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Reduce sales turnover with a smarter commission structure

Sales teams face two challenges when it comes to compensation:

  1. Retaining top talent
  2. Encouraging actions that help customers
  3. The solution?

    A smarter sales commission structure.

    But what if you’re not sure where to start?

    This sales commission structure template gives you everything you need to know about roles (from junior sales development rep to senior account executive) to compensation (including base, variable, OTE, and targets).

    What you get:

    • Sales role, hiring and promotion schedule
    • Sales commission structure template

    Share the tool

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What is a sales commission plan?

A sales commission plan explains how different salespeople are going to be paid based on reaching their goals and overall revenue contributions.

In most cases, it includes both base pay and variable pay (also known as commission or incentive pay). 

In some rare cases, commission plans are based only on commission.

Most include both base pay and commission.

What is a typical sales commission structure?

Typically, the industry average for sales commission structure is between 20-30% of gross margins. Depending on the margins in your particular industry, a sales professional may earn 5-10% of a total sale.

How do you make a sales commission plan?

You may be rebuilding an old sales commission plan, or starting a new one.  Either way, here are the essential four steps to follow for making a sales commission plan:

1. Sales commission plan best practices

5 quick rules for creating your sales commission plan:

  • Clear, not clever — Your entire sales commission structure should fit onto a single slide (for an example, download the template above)
  • Show the relationship — It must be clear how sales actions translate into commission
  • Move fast — The connection between sales activity and compensation should be less than 60-90 days
  • Equity > Equality — Sales compensation need not be equal across all team members, but it must be fair
  • Again, clarity — The more complicated this system is to manage, the easier it is to break and create fallout. Make it as easy to understand, and implement, as possible.

2. Finalize your roles and levels

Standard role levels on a sales team can be broken down based on experience:

  • Junior Sales Development Rep ( Jr. SDR) — Entry-level position AKA Market Development Rep
  • Sales Development Rep (SDR) — < 2 years of experience
  • Senior Sales Development Representative (Sr. SDR)  —  2+ years of experience, focused on larger deal size
  • Junior Account Executive (Jr. AE)  — < 2 years of experience, smaller deal size
  • Account Executive (AE) — 2+ years of experience, standard sized deals
  • Senior Account Executive (Sr. AE) —  4+ years of experience, larger and strategic deals

3. Determine on-target earnings (OTE)

Since you’re going to be paying your sales reps at least partially on commission, you first need to establish their on-target earnings (OTE). An OTE is what a team member should expect to earn annually if their hit their sales goals (and includes both their base pay and commission)

4. Determined base pay and sales commission plan structure

Once you’ve established the OTE for each level of your team, work backwards to establish the base pay and what level of sales commission each representative level will be earning. It is not unusual for higher percentages of commission to be paid out for lower-level representatives as they’ll be working with significantly smaller average deal sizes.

What are the 7 types of sales commission structures?

Here is a brief outline of the 6 different ways you can include commission in how you structure your pay:

  1. Commission only
  2. Bonus commission
  3. Salary + Commission
  4. Variable commission
  5. Graduated commission
  6. Residual commission

1. Commission Only

Sales reps that are selling a product with great product-market fit and have a highly qualified lead flow absolutely love commission only pay structures. Why? It has the highest earning potential. 

Additionally, most companies that work on commission only don’t cap earning potential so the sales reps can, hypothetically, earn far more than they would anywhere else.

This structure is also popular among startups and scaleups that are looking to go to market (or go upmarket) quickly.

2. Bonus Commission

Bonus commission is in addition to a sales rep’s base pay and are based on meeting set earnings and sales quotas during a specific timeframe (usually quarterly).

Bonus commission structures can be set at the individual, team and company level.

3. Salary + Commission

The most common sales commission structure (and the one you’ll find in the template above) is base pay (salary) plus commission. Why is it so popular?

It puts the responsibility equally on the sales rep and the company.

As long as the OTE makes sense for the sales rep and the team/company, this is a great way to structure sales commissions.

4. Variable Commission

Variable commissions come into play when sales reps are selling custom product packages, or just separate products. The commission on each product may vary.

This is a great sales commission structure for companies going upmarket and looking at market expansion. If you’re looking to break into a new product category, or start selling in another country, variable commissions may be a great fit for your sales team.

5. Graduated Commission

Although the graduated commission structure can violate one of the rules above (“Again, clarity” listed under best practices), it’s still extremely popular.

When companies want to motivate sales reps to sell more, they’ll introduce higher commission rates based on overall sales volume of won deals.

For example, an SDR may make 10% commission every quarter, but if they reach a certain sales goal milestone, that commission percentage increases to 15%.

6. Residual Commission

Residual commission is fantastic for ongoing accounts. If you work in SaaS or any other high volume (or high value) accounts, it may make sense to offer residual income over time to encourage your sales reps to close longer deals or close customers with the most potential to be long term customers.

The flip-side of this is that losing customers due to a poor product (or a bad experience with another member of the company) can negatively impact the sales rep’s overall pay.

Get a free visual sales commission structure template (that you can use today!)

Working from this highly visual sales commission structure  template, you’ll be able to customize your sales team’s compensation and commission structure to fit your current budget and sales goals.

This free sales commission structure template includes everything you need to create a sales commission structure that aligns your entire sales team, from the most junior SDR to senior AEs!

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Start a 14-day free trial of ActiveCampaign. No credit card, no setup, no hassle.