The Ultimate Guide to Sales Commission: Models, Examples & Best Practices
Sales commissions are one of the most powerful tools for motivating sales teams and driving revenue growth. But choosing the right commission structure is critical—get it wrong, and you risk demotivating employees or overpaying for performance.
In this guide, we’ll explore different types of sales commission structures, how they work, real-world examples, and best practices to ensure your commission plan aligns with your company’s goals.
What is a Sales Commission?
A sales commission is a variable compensation paid to sales representatives based on their performance. It acts as an incentive for closing deals, increasing revenue, and hitting sales targets.
Why are Sales Commissions Important?
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Drives motivation and performance
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Encourages goal alignment between reps and company
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Rewards top-performing salespeople
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Scales compensation with business growth
Common Sales Commission Structures (With Examples)
Choosing the right structure depends on your industry, sales cycle, and business goals. Below are the most commonly used models:
Straight Commission
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How it works: Sales reps earn commission only—no base salary.
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Best for: Highly motivated, experienced sales professionals.
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Example: A real estate agent earns 3% of the sale price for every home sold.
Base Salary + Commission
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How it works: A fixed base salary plus commission on sales.
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Best for: Companies balancing stability with performance incentives.
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Example: A software sales rep earns $40,000 per year + 10% commission on sales.
Tiered Commission Structure
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How it works: Higher commission rates for exceeding sales targets.
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Best for: Motivating reps to go beyond quota.
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Example: 5% commission up to $50,000 in sales, 10% for sales beyond that.
Draw Against Commission
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How it works: Sales reps receive an advance on future commissions.
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Best for: New hires needing income stability while ramping up.
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Example: A sales rep receives a $2,000 monthly draw, deducted from future earnings.
Uncapped Commission
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How it works: No limit on earnings—top performers keep earning.
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Best for: Companies wanting to drive aggressive sales growth.
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Example: A tech salesperson earns 8% commission on all deals, with no earning limit.
How to Choose the Right Commission Structure
Selecting the right plan depends on:
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Industry norms (e.g., SaaS vs. retail)
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Sales cycle length (shorter cycles favor higher commissions)
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Profit margins (ensure commissions don’t erode profits)
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Sales team experience level (new reps may need stability)
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How to Calculate Sales Commissions (With Examples)
Basic Commission Calculation
Formula: Commission = Sale Price × Commission Rate
Example: A rep closes a $10,000 deal with a 7% commission.
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$10,000 × 7% = $700 commission
Tiered Commission Example
A rep sells $80,000 in a month. Their tiered plan:
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5% on first $50,000 = $2,500
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10% on remaining $30,000 = $3,000
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Total commission: $5,500
Industry Benchmarks for Sales Commissions
Typical commission rates by industry:
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SaaS sales: 8-15%
In SaaS Sales, however, Sales commissions can be as high as 30-40% on the first year's ARR. -
Real estate: 2-6%
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Retail sales: 5-10%
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Manufacturing: 7-12%
Conclusion
The right commission structure can boost motivation, improve sales performance, and align incentives with business growth. Whether you need a simple model or a complex, tiered system, choosing wisely is crucial.
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