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A Guide to Sales Commission Structures [2022]

A Guide to Sales Commission Structures [2022]

Kushal Saini Kakkar
Kushal Saini Kakkar
November 11, 2022
5 min read

As a sales manager, you end up being the rope in the tug of war between achieving business goals and ensuring that your sales reps are fairly compensated. 

You have to find that sweet spot to hit the right balance between the revenue amount your reps are bringing in and the amount that they are being paid. Plus, in your team, there are different reps that work on different levels - their efforts vary, their deal revenue varies, and so do their sales targets. We’re not on our way to promoting hustle culture here, but those who are putting in more effort need to be compensated on the same levels. Clearly, fixed salary models don’t work the best here. Sales is not like other businesses; here, numbers speak for themselves in terms of revenue and commission, both.

So, how do you ensure that Mark is satisfied with his in-hand figures after working so hard to hit those targets? And how do you ensure Johanna’s commission is justified, and nobody asks you questions like why she is paid more, and they aren’t? 

The answer is: well-planned sales commission structures. 

An organization-wide sales commission structure gives your reps a clear picture of how their sales efforts will be compensated and rewarded, motivating them to perform better. Let's explore the various commission plans so that you can choose the right one for your SaaS organization and reps:

1. Base salary plus commission

This is one of the most commonly used compensation structures. Sales reps love it because it guarantees a base salary, and employers like it. In this structure, the standard salary-to-commission ratio is 60:40, which means that 60% of salary is fixed and 40% of the commission in a variable, depending on the number of sales that a sales rep makes.

Here’s how you can calculate this one:

Commission percentage x total sales amount = total commission

Pros: 

  • 60% of income is guaranteed to come to the sales rep so the sales force does not feel exploited or like they do not have a stable income.
  • This type of compensation structure provides tremendous motivation for salespersons to upsell and earn incrementally. In some companies, if the sales rep exceeds the set targets, they also access a higher commission rate tier, which could give them 10-20% more commission per sale. 
Still, a lot more to read, don’t rush to make a decision just yet 

Cons: 

  • Although a portion of income is guaranteed, the base salary may be minimal or might – in some scenarios – even be an hourly wage.
  • A company might create complicated sales contracts, which might make it difficult for sales reps to predict their total income. If you choose this commission plan, be sure to avoid making it extra difficult or lengthy - word gets around, and you might soon struggle to attract talented sales reps. Moreover, you wouldn’t want to be an exploitative sales manager or employer, right? 

2. Tiered commission plan 

A tiered commission plan is exactly what it sounds like: the higher the number of sales, the higher the rate commission rates go. It is one of the most successful strategies for motivating top performers to continue selling.

Pros: 

  • This approach can motivate salespeople to boost sales through methods such as upsells and cross-sells.
  • It encourages sales representatives to exceed their quotas. When sales representative reaches a specified amount of deals or revenue, they are promoted to a higher commission rate.

Cons:

  • If you lack the funds to compensate your top performers, the commission model may backfire.
  • This commission system may be confusing to your sales reps. So, make sure you clarify the terms and conditions beforehand. 
Mo' money, mo' motivation!

For example, the sales team receives an 8% commission on the sales value of up to $10,000. Sales reps earn a 10% commission on sales value between $10,000 and $20,000. They receive 12% on sales value between $20,001 and $40,000, and so on.

So if your sales value is $15,000 then you get $1500 as commission. 

3. Commission-only plan

In this commission-only plan, sales team members are compensated based on the sales numbers achieved.

Woah! The commission-ONLY plan sounds like a tough one, right?

Pros:

  • Commission-only plans make sales teams comparatively easier to manage and motivate since sales reps are only compensated when they show results.
  • Your sales team ends up attracting and retaining only top performers who are confident that they can make a solid living because of their selling talents.

Cons: 

  • This type of commission structure could affect the mental health of the salespeople, who might become concerned when they are not performing as it might affect their income, and they could easily burn out.
  • This compensation plan also might promote fierce competition amongst your sales team, which some sales organizations might say isn’t a healthy working environment.

Calculation for a commission-only plan : sales x commission rate = total income

4. Territory volume commission plan

If you are a company that is looking to expand in specified zones and also promote team spirit, then this plan might be the one for you.

In this revenue model, the salespeople get their commission payout based on the total sales made by the team in the region. 

All the sales are added up, and then the amount is distributed amongst the sales team members.

All the sales reps get equal candy - in this case, candy being the commission. 

