Sales commission structure, plans, and best practices

Sales commission is one of the most powerful levers in sales management. The right commission structures motivate sales representatives, drive sales performance, and align sales goals with company growth. But designing a commission plan that balances fairness, profitability, and motivation isn’t always easy.

This guide explores what sales commissions are, how different commission structures work, and the best ways to design commission plans that maximize sales revenue.

What is sales commission?

Sales commission is a form of variable pay awarded to sales representatives for achieving specific results, typically tied directly to the revenue or profit they generate. Unlike fixed salaries, which stay the same regardless of performance, commission in sales is performance-based compensation, meaning the more a rep sells, the more they earn.

In most companies, sales compensation blends base pay plus commission. The base salary provides financial stability, while the commission serves as a motivator and reward for meeting or exceeding sales targets. This structure creates a clear link between sales effort, sales cycle outcomes, and earnings potential.

Commission on sales can be calculated in several ways:

• Percentage of revenue: e.g., 10% of each deal closed.
• Profit-based commission: calculated on gross margin rather than total sales revenue.
• Flat-rate commission: a fixed amount per sale, regardless of deal size.
• Residual commission structure: continuous earnings from recurring revenue or renewals.

Sales commissions also vary based on role and industry. For example, inside sales representatives may earn lower percentages with higher volume, while enterprise reps handling complex deals may earn higher rates but on fewer transactions.

The purpose of a sales commission plan is not only to reward sales performance but also to align sales goals with company objectives. When structured correctly, commissions encourage behaviors that drive growth, whether that’s acquiring new customers, expanding accounts, or protecting margins.

Why sales commissions matter?

A well-designed sales commission plan goes beyond financial reward. It:

• Keeps sales team performance aligned with sales targets
• Encourages sales productivity and consistent effort throughout the sales cycle
• Attracts and retains top-performing sales representatives
• Provides transparency through clear commission agreement terms
• Supports incentive compensation strategies that reward achievement

Without thoughtful commission schemes, companies risk disengaged teams and inconsistent sales results.

Commission on sales: The basics

When a company decides to pay commission on sales, it’s essentially tying an employee’s earnings to measurable business outcomes. But not all commission models are created equal. The right model depends on your industry, sales cycle, and sales goals.

Here are the most common commission models explained in detail:

1. Flat commission percentage

This is the most straightforward model; sales representatives earn a fixed percentage of each sale, regardless of the deal size or type. For example, a 10% commission rate on every transaction.

Best for:

• Simple sales cycles (e.g., retail, wholesale, transactional sales)
• Businesses that value transparency and ease of commission tracking

Pros: Easy to administer, highly predictable for both the rep and the business.

Cons: Doesn’t encourage focusing on high-margin products or larger, strategic deals.

2. Revenue commission

In this model, commissions are calculated directly on sales revenue generated. If a rep sells $100,000 worth of product at a 7% rate, they earn $7,000 in commission.

Best for:

• Companies prioritizing topline sales growth
• Industries with consistent pricing and margins

Pros: Motivates reps to maximize deal volume and total revenue.

Cons: Can be costly if reps close low-margin deals that hurt profitability.

3. Gross margin commission model

Instead of revenue, this model bases commission on profit (gross margin). For example, if a deal brings in $50,000 in revenue but only $10,000 in margin, the rep’s commission percentage is applied to that $10,000.

Best for:

• Companies with varied pricing models or discounts
• Businesses that need to protect profitability

Pros: Encourages reps to sell higher-margin products and avoid discounting.

Cons: More complex to calculate, requiring visibility into cost structures.

4. Territory volume commission

Here, commission is tied to total sales within a rep’s assigned territory rather than individual deals. For instance, if a region brings in $1M in quarterly sales, all reps covering that area split the commission based on contribution.

Best for:

• Businesses with team-selling models
• Companies managing large geographic territories (e.g., pharma, FMCG)

Pros: Promotes collaboration across sales representatives in the same region.

Cons: Can cause disputes if territory boundaries or contributions aren’t clear.

5. Residual commission structure

Residual commissions reward sales reps not just for the initial deal but for ongoing revenue, such as subscription renewals, repeat purchases, or client retention. For example, a SaaS rep might earn 5% annually for every year a customer renews.

Best for:

• Subscription-based businesses (SaaS, telecom, insurance)
• Companies focused on customer lifetime value (CLV)

Pros: Encourages long-term customer relationships and reduces churn.

Cons: Can be expensive for the business if not capped or structured carefully.

The takeaway: while each commission model works differently, the common goal is to design a system that motivates the right behavior, whether that’s driving more sales revenue, protecting margins, increasing retention, or boosting territory growth.

