How to Determine Sales Commission Structure for Reps in 2022
Whether you are thinking about sales, new to sales, a veteran in the game, or leading a sales team, you should know all there is to know about sales commission structures.
The commission structure you choose for your business provides a solid base for your team to derive the confidence and motivation for success.
Using sales commission software to help you determine the right sales commission structures for your reps helps gather and track data to ensure profitable, motivating results.
This article will discuss how to determine the best sales commission structure for reps in this year and the right software to help you dictate what will work best for your team.
What Is a Sales Commission Structure?
Sales commission structure, commonly referred to as a commission plan, is the rule book given to employees for how and when a salesperson gets compensated.
Normally, sales compensation is broken down into two parts: fixed and variable pay.
- Fixed pay, base salary given at start date to sales rep
- Variable pay, built from sales commission structures, how reps will be paid for their performance
- Determined by sales, quotas, volume, industry, etc.
This article will mainly focus on variable pay and the importance of choosing the best sales commission structure to determine how reps will be paid, what they will be rewarded for, and how to maintain motivation to succeed.
It’s important to know there is not just one sales commission structure everyone follows, but various approaches based on what works best for individual businesses to maintain and motivate employees and improve profitability.
Picking the right sales commission structure will attract and retain employees to your business. But if the wrong sales commission structure is chosen, it can be a surefire way to lose workers.
Before you begin to determine the right sales commission structure for your reps, make sure you are collecting all the data you can. SetSail will do this for you, our software tracks and collects more data points than any other sales tracking software on the market so that you can incentivize your team around the actions that matter most.
How to Determine the Right Sales Commission Structure for Your Reps?
Picking the wrong sales commission structure can be discouraging for your team.
In order to determine the right sales commission structure, first you examine and analyze past structures that have been enacted. What has worked best in the past? What challenges arose?
It’s incredibly important to hold open conversations with your team about what plans motivated them and which were demeaning. who you are focusing on when choosing which sales commission structure works best. They are able to provide you with a wealth of knowledge.
By using a tool like SetSail, you’ll find it easy to monitor all of your team’s key metrics on a leaderboard, set monetary rewards for top reps, and ultimately motivate your team. Monitoring these key metrics will keep you up to date on the processes that are working and not working for your reps.
Make sure you focus keenly on creating not only an effective commission structure, but also a fair and accurate one. Employees who feel they are getting paid fairly will not only feel more secure but will most likely stay and grow with your business.
Consider each member of your sales team, their role, experience, length of the sales cycle and type of deals they engage in when considering which plan will work best for them.
The structure of your sales commission should include awareness around your team's organization, resources, and goals. Along with the following:
- Company culture
- Competition rates and structures
- Living costs
- Overall goals
Common Types of Sales Commission Structures
Let’s discuss the most common types of sales commission structures.
This commission-only model cuts out half the equation usually found in sales compensation and only focuses on variable pay, or commission.
Within this structure reps are not paid a base salary, they receive income directly from the number and value of deals they close. Bluntly put; without sales, reps will receive no income.
This structure is especially appealing for reps who prefer no commission cap, a shorter sale cycle, higher valued deals, and want to function like an independent contractor. Yet, it can be less appealing because they do not receive benefits and lack security in a guaranteed living wage.
For businesses, this structure is enticing for startups on a budget, allowing them to only pay out when customers are acquired. It’s also ideal for businesses with shorter sales cycles and/or higher-value deals, and businesses who need to get products out quickly with a low income.
Base Pay Rate Only
The other half of the equation found in sales compensation in base rate pay. Base pay rate means only providing a base, set pay to employees. Similar to salaried workers.
Base pay rate is not as popular as other sales commission structures because there is a lack of reward for higher performing sales employees.
Yet, team members may prefer this structure to prioritize knowledge and qualified support over performing numbers. It provides team members a more flexible platform to be honest and unbiased, and allows for businesses to capitalize on the honest feedback from workers without the financial factor.
Businesses also can still enact a money motivator through enticing raises and bonuses for those performing above and beyond.
A base pay rate only structure is best-suited for businesses that focus a lot on teaching, consulting, and supporting before and after the sales process, and is perfect for businesses experiencing a lot of inbound leads.
