10 Best Sales Commission System & Structures

Looking to drive more sales and improve the earning potential of your sales team? A sales commission system is designed to do both of these things.The first step of implementing an impactful commission system is to answer the overarching question, “What is the best commission structure?” 

We’ll touch on sales commission examples, the different types of commission structures, and how your accounting team can seamlessly keep track of commission payouts with the aid of finance automation software. 

Coming Up

What is a Sales Commission Structure?

Why is an Effective Sales Commission Structure Important?

What are the Most Common Types of Sales Commission Structures?

How to Choose the Best Sales Commission Structure?

How to Implement a Sales Commission Structure?

Wrap Up

What is a Sales Commission Structure?

A sales commission structure defines how the organization will pay employees according to the sales that they make. For leadership, this means reviewing the budget and margins to determine how much money can be allocated towards commissions, along with the employees’ base salary, and any incentives that can be offered to further drive sales. 

A sales commission structure can pay out weekly, every other week, or even monthly. It’s up to the business to determine how and when commissions will be calculated. 

Why is an Effective Sales Commission Structure Important?

An effective sales commission system can positively benefit the employer and employees alike. Sales commissions that are set up properly have the power to:

1. Increase Motivation

With the potential to earn more money, salespeople may feel more inclined and motivated to close more deals. 

2. Increase Retention

A competitive commission plan rewards hard work and can also be a great method to recruit solid talent. 

3. Increase Sales

Increased motivation can lead to greater effort, and in turn, more sales volume. 

What are the Most Common Types of Sales Commission Structures?

Wondering what the best sales commission structure would be for your particular business? Every company has different needs and setups, so it’s helpful to explore the various commission plan examples to make an informed decision about your own. 

1. Base Rate Only Commission

The base-rate-only pays sales employees an hourly or flat salary. In this setup, there’s no extra incentive for an employee to sell more products or services because they get paid the same rate either way. 

2. Salary, Plus Commission

A base salary plus commission structure is where the incentivizing begins. As one of the most popular sales commission structures out there, salespeople earn an hourly wage or salary and a commission rate. 

The salary or hourly wage is relatively lower than what they’d need to be fully supported, which is why an extra commission on top is of value. However, the base salary protects the employees if sales are low. Typically, the salary is 60%, and 40% is commission-driven. 

3. Straight Commissions

A straight commission pays the salesperson the commission whenever a sale has been completed. This means that there is no base pay or salary- the role is commission-only. 

Skillful salespeople are typically fans of this structure because it means that they get what they work for, and their income earning potential is basically limitless and dependent on their own ability to close deals. In turn, their income= sales x commission rate. 

4. Tiered Commissions

A tiered commission setup means that a salesperson will earn a certain percentage of commission on sales up until they reach a preset amount. Then, when they surpass that goal, the commission percentage increases. 

As you can see, this is an approach to continuously motivate more sales to be made as greater success results in greater commission rates. 

5. Profit-Oriented Commissions

A profit-oriented commission isn’t paid on the whole amount of money that a sale generates. Instead, the commission is based on being a portion of the profit from that sale. 

6. Gross Margin Commissions

A gross margin commission pays a sales representative a percentage of the gross margin that is earned by the sale. 

7. Commissions By unit 

Another way to set up commissions is based on quantity, as opposed to nominal value. In this structure, sales representatives earn a set commission for each unit of goods or services sold. 

8. Residual Commission 

In an effort to promote loyalty and longevity of accounts, a residual commission may be applied. As long as the account is generating revenue, salespeople will earn a percentage commission on the payment that the customer makes. 

This is a typical commission structure in industries like insurance since customers make continuous payments to keep their plan valid. 

9. Territory Volume Commission 

A territory volume commission is based on a salesperson earning income according to the set rate in their region. 

The commission depends on territory volume. Sales numbers are combined, and then the commissions are equally split amongst sales people for that region. This is a great structure in a team-oriented workplace. 

10. Draw Against Commission 

For new salespeople, a draw against commission structure may be desirable. This is because a draw against commission provides team members with advance payments in which they can earn a salary (or draw) every month during a specific time period, even if they don’t close a deal. The advanced payments must eventually be paid back to the employers. 

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While each sales commission system is relatively straightforward, the nuance and challenges arise during the accounting process. With a growing number of sales and team members, it’s vital that the company stays on top of the transactions and related commission payouts to ensure that the employees and employer alike earns what they deserve. 

To seamlessly handle commissions accounting, most businesses implement finance automation software to automate commission management. 

The best sales commission software integrates with your existing systems, performs complex calculations based on your set commission structure, and offers visibility into the process so that sales representatives, managers, and finance teams all are aware of how the commission structure and sales team is performing. 

How to Choose the Best Sales Commission Structure?

Choosing the best sales commission structure will depend on your business. In order to narrow it down and move forward with one structure over another, it’s advisable to: 

1. Assess the Current Situation 

Before implementing any changes, how is your current commission structure set up and how is it faring? Take a look at both the top and bottom producers to determine how big the gap is between the two. 

Also, look at your retention and turnover rates. Assess if the current setup is working in favor of both the business itself, as well as its employees. 

2. Define Goals 

Next, determine the optimal outcome and what you’re looking to achieve. Goals may include increasing customer satisfaction, boosting customer loyalty, improving sales team retention, enhancing profits, etc. 

3. Acknowledge Size 

The size of your sales team is an important variable to consider, as well. For example, if you have a very large sales team and want to initiate a commission-only structure, this could quickly and negatively harm many people at once, which could result in turnover. 

That’s undesirable. So, the ability as to which you can test different structures will depend on the size of your team. 

4. Test the Waters 

Speaking of testing the waters, don’t be afraid to try a few different setups. However, don’t throw everything out at once to see what sticks. The truth is that sales teams are prone to high turnover because it’s a tough role to be in and not everyone makes it. 

Give each structure a fair chance, but if it isn’t working out, try something new. With a finance automation software to handle the complex accounting aspects, you have the freedom and agility to adjust the commission structure more easily because it won’t manually drain your finance department. 

5. Document Outcomes

With any commission structure that you put in place, remember to document the outcomes and results so that you can keep track of what works versus what doesn’t. Automation software makes this easy to do with customizable reports, dashboards, and secure data storage and analysis capabilities. 

How to Implement a Sales Commission Structure?

Implementing a sales commission structure requires planning and oversight. Here are a few things to do to get started and maintain adequate internal control:

• Set and review annual sales goals (serves as a benchmark) 
• Develop the commission plan  (works in favor of employees and stakeholders and serves business goals) 
• Share the commission plan with stakeholders (ensure buy-in and clear communication) 
• Plan the timing (initial launch and when the team will get paid out commissions as part of their paychecks) 
• Review KPIs for the sales team (ensure visibility – the use of automation software can aid in providing dashboards designed for each relevant party) 
• Automate as much as possible! (from sales processes to sales commission accounting) 

Wrap Up

An effective sales commission system can improve profits, increase income, boost employee retention, and keep everyone aligned to achieve business goals. Setting up and implementing the right sales commission structure for your business depends on the variables and considerations listed above. 

Once you have the commission structure clearly laid out, a finance automation tool can handle the complex calculations and all the ins and outs of streamlining the accounting process to ensure correct payouts for every pay cycle.