Which Sales Commission Plan Drives the Best Results?
Commission plans can make or break the success of your sales team. For salespeople, motivation often boils down to one thing: money. But selecting the right commission plan isn’t just about what gets them excited—it’s about choosing a plan that benefits both your salespeople and your organization in a sustainable way.
Whether you’re hiring your first salesperson or reevaluating your current structure, this blog will break down the different types of commission plans available and help you decide which one is right for your team.
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Straight Commission: The ‘All or Nothing’ Plan
Straight commission plans are simple: sales reps only get paid a percentage of the deals they close, with no base salary. This plan works well for experienced, career-focused salespeople who thrive on high stakes and high earning potential. However, if your team is inexperienced or you’re looking for stability, this plan might not be the best fit—it tends to create turnover as less experienced salespeople struggle to make ends meet.
Key Points:
- Great for highly skilled, independent salespeople
- No base salary, which saves the company money
- High earning potential, but can lead to burnout or high turnover
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Tiered Commission: Motivate with Milestones
In a tiered commission plan, sales reps earn a higher percentage of their sales as they hit specific milestones. This structure rewards top performers and encourages the entire team to push harder as they approach their next goal. However, managing multiple commission tiers can get complicated, especially for small businesses.
Key Points:
- Motivates salespeople to hit bigger goals
- Can be complex to manage
- Ideal for experienced teams with ambitious sales targets
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Revenue Commission: Focus on Big Wins
Revenue commission plans are based on the total revenue generated from a sale, usually as a one-time payment. This method incentivizes salespeople to prioritize larger deals, which can be beneficial for your organization. But beware—it can also lead to neglect of smaller, more frequent sales that could also drive growth.
Key Points:
- Best for B2B or larger deal cycles
- Focuses on higher-value deals
- Encourages prioritization of big wins, but may overlook smaller opportunities
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Gross Margin Commission: Profit Over Revenue
In gross margin commission plans, salespeople are compensated based on the profitability of a deal. This type of plan works well in industries like staffing, where margins can vary. It ties salespeople’s earnings to the profitability of the business, aligning their goals with the company’s bottom line.
Key Points:
- Ties commissions to profit, not revenue
- Works well when salespeople have control over pricing
- Can be more complex to calculate
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Residual Commission: Keep the Momentum Going
Residual commission offers a continuous income stream to sales reps based on long-term customer relationships. This is commonly used in subscription-based or SaaS businesses. While it ensures that sales reps stay engaged with clients post-sale, the downside is that payouts can take a long time to reach the rep, potentially impacting motivation.
Key Points:
- Keeps sales reps engaged with long-term clients
- Best for subscription or recurring revenue models
- Payments can take time, so mixing this with other plans works well
- Draw Against Commission: Cushion the Onboarding Process
A draw against commission provides a financial safety net for sales reps as they ramp up. This is essentially an advance on future commissions. While it can give new hires peace of mind and financial stability, it’s harder to manage for smaller businesses without robust accounting systems in place.
Key Points:
- Good for onboarding new sales reps
- Provides financial stability while sales reps ramp up
- Can be complicated for small businesses to manage
Conclusion
Choosing the right commission plan depends on your sales strategy, team structure, and financial stability. For small businesses, managing cash flow and ensuring the plan motivates the right behaviors is crucial. Remember that commission plans can and should evolve over time to match your company’s goals and your sales team’s maturity. As long as your plan aligns with both your company’s objectives and your salespeople’s aspirations, you’ll set your team up for long-term success.
Bonus: To help you further, we’ve created a detailed commission plan guide that outlines all the commission types mentioned above, along with a comparison table to make it easier to evaluate which one fits your needs best. You can download the document here.
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