Base Salary plus Commission
You have probably heard of the 60:40 ratio of salary to commission since it is the most common sales commission structure found. This means 60% fixed salary and 40% variable, or commission based.
The strategy guarantees reps an hourly or base salary, and on top of that, a commission rate. Allowing them the comfort of knowing they are supported during slow sales weeks, and still gives them an incentive to sell more to earn more.
Most base salaries are not a comfortable amount to live off, motivating the sales reps to sell and meet their commission goals so they are not relying solely on their base salary.
It’s a common choice for reps who want to have the cushion and promise of an income if any drastic changes occur in the market, or if they anticipate periods with a low sales volume.
This structure is ideal for companies actively investing in the success of their reps while incentivizing them to improve performance, as well as businesses who rely on rep retention for the success of the sales organization.
Micro Incentive are not commission, not base pay, but special data-driven rewards that are a new trend in driving behavioral change at scale. SetSail found sales reps are most effective when given data on the next best action in tandem with a micro-incentive (points that lead to prizes and rewards) to act. On average, if a sales rep takes action on five or more success indicators the deal win rate increases by 62%.
“Reps must be aware of the path to success and motivated to execute on multiple recommendations, focusing on the small wins that lead to big deals,” said Haggai Levi, SetSail CEO. “Micro-incentives accomplish this – they lay out success indicators and prompt reps to take action, making the difference between a deal closing and an indefinite sales cycle.”
Revenue Commission Structure
This commission structure works by paying sales reps a commission that is determined by a certain percentage of the total amount a deal acquires.
For example, if a rep closes a $5,000 deal with a 5% commission rate, they will earn $250.
This works especially well for companies focused on larger business goals rather than total profit, and who have a set price for products and services with less complex offerings.
This encourages the opportunities for reps to become top sales performers.
Tiered Commission Structure
This structure encourages sales teams to exceed their goals and close the highest volume of deals through earning higher commission rates as they meet certain tiered quotas.
To map it out, a sales rep may receive a 5% commission rate until they close a certain number of deals, after that number is met they can start earning a 10% commission rate.
Sales reps who are highly motivated and are top performers prefer a tiered commission structure for the ability to earn high commission rates as they meet quotas.
Businesses lean towards a tiered commission structure when they have a large, established sales team and want them to exceed and out-perform quotas.
Multiplier Commission Structures
This is the structure that requires the most dedication to enact due to the customizable aspect of it.
The multiplier commission structure allows companies to build custom-made compensation plans based on certain KPIs (key performance indicators) to incentivize certain behaviors and goals.
Breaking it down, this structure starts with a base revenue commission structure and then the commission rate is multiplied by a predetermined factor determined by the KPIs focused on.
It can be tricky to manage, but is great for organizations with specialized needs and ones that need their team to be on top of their game. It’s the best strategy to target and refine specific seller behaviors, and to fine tune reps on the most effective sales techniques.
Incremental Rewards (like Spiffs)
This last commission structure is the most important if you want to change rep's behaviors.
Spiff stands for Sales Performance Incentive Funding Formula, or Sales Performance Incentive Fund. It’s an incremental rewards structure that enacts rewards or bonuses to sales reps for the closing of a deal or even securing a demo of a product.
You can better motivate and inspire your reps to get to that final step in the buyer’s journey by implementing incremental rewards.
It’s best-suited to companies lacking other means to motivate their sales teams, and for reps who are looking for extra fire to close deals.
What is Sales Commission Software?
Every business and company needs help assessing performance and tracking objectives and benchmarks, that’s where sales commission software comes into play.
Providing companies with a peek into past earnings and forecasted revenues, sales commission software also takes the pressure off of the accounting and administration of commissions and incentive plans.
Sales commission software creates, manages, and maintains compensation based on several customizable rules. You can base rules around employee role, tenure, or sale type, giving businesses important data to be able to tweak and enhance strategies.
You can also produce reports tailored from specific goals, making it easy to highlight areas that are blocking your progress.
