Sales commissions are a strategic tool for sustained business growth. An effective sales compensation plan aligns incentives to business goals, motivating the right behaviors to achieve business objectives. This, in turn, improves the quality and quantity of deals and customers.
In fact, companies that focus on employee motivation and engagement realize 27% higher profits, 50% higher sales, 50% higher customer loyalty levels, and 38% above-average productivity.
Additionally, a strong sales commission structure drives business goal achievement and facilitates recruiting and retaining reps. The facts speak for themselves. The Sales Happiness Index showed that 51% of sales reps would be motivated to leave for higher pay. Plus, a Sales Management Association study revealed that companies with effective sales compensation programs had a 50% higher employee retention rate than those with weak programs.
Let’s break down a typical sales commission structure, review best practices, and share some compensation plan examples.
Calculate OTE:Quota ratios
Use this free calculator to ensure your reps’ on-target earnings and quotas mirror what they’re bringing in for the business.
Try it NowWhat Is A Typical Sales Commission Structure
Before we discuss the various types of compensation structures, let’s review the common frameworks and elements used to build a typical sales commission structure.
| Base salary | A preset amount of money that is paid to an employee on a regular basis, despite their performance. It is typically amended by incentives and paid bi-weekly or monthly. |
| On-target earning (OTE) | The estimated total annual earnings a salesperson can expect if they hit their quota. OTE consists of the sales rep’s base salary, commission, and other potential incentives, like bonuses. |
| Commission rate | A percentage of a closed sale paid to an employee for closing the deal. |
| Quota | A designated measurable sales goal that an individual salesperson, team, or department are expected to achieve during a month, quarter, or year. |
| Accelerators | A type of incentive structure that rewards sales reps for exceeding their sales goals. |
| Decelerators | A sales commission rate that reduces a salesperson’s earning compared to the amount they would have been paid with their base commission rate. |
| Tiered commission | A commission structure where the commission rate increases as the sales volume rises. |
| Draw against commission | An advance against future commissions that behaves like paycheck protection. There are two types of draws—a recoverable draw and a non-recoverable draw. |
| Cliffs/Floors/Thresholds | A designated minimum level of sales a rep must achieve before they qualify to earn commissions according to the sales compensation plan. |
| Clawbacks | A paycheck deduction where the company “claws back” a sales rep’s commission payment for a deal when a customer terminates their contract within a designated period. |
The SPIF Report
Read the ungated report to learn the most commonly implemented SPIFs and accelerators in 2024 and the average commission rate increase for multi-year contracts.
View ReportTypes of Sales Commission Structures
Now, let’s look at some commonly used typical sales commission structures.
Single-Rate Commission
An easy-to-understand plan that pays the same rate on every deal. A single-rate plan is an excellent “first” compensation plan. It works well for a Startup, early-stage company, new product, or new territory when you don’t have historical data to leverage when developing your compensation strategy. It is also the easiest plan to execute and suit various industries.
This tiered commission structure is an effective way to reward overperformance. However, it can become costly if your entire team overperforms. This plan is typically adopted by SaaS companies that are confident in their quota and target calculations.
Commission with Accelerators & Decelerators
A 3-tiered sales commission structure is commonly used by SaaS, offering products that aren’t impacted by seasonal shifts in buyer behavior. However, we don’t recommend this compensation plan if you’re in ecommerce. This plan is well suited for mature companies confident in their targets and seeking to contrast the top performers from the underperformers.
Commission with Accelerators & Milestone Bonus
This plan effectively incentivizes consistency with high-velocity, lower contract-value sales. However, watch out. This plan can lead to sandbagging.
Commission with Accelerators & Cliff
This plan establishes a minimum threshold before reps qualify to receive commissions, protecting the business from paying reps who aren’t performing up to standard. However, this structure is more commonly used in leadership plans as it can lead to sandbagging and unhappy reps.
Streamline commissions for your RevOps, Finance, and Sales teams
Design, track, and manage variable incentives with QuotaPath. Give your RevOps, finance, and sales teams transparency into sales compensation.
