10 Types of Sales Commission Structures

If your company is in an industry like finance, you 10 Types of likely have a team of sales representatives, meaning you’ve got several different options for how to pay them.

Most employees get a base salary. But since sales reps are directly responsible for driving revenue, many companies pay them via commission, where they get a cut of the revenue earned. But what cut should they get, exactly?

There are several different types of sales commission structures out there, and we will cover 10 of the most common ones in this blog post. You can read through the list to see your options and choose the one that best suits your needs.

The sales commission structures we’ll cover include

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Read on to learn more about each one. Then subscribe to Revenue Weekly, our email newsletter, for more business and marketing tips!

Base salary plus commission
Base salary plus commission is the first sales commission structure on this list because it’s the most popular. With this type of commission, you pay your sales reps a base salary in addition to a commission based on how much revenue they drive.

For example, you might pay your sales reps $25,000 per year, in addition to a 15% commission on each sale they drive. The benefit of this structure is that sales reps can earn more by working harder, but they also have a safety net to fall back on if they’re in a rough season and can’t drive many sales.

Base salary only
Base salary is exactly what it sounds like. With this structure, there is no commission — you pay your sales reps a set salary like you would any other employee.

The benefit of this structure is that it makes your budget less complicated. It can also benefit your employees by providing more stability without causing them to worry about ups and downs caused by fluctuating sales success rates.

However, it isn’t as good of a motivator as a commission. When the quality of their work doesn’t affect their pay, your sales reps won’t have an incentive to go above and beyond, so your sales may stagnate.

Straight-line commission

Straight-line commission, or straight commission, is the opposite of base salary only — it’s commission only. There is no base salary, and everything your sales reps earn is directly tied to how much revenue they drive for the company.

This has major upsides and steep downsides. On the one hand, it’s a great motivator — your employees can’t afford to slack off or they won’t make any money. Meanwhile, they have lots of incentive to go above and beyond so they can boost their bank account.

On the other hand, it can be scary and stressful for your sales reps to know that they’re at risk of earning mere pennies in the event that if they have an off month. That can hurt work ethic and ultimately make your employees less productive.

Absolute commission

Absolute commission, or revenue commission, is a sales commission structure that strikes a balance between salary and commission. Most commissions are percentage-based — so, someone who makes a $100 sale on a 10% commission would earn $10 from that sale.

With an absolute commission, the amount of money someone earns is a flat rate, and they earn that commission based on the number of sales they make — not the amount of revenue they drive.

So, if someone makes a $300 sale, they might earn a commission of $50. But they might earn that same $50 for making a $100 sale, or for a $600 sale. The amount of revenue the sale earns doesn’t affect the commission amount — it’s a set rate.

Tiered commission
Tiered commission is similar to straight-line commission in the sense that sales reps earn a certain percentage of the revenue they drive. The difference is that tiered commission includes set quotas. Once a sales rep exceeds their quota, their commission increases.

So, a sales rep’s starting commission might be 10%, and they’re working toward a set quota. If they fall short of that quota, they still get their 10% commission. But if they exceed their quota, their commission might jump to 15%. That guaranteed commission incentivizes them to go above and beyond without punishing them if they don’t quite make it.

Residual commission

Residual commission is a structure that rewards the 5 keys that will transform your business sales reps for earning new clients and retaining existing clients. This works best for companies that offer subscriptions rather than one-time purchases. Those are two different systems that require two different types of sales funnels:

 

So, if a sales rep makes a sale to a new client, they earn a commission for that sale, like usual. But let’s say that new client stays a client for several months. Each month that the client sticks around, the sales rep continues to earn a commission off the client’s subscription fee.

Multiplier commission
Multiplier commission, unlike the other sales commissions on this list, factors in each sales rep’s long-term value.

What number? Well, that’s up to you. Basically, you choose multipliers based on how efficient or valuable each sales rep has proven to be in the past. So, your best sales rep would probably have the highest multiplier on the team.

If two sales reps make the exact same sale, their initial commission is the same. But if one has a higher multiplier because they have a history of doing a particularly good job, they’ll end up earning more from that sale.

This strategy incentivizes employees to work hard consistently rather than slacking off sometimes and then picking up the pace only when they feel like earning more.

Gross margin commission

Gross margin commission is a sales commission aqb directory structure where sales reps only earn a commission on the profit from each sale, rather than the total revenue. After all, it does cost you money to make sales. This structure excludes the portion of the revenue that’s cancelled out by sales expenses.

 

Draw against commission
Draw against commission is a slightly unusual type of sales commission structure.

Basically, you pay your sales reps a set rate based on what you expect them to make. You pay it upfront, so they get that much money even if they don’t end up earning as much as you’d expected.

Now, here’s the thing — there are two types of draw against commission:

Recoverable draw against commission is where, if a sales rep doesn’t earn as much as you’d predicted, they have to eventually pay back the portion of their commission that they didn’t earn.
Non-recoverable draw against commission, on the other hand, doesn’t get paid back. They get to keep it regardless.
This structure isn’t usually used long-term, particularly if it’s non-recoverable. It’s generally used to provide a safety blanket for new hires until they settle in.

Territory volume commission
Since driving more revenue doesn’t help employees earn more, they won’t try. In fact, they could be encouraged to slack off and mooch off their coworkers’ success.

 

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