) for the tiers and
payouts, instead of percentages.

Commission Plan SUMPRODUCT Units Dollars.xlsx (10.6 KB)

Here is an alternate solution submitted by Matthew Burgos using VLOOKUP
instead of SUMPRODUCT. He explains the formula in detail in the comment
below.
Tiered Commission Rates Using VLOOKUP.xlsx (12.1 KB)
Still Confused? �
I was too the first time I learned this technique. It’s definitely complex. I’d
recommend reviewing it a few times with sample workbook and then try to
implement it in your own model.

I have another article on how to calculate commissions with VLOOKUP that is

an easier calculation for a simple commission plan.
Please leave a comment below with any questions/comments about this
technique.