Talk to SalesTips for Sales Team Commission Structures
There is no one-size-fits-all typical sales commission structure. It takes research, analysis, reiteration, and refinement. However, the rewards are worth the effort. Remember the following best practices to help you create an effective incentive structure for your sales teams. (NUMBERED)
- Align with Business Goals.
An effective commission structure supports company objectives by incentivizing behaviors that drive business goal achievement—for instance, motivating reps to increase customer lifetime value or expand into new markets.
2. Keep it simple.
Your commission structure needs to be easy to understand. This enables reps to know what they need to do to earn incentives and are motivated to take action to drive the desired results. Otherwise, you risk reducing performance, increasing rep turnover, and falling short of organizational objectives.
3. Set fair and realistic quotas.
Analyze your sales team’s quota attainment record to find the balance between ambitious and achievable quotas. The sweet spot is between 60 and 100 percent. Less than 60 percent of achievement reveals too high of a quota, whereas 100 percent means the quota isn’t high enough. Setting fair and realistic quotas motivates reps and drives business goal achievement. However, establishing unattainable quotas typically leads to demotivated reps and employee attrition.
4. Communicate Effectively
Introduce your compensation plans promptly, especially if you make mid-year changes to your commission structure or plan elements. Start with leadership providing an overview of the plan. Then, share various formats of support materials, such as videos and print material, including plan documents and examples of how to calculate commissions, with all team members. Discuss changes and why they are occurring. Review the plan with your team as well as in 1-on-1 meetings.
Ensure reps understand the changes, the reasons for them, and how the company will support them under the new plan. Provide multiple channels where reps can get answers to their questions. Confirm reps understand their plan by having them sign off on plan verification.
5. Research market OTEs.
As base salaries for sales reps consistently change yearly, you must do market research as you create or update a typical sales commission structure. This helps you attract and retain top talent with a competitive incentive plan as competitors and industries evolve.
6. Use a Sales Commission Calculator:
A platform like QuotaPath can help you accurately calculate commissions and analyze the impact of various structures on your sales team’s earnings and your company’s bottom line. This type of software also enables sales reps to run what-if scenarios with new plans, boosting plan understanding, motivation, and buy-in.
Free Sales Commission Calculator Template
A free spreadsheet to simplify the commission tracking process. Track what you or your team have earned in 4 inputs.
Download Now7. Repeat and Adjust
Lastly, a comp plan isn’t set in stone and should be reviewed and updated at least once a year but no more than twice a year. Evaluate commission plans for effectiveness by identifying what is working and what isn’t. Adjust based on these observations, organizational goals, marketplace, and economic shifts.
Try QuotaPath for free
Try the most collaborative solution to manage, track and payout variable compensation. Calculate commissions and pay your team accurately, and on time.
Start TrialTypical Sales Manager Commission Structure
Sales manager compensation plans differ from sales rep plans in focus, pay mix, and metrics.
For instance, sales rep structures are tied to individual performance, such as deal size, quota achievement, and activities, such as the number of demos or meetings scheduled.
Conversely, a typical sales manager commission structure is tied to team performance elements like team development, coaching effectiveness, and collective quota achievement.
The pay mix typically differs between sales rep and manager compensation structures. For example, reps often receive a 50/50 mix of base and variable pay, while managers receive higher base pay plus bonuses.
Key performance indicators (KPIs) used to gauge achievement are also a central area where typical sales rep and sales manager commission structures differ. For instance, sales rep incentives are often tied to closed/won deals and activities metrics. By contrast, manager incentives are commonly tied to team attainment, team growth, and retention.
Below are three typical sales manager commission structure options to consider as you build yours.
Single Rate Sales Manager Commission Structure
Sales managers’ quotas are usually based on the combined quotas of their team members. However, this is not always the case. Sometimes, a “buffer” of 10-20% is applied when calculating a sales manager’s quota, allowing for a potential shortfall in team quota attainment. For instance, a sales manager has six reps reporting to them, each with a $150k quota. The manager’s quota is 90% of that sum. So, instead of $900k (6*$150k) it is $810k ($900k*90%).
The sales manager’s compensation based on the deals their reps close enables them to focus their efforts on coaching their team members to close more deals.