By using SetSail, you are utilizing machine learning to go beyond simple rep activity metrics and into customer behavior by analyzing best practices and tracking the best deal breakthroughs.
SetSail stands apart from other software by analyzing communications for hundreds of data signals that impact deal performance, optimizing the reports produced providing you with a level up from competitors.
How to Evaluate the Right Sales Commission Software?
It can be overwhelming when faced with picking the right sales commission software for your business. Not all sales commission softwares are going to work for your specific business.
When evaluating the right sales commission software keep in mind the following:
- User friendliness
- Reporting and analytic strategies
- Integrations available
- Customer support
Top 3 Recommendations for Sales Commission Software:
What is it: SetSail is an AI-powered platform that combines data and behavioral science to drive more revenue per sales rep.
What makes it different: Combines data and behavioral science producing more in-depth, well rounded reports that are easy to read and enact.
Who is it best for: All businesses and companies looking to leverage data science along with a unique reward model to achieve mass productivity.
What is it: Maintains motivation by making it quick and easy to calculate sales commissions and create compensation plans seamlessly.
What makes it different: Created by sales comp professionals, Performio uses a rich data set from years of experience in dozens of industries.
What is it best for: Built specifically for sales comp professionals on larger sales teams.
What is it: Easy to use cloud-based customizable sales commission platform.
What makes it different: Offers additional built in features for insurance sales, medical sales, and more.
Who is it best for: Smaller commission based sales teams in small or medium businesses.
Average Sales Commission Rates by Industry
Now that you have a good grasp regarding sales commission rates and strategies, let’s break down how these rates vary throughout industries.
When you are determining a fair commission rate for your team, be sure to focus first on what sales commission strategy you’ve adopted.
For sales reps that work with commission-only strategies, commission will be higher than those who have a large base salary.
Second, take a look at your industry. What product or service you are offering, and how you compare to competitors. Let’s break down some key industries and their median pay:
- Wholesale and Manufacturing Sales - Median pay: ～$63,000
- Security, Commodities, and Financial Services - Median pay: ～$62,000
- Sales Representatives, Business Support - Median pay: ～$56,000
- Retail Sales - Median pay: ～$25,000
- Advertising Sales - Median pay: ～$53,000
- Insurance Sales - Median pay: ～$51,000
So, What Is the Typical Sales Commission Percentage?
Within today's market and among competitors who have a generous base pay, the starting sales commission percentage in 2021 was 5%, and the typical would land anywhere between 20% - 30%.
These percentages are determined based on the industry, sales reps skills, knowledge and experience, and company budget.
At some companies you can find commission rates as high as 50%, typically for sales commission structures that rely heavily on commission and performance of reps.
When making the decision on what sales commission percentage to choose for your team, be sure to download the right sales commission software to best equip you with the data you need.
SetSail will ensure that you are covering your bases by extracting more data points than any other sales tracking software, combining AI and behavioral science to turn data into insights helping you choose the appropriate sales commission percentage that will motivate and inspire your team to perform.
Sales Commission Structure Template
The final step before you implement your sales commission structure with your team is creating a sales commission structure template.
This is a key step to ensure your managers and salespeople are on the same page when it comes to how they will get paid, regardless of the sales commission structure you follow.
It’s vital to get this agreement in writing, and also super simple.
Ultimately you want to make sure you are covering these points when drafting your sales commission agreement.
- Establish who the agreement is between
- Should include the employer and employee’s names
- Describe the purpose of the document
- To establish a sales commission structure dictating employees compensation
- Outline sales commission structure clearly
- Breakdown how you will compensate the employee
- Acquire signatures that state you both are aware of the sales commission structure outline in the document
SetSail is a Revenue Execution Platform that realigns sales around the small wins that lead to their big win. SetSail uses machine learning and AI to identify key buying signals that lead to successful deals, tracks those signals for coaching, and allows managers to create automated incentive programs to drive top sales behaviors.
CROs and Sales VPs at companies like Dropbox, Cisco, and HubSpot use SetSail to increase attainment, accelerate ramp time, and improve win rates. Customers that use SetSail have 12% higher quota attainment, 25% faster ramp time, and a 15x ROI on sales incentives.