Many companies looking for talented sales people offer competitive commission rates to attract and retain top-performing talent. When looking for a potential new employer, verifying whether they offer a detailed payment plan or a comprehensive commission structure is important.
According to a Paychex study, low pay is the top reason employees in virtually every sector leave their companies. However, pay and commission plans for sales teams may vary between employers. Understanding the various ways businesses compensate their sales reps can help you make the right choice during your job search.
What are Commission Sales?
Whenever a salesperson closes a deal, they may earn a commission, typically calculated from a percentage of the total sale value. The more valuable the sale, the more the sales rep makes.
In their simplest form, commissions are a straight percentage. For example, suppose a sales rep earns 4% per commission. If they close a deal on a product or service valued at $7,500, the representative makes $300. Some companies may have more complex commission calculation methods, but all rely on the same basic principle.
When applying for sales jobs, one of the most critical decisions is whether you prefer to work for a salary, on commission, or a combination of the two. There is no easy way to quantify what an average commission looks like, as the percentages and actual values vary immensely.
Potential variables for how you’ll be paid in sales include the following:
- Which industry the company belongs to
- How much experience you have as a sales rep
- How long or complex a typical sales process is, from prospecting to closing a deal
- The company’s sales goals
Examples of Sales Commission Structures
Most compensation plans fit into one of two broad categories: fixed or variable.
Fixed plans include a guaranteed base salary, whereas variable plans have a pay structure entirely based on commissions and other bonuses.
A salary-only (or base rate-only) compensation plan is the most consistent payment strategy possible. Sales reps receive a salary set by their employer and nothing beyond that, regardless of how many sales they make.
By definition, this payment plan excludes commissions. Depending on the company, the rate may be hourly, weekly, or monthly, similar to other sectors.
The stable pay means you aren’t under stress to meet sales goals, and calculating how much you’ll take home each pay period is easy.
However, a fixed salary offers no financial reward for working beyond your minimum quota. If you are a high-performing rep, you may feel disadvantaged, as performance has no impact on your compensation.
A commission-only payment plan (also known as straight commissions) is 100% variable. The company sets no base salary, and sales reps only earn money when they close a sale. No sales mean no income.
This payment plan scales entirely depending on your performance. The more deals you close, the higher the commissions, making it the most attractive commission system for top performers.
Straight commissions grant each salesperson high autonomy and responsibility. Although you can set your own hours and act independently, your livelihood depends entirely on your success, making lean months, bad luck, or general lack of success feel punishing.
Base Pay Plus Commission
The base salary plus commission structure is perhaps the most common in the sales industry. Under this structure, a salesperson gets both a salary and commissions, functioning as a compromise between salary only and straight commissions models.
The base pay is usually too low to be considered livable, encouraging salespeople to close deals and earn the rest of their income through commissions. The standard ratio is 60:40; 60% base pay, 40% commissions. During lean months, the base pay provides guaranteed income while still making it possible to earn more if you perform well.
For example, suppose a salesperson earns $600 base pay + 8% commission. If they sell $25,000 of products in a month, they will make $2,600; $600 from the base pay, and $2,000 in commissions.
Gross Margin Commission Plan
Although similar to the standard base salary plus commission system, gross margin plans subtract all production expenses from the sale value. In other words, the sales rep’s commission percentage depends on the profit margin instead of the sale value.
Under this system, you will be encouraged to upsell the product and avoid offering heavy discounts to close the deal, as your commission rate depends directly on the profit margin. This payment method is common in sectors such as automotive sales.
For example, suppose a salesperson must secure a sale on a vehicle that costs approximately $34,000 to make. They will earn a 5% commission on the profit margin, meaning that if they manage to sell it for $50,000, the profit margin will be $16,000, meaning they will make $800.
Draw Against Commission
The draw against commission payment plan effectively pays each rep in advance, but with a caveat: they must repay that money to the company at the end of a sales period.
The idea of the draw against commission is to pay each employee first to cover expenses, then incentivize them to close as many sales as possible to keep the difference. The target amount is typically double what they received initially. The main drawback of this payment method is that poor performance means a rep may owe money to their employer.
For example, at the start of a month-long sales period, every rep receives a $1,800 draw, which they must pay back at the end. If a salesperson makes $4,000 in commissions by the end of the month, they will have $2,200 remaining after paying back the advance draw. Conversely, if a rep makes only $1,000 in commissions, they will owe their company $800.
A tiered commission system establishes a hierarchy of commission percentages, offering progressively higher commissions in compensation for higher sales. If a sales rep’s performance is high enough to reach a specific tier, their commission percentage is adjusted accordingly.
For example, a company may set a 3-tier system. $100,000 or less in a sales period grants 5% commission, $100,001 to $200,000 grants 7%, and $200,001 or more grants 10%. If a rep manages to sell $187,600 worth of products during a sales period under this tier system, they reach the 7% tier, earning $13,132.
Residual commission systems are most common in industries that rely on ongoing contracts and steady revenue streams (e.g., consulting firms, monthly subscriptions). Under the residual commission system, the sales team receives a commission on each recurring payment.
This model encourages reps to maintain relationships with existing customers, retaining them and encouraging repeat sales.
For example, if a salesperson with a 5% commission rate closes a $2,500 monthly premium contract, they will receive a commission of $125 each month.
Choose the Right Commission Structure for Your Lifestyle
When applying for sales jobs, it’s critical to consider what payment model works best for your lifestyle. While some workers may value a consistent paycheck so they can anticipate their monthly and annual income, others enjoy the ability to increase their pay if they put in the time and effort to perform better.
Here’s what you need to consider when deciding whether you want to accept a sales job with commissions:
- Assess your skills, experience level, and work ethic. If you prefer more security, look for jobs offering more fixed payment plans, such as base pay plus commission. If you’re highly motivated and confident in your capabilities, variable structures such as straight or tiered commissions may be more satisfying.
- Think about your ability to manage your finances. Are you capable of budgeting your savings effectively if you have a slow month on commission so you can continue paying your bills? If not, a sales job working on commission may be unsuitable for your lifestyle.
- The job market is constantly evolving, and while you may join a company under one payment model, it’s possible their commission payment plans could change in the future. Consider whether you’re open to this potential instability.
Put Your Talents to Use with JobsFuel
When you’re seeking a new position in sales, jobsfuel.com is your online resource for finding suitable openings in your area. JobsFuel can help you connect with employers who offer the salary or commissions payment model that suits your lifestyle. You’ll also find guidance on preparing applications for these positions to help you land the job you’re after with ease.