Single Rate Sales Manager Commission Structure example:
Quota: $945k per quarter (based on a team of 6 reps at a $175k/quarter quota, held to 90%)
On-Target Earnings: $200k per year
Base Salary: $100k per year
On-Target Variable: $100k per year
Commission Structure: 2.65% of all deals their reps close
Notes: This simple structure utilizes a single rate commission. That means that the manager earns the percentage on all deals their team closes, despite their team quota attainment. This type of plan is commonly adopted because it is easy to understand, implement, and build on as a company grows.
Sales Manager Commission Structure: Commission with Accelerator
The plan is a typical sales commission structure that is commonly adopted for sales managers.
In this compensation plan, the manager receives a fixed commission rate for each sale made by their team. After the team exceeds 100% of its quota during the quota period, the manager’s commission rate increases for each additional deal.
The commission rate should be adjusted as the team’s size changes. Failing to do so can substantially impact the manager’s income potential.
Including a “cliff” in this plan is typical, protecting the company from rewarding underperformance.
Sales Manager Commission Structure Example: Accelerators
- Commission Tiers:
0-100%: Base rate: 3.1%
100%+: 1*5 base rate 4.63% (non-retro) - Annual OTE: $200,000
- Base:variable: $100,000 / $100,000
- Pay mix ratio: 50:50
- Annualized Team Quota: $3.6M Annually
- Quarterly Team Quota: $900,000
- Manager Buffer: 90%
- Manager Quota: $3.24M Annually
Sales Manager Commission Structure: Bonus
This final sales manager commission structure example includes bonuses as incentives.
This structure designates managers receiving a pre-determined bonus for each attainment point linked to their team’s overall quota achievement.
The Sales Manager’s bonus percentage for this compensation plan is based on their team’s quota attainment percentage. For example, if the team achieves 93% of their quota, the Sales Manager will receive 93% of their bonus (calculated at $250 per percentage point), regardless of the quota size.
This structure also incorporates a manager buffer of 10% to account for a potential shortfall.
However, regardless of team size, the manager’s bonus remains consistent within this sales leadership compensation plan. While the team may grow or scale back, the per-attainment bonus remains unchanged.
Sales Manager Compensation Plan Example: Bonus
- Single-rate bonus: $250 per percentage point of attainment
- Annual OTE: $200,000
- Base:variable: $100,000 / $100,000
- Pay mix ratio: 50:50
- Rep Quota: 150,000 Quarterly
- Annualized Quota amount: $3.6M Annually
- Quarterly Team Quota: $900,000
- Manager Buffer: 90%
- Manager Quota: $810,000 Quarterly
- Manager Quota: $3.24M Annually
Typical Sales Commission Structures — Final Thoughts
A typical sales commission structure facilitates sustained business growth. It aligns incentives with business goals, motivating the right behaviors to achieve business objectives while boosting revenue and loyal customers. An effective compensation plan also helps attract and retain sales talent, further stabilizing company growth.
One size does not fit all when it comes to building compensation plans. Select a structure and consider our best practices as you create your plans.
See how QuotaPath streamlines compensation plan creation and administration. Schedule time with a team member today.
FAQs About Sales Commission Structures
How much should I pay in commissions?
The percentage of total compensation that is commission impacts on how much the employee can potentially earn. One size does not fit all when determining how much commission to pay. Factors to consider when making this decision include the type of sales role, the company’s sales goals, the person’s experience and performance, and industry benchmarks.
How do commissions affect my bottom line?
An effective sales commission structure positively impacts a company’s financial health. By aligning sales goals with company objectives and incentivizing desired behaviors, you can increase sales productivity and revenue. A competitive commission plan also protects your bottom line by boosting employee retention, reducing turnover costs, and increasing sales force stability.
What’s the difference between OTE and base salary?
On-Target Earnings (OTE) refers to the total amount an employee can potentially earn in a year if they meet all their sales targets. This figure includes their base salary and incentives. By contrast, the base salary is the fixed amount of money an employee receives regardless of their performance. Therefore, OTE represents the employee’s total potential earnings while base salary is the guaranteed minimum pay.