Average sales commission

The average sales commission varies widely by industry. Tech often pays higher sales commission rates by industry standards because deals are complex and longer in the sales cycle, while retail leans toward lower rates with higher volume.

Benchmarking the average sales commission in your field ensures you remain competitive and attractive to top sales talent.

Sales commission structures

Sales commission structures define how salespeople are rewarded. Common commission structures include:

• Straight commission: 100% earnings from commission with no base pay.
• Base salary plus commission: Stability with upside potential.
• Tiered commission: Higher rates are applied as sales targets or quotas are exceeded.
• Draw against commission: Advances provided and balanced against earnings.
• Residual commission: Ongoing commission for recurring revenue.

When deciding how to structure sales commission, companies must weigh simplicity against motivational impact.

Commission structure examples

Here are a few commission structure examples in practice:

• Standard commission rate: 8% on all sales.
• Tiered commission structure: 5% until $50,000 sales quota, then 10% above.
• Gross margin commission: 7% calculated only on profit.
• Full commission: No salary, but 20% commission percentage on each sale.

These different commission structures illustrate how businesses design commission schemes to fit their revenue models.

Sales commission rates

Sales commission rates vary depending on role, deal size, and industry. Commission rates by industry can range from 3–5% in wholesale to 10–20% in software or real estate.

Choosing the right sales commission rates ensures competitiveness while safeguarding profitability.

Sales commission plans

A sales commission plan is a formal document that explains how commissions are calculated, tracked, and paid. Unlike a broad commission structure, a sales commission plan gets into the specifics of payment timelines, commission percentage, and dispute handling.

Strong sales commission plans include:

• Clear performance metrics tied to sales goals
• Defined commission tracking and payout schedules
• Flexibility to adapt commission plan design as markets shift

Types of commissions

There are many commission types businesses can adopt. The most common sales commission structures include:

1. Revenue-based commissions: Earned as a percentage of sales revenue
2. Profit-based commissions: Aligned to margins instead of revenue
3. Activity-based commissions: Reward for demos, meetings, or pipeline creation
4. Tiered commission: Scaling incentives for over-performance
5. Residual commission structure: Recurring earnings from renewals

Understanding the types of commission structures helps leaders align compensation with strategy.

How to structure sales commission

When deciding how to create a commission structure, keep these steps in mind:

1. Define company objectives (growth, retention, upselling).
2. Choose commission types that align with the sales cycle and product.
3. Benchmark sales commission rates by industry.
4. Combine base commission with variable pay to balance risk and reward.
5. Regularly review and optimize your commission plan.

In other words, commission plan design is not static—it evolves as sales productivity, performance metrics, and company strategy change.

Common commission structures

There are many different sales commission structures, but a handful appear consistently across industries. Each has its own philosophy, trade-offs, and impact on sales team performance. Choosing the right structure depends on your sales cycle, revenue model, and company priorities.

1. Base rate only

This structure pays sales representatives a fixed salary with no commission on sales. It’s the least common approach in sales management because it removes the performance-based incentive.

Best for:

• Roles where sales goals are secondary to account management or customer service
• Early-stage teams where stability is prioritized over aggressive growth

Pros: Predictable costs, easy to manage.

Cons: Can reduce sales productivity since performance metrics aren’t tied to earnings.

2. Base pay plus commission

This is one of the most common sales commission structures—a steady base salary combined with variable commission. The commission percentage typically scales with performance, giving reps stability while rewarding success.

Example: A rep earns $50,000 base salary plus 7% on sales revenue.

Best for:

• Companies are balancing talent retention with aggressive sales growth
• Industries with competitive hiring markets

Pros: Reduces risk for reps, improves recruitment, and drives consistent sales performance.

Cons: More expensive than straight commission, and poorly designed commission plans can still demotivate reps.

3. Straight commission

In a straight commission structure, reps earn 100% of their income from commissions with no base pay. If they don’t sell, they don’t earn.

Best for:

• High-margin industries like luxury goods, insurance, or real estate
• Independent contractors or commission-only sales roles

Pros: Extremely motivating for self-driven reps; no fixed cost for employers.

Cons: High risk for employees, can increase turnover if reps fail to hit sales targets.

4. Tiered commission structure

With a tiered commission, reps earn higher commission rates as they hit or exceed their sales quota. For instance:

• 5% commission up to $50,000 in sales
• 8% commission from $50,001–$100,000
• 12% commission above $100,000

Best for:

• Companies that want to push top performers to overachieve
• Businesses scaling revenue in highly competitive industries

Pros: Drives overperformance, rewards top sellers.

Cons: Can demotivate low performers who feel stuck below the first tier.

5. Residual commission

In a residual commission structure, reps continue earning commissions for as long as a customer account generates revenue. This is common in subscription-based or service industries.