Pros:

  • This will encourage the top performers to train and give tips to the new hires or the underperforming sales staff. It will also create a strong sense of teamwork.
  • You experience growth in a new region because the team is financially incentivized to put in extra effort toward developing your new market. 

Cons: 

  • On the face of it, it might seem that this technique is fair to all, but there’s a high possibility that the top performers might feel they are carrying the burden of the entire sales team. This might lead them to be less motivated, and they could pare down their efforts as a consequence. 
  • If you make the new market more profitable than the existing markets, your sales reps might start to ignore existing markets in favor of pursuing markets that enable them to earn incrementally. 

The calculation for this commission model: sales totals x commission percentage divided by the number of salespeople = commission total per person.

5. Residual commission model

Buyer retention is important to lots of companies, more so to some. If maintaining long-term accounts is key to your business, the residual commission model could be right for you. In this commission structure, the sales rep only gets the commission payout if their accounts continue to deliver revenue to the company. 

Sales reps become personally invested in ensuring customer satisfaction

The sales rep can take different approaches to get repeat businesses, be it by upselling or regularly renewing the contracts.

Pros:

  • This sales commission model is cost-effective as it’s easier to maintain long-term accounts than to sign a new customer.
  • Because the sales team is invested in customer satisfaction, you could develop a higher volume of happy customers and earn a reputation as a reliable company.

Cons: 

  • This commission model is only applicable to companies that are selling products that would require contract renewal or provide the opportunity to upsell. You need to understand it carefully before applying it to your business. 
  • It might not work if your product or solution has inherent flaws or if customer support teams do not support the sales team. You’ll have antagonized your sales team and alienated your customers. 

Before you decide the fate of your existing and future new hires, let's answer some questions which are essential for you to know before we decide which compensation structure would work the best for you and your sales teams.

Choosing the right one 

Consider these points before deciding on the perfect sales commission plan. 

Dig up the past! 

Start by gathering information about what previous compensation plans your company is using and gather as much information as possible.

Before making future commission plans, determine why previous commission plans were successful (if you had any plans previously).

 

Read about various commission models and interview your sales reps about them. 

  • What was the sales compensation plan that made the sales reps the happiest?
  • Why did your company stop using that compensation plan?

In addition to reviewing the statistics of the salespeople, their mental health is equally important, so don't forget to include questions like 

  • Which plans provided the sales reps with the most motivation to sell? 
  • Do any of the sales goals or commission rates cause the sales team undue stress?

Of course, while you mull over past successes and mistakes, keep in mind that what worked three years ago might not work today. Sale is an ever-changing field so do not be afraid to test and evaluate new commission models.

Are you being fair to your sales team?

You should be rethinking the commission payout if retention or staff turnover has been a significant problem with your salespeople.

Time is money after all 

 

Think about whether your sales team is adequately compensated and recognized for their contributions. 

  • For example, if you are using a tiered commission structure, is it too difficult to achieve the benchmark sales goals? (Think of the hurdles the sales team faces during the entire sales cycle).
  • Is the compensation at par with the rest of the sector? 

The problem could be the commission percentage if you're losing a lot of sales reps to your competitors. To increase retention amongst the new hires, maintain a keen ear to ground realities and stay aware of what sales incentives would work.

Let Wingman do the math for you

Like Patrick had SpongeBob's back, Wingman has yours.

 

When looking for a means to grow your team, select a sales commission scheme that will best motivate your sales staff. 

Finally, Wingman’s here to streamline and clarify the process.

Wingman’s integration with your revenue tools empowers your sales commission planning with artificial intelligence. With Wingman, you don’t have to depend on incomplete feedback from your reps’ peers, nor do you have to listen to their long sales calls to analyze their performance. Wingman helps you gain deep insights into your sales team’s performance with these AI-powered features:

  • Sales performance analysis: Breeze through your team’s sales calls to analyze their performance. Scan through call transcripts, search for important parts in the calls using desired keywords, or zip through them at 2X speed. 
  • Deal intelligence: Analyze the health of the deals that your reps are working on. Are they discussing pricing at the right time? Are they talking to the decision-maker? Are they spotting at-risk deals in time and taking corrective measures? 

Wingman gives you the answers to these questions and further helps you plan commission structures, and arms your reps with the right insights to up their sales game. Sounds interesting, right? Book a demo with us now to learn more about Wingman’s sales intelligence and how it helps you streamline your sales processes.

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