Example: A SaaS rep earns 5% on a client’s subscription every year they renew.

Best for:

• SaaS, telecom, financial services, and insurance
• Businesses focused on recurring revenue and customer retention

Pros: Encourages reps to build long-term relationships and reduce churn.

Cons: Can become expensive if payout terms aren’t capped or reviewed.

6. Base commission with bonuses (Hybrid model)

Some companies use hybrid commission schemes, a base commission structure combined with bonuses for hitting specific performance metrics, such as closing strategic accounts or expanding into new markets.

Best for:

• Businesses are balancing immediate revenue goals with strategic initiatives
• Sales teams with long sales cycles that need extra motivation

Pros: Flexible and adaptable; aligns incentives with multiple goals.

Cons: More complex to manage and explain to sales representatives.

These different commission structures give leaders the flexibility to align commission plan design with company objectives, whether that’s driving short-term sales revenue, maximizing gross margin commission, or building lasting customer relationships.

Commission plan vs. commission structure

When sales leaders talk about commission, the terms “plan” and “structure” often get blurred. But treating them as the same thing can lead to confusion, disputes, and missed opportunities to motivate your team.

Commission Structure = the blueprint.

This is the strategic framework: whether you pay on revenue, margin, or renewals; whether you use flat, tiered, or residual models. It defines what you reward and how payouts scale.

Commission Plan = the playbook.

This is the operational document: the exact formulas, payout cadence, eligibility rules, and real-world examples. It translates the high-level structure into a contract that every rep can understand.

Think of the structure as the architect’s drawing and the plan as the finished house you hand the keys to. Both are essential, but they serve very different purposes.

Why does this matter?

• Get the structure wrong → you’ll incentivize the wrong behaviors (discounting, short-term wins, churn-heavy deals).
• Get the plan wrong → even a great structure will fail if reps can’t see how it applies to their deals, or if payout rules feel opaque.

Example in action:

A SaaS company might choose a tiered commission structure to push over-quota performance. The commission plan then spells out:

• 5% on deals up to $100,000
• 8% on deals from $100,000–$250,000
• 10% beyond $250,000, paid monthly on invoice collection

The structure sets the direction; the plan brings it to life in practice.

Final thoughts on sales commissions

Sales commissions remain the backbone of sales compensation strategies worldwide. 

Whether you use a commission structure for sales like a base salary plus commission model, or more advanced commission schemes like multiplier commission or residual commission, the key is alignment.

The best sales commission plan doesn’t just boost short-term sales; it builds a motivated sales team, rewards consistent sales performance, and drives long-term growth. 

Want your team to chase their targets faster? Here is a guide on personalized sales best practices, so your team gets better at buyer persona development and closes faster.  

FAQs on Sales Commissions

1. What is sales commission?

Sales commission is the variable compensation paid to sales representatives based on the revenue, profit, or accounts they generate. Unlike a fixed salary, it directly ties earnings to performance.

2. How do sales commission structures work?

A sales commission structure is the framework that defines how reps earn money. Common commission structures include straight commission, base salary plus commission, tiered commission structure, and residual commission models.

3. What is the difference between a commission plan and a commission structure?

A commission structure is the overall framework (e.g., tiered, gross margin, residual), while a commission plan applies that structure with detailed rules, commission percentage, payout frequency, and eligibility guidelines.

4. What is a standard commission rate for sales?

There’s no universal standard commission rate, as it varies by industry, sales cycle, and margin. Some companies use 5–10% of revenue, while others base commission on profit, quotas, or customer renewals.

5. What are the most common types of commission structures?

The most common commission structures include:

• Base pay plus commission
• Straight commission
• Tiered commission structure
• Residual commission
• Gross margin commission model

6. How do you design a sales commission plan?

To design a sales commission plan, first choose the right commission structure for your business, then define payout rules, commission percentages, sales quotas, performance metrics, and clear eligibility criteria.

7. What is the average sales commission by industry?

Average sales commission rates vary widely by industry. For example, real estate and insurance often use straight commission, while SaaS and B2B companies prefer base salary plus commission or tiered commission structures.

8. What is a tiered commission structure?

A tiered commission structure increases commission rates as sales representatives exceed their quota. For example, 5% up to $100K in sales, 8% for $100K–$200K, and 12% for anything beyond.

9. What are examples of commission plans?

Examples of commission plans include flat-rate commission, base salary plus commission, straight commission, draw against commission, and hybrid models with bonuses tied to sales goals.

10. How do commission plans impact sales team performance?

A well-designed commission plan motivates reps to hit sales targets, improve sales productivity, and align efforts with company revenue goals. Poorly structured plans, however, can demotivate reps and lead to high turnover.