Eight ways to pay
a salesperson, and
what each one causes
A commission structure is a behaviour instrument before it is a payment method. Choose the flat rate and you get volume. Choose gross margin and you get discipline on discounting. Most plans fail because nobody asked which behaviour they were buying.
There are only about eight commission structures in common use. Everything else is a combination of them, or one of them with a condition bolted on. Knowing the eight, and what each reliably produces in a sales team, is most of what it takes to design a plan that survives its first year.
Flat rate commission
A fixed percentage of every sale, from the first dollar to the last. A rep on 8% who sells $50,000 earns $4,000, and the same rep selling $500,000 earns $40,000.
The virtue is that everyone understands it, including the rep doing mental arithmetic in a car park. Nobody disputes a flat rate plan, which is worth more than most compensation designers credit.
The weakness is that it pays the same for the easy dollar and the hard one. A rep who inherits a strong territory earns the same rate as one building from nothing, and there is no extra pull once someone passes their target.
Tiered commission
The rate rises as cumulative sales pass thresholds. For example 5% up to $50,000, 7% from there to $100,000, and 10% beyond that.
Tiers create pull at exactly the point where a flat plan goes slack. A rep at $96,000 in the last week of a quarter has an obvious reason to close one more deal.
The design question that decides everything is whether tiers are retroactive. In a retroactive plan, crossing $100,000 lifts the rate on every dollar already sold that period, which produces a large jump and a very motivated rep. In a marginal plan, only the dollars above the threshold earn the higher rate. Retroactive costs far more than most models predict, because it compounds at exactly the moment the most people are crossing.
One word in the plan document, $4,000 of difference on identical performance. Retroactive plans spike hardest at period end, when the most reps cross at once.
- Marginal tiers
- Each band pays its own rate on the dollars inside it. Cheaper, easier to forecast, and less exciting to the rep.
- Retroactive tiers
- Crossing a threshold reprices the whole period. Powerful, expensive, and prone to producing an argument when a deal slips a day into the next quarter.
- Cliff thresholds
- No commission at all until a floor is cleared. Legal in many places and demoralising in most, because a rep at 90% of the floor has earned nothing.
Base salary plus commission
The most common arrangement in business to business sales. A guaranteed salary covers living costs and a variable component rewards production, usually expressed as a target split such as 60/40 between base and variable at on-target earnings.
The split says what the company believes about the role. A 90/10 split describes a job where the rep influences outcomes at the margin, such as account management. A 50/50 split describes a hunter who is expected to live or die by production.
Getting this wrong is expensive in a way that shows up late. Too much base and the plan stops motivating anyone. Too little and the company loses everyone whose pipeline goes quiet for a quarter, including good people having an unlucky one.
Draw against commission
The rep receives a regular payment that is advanced against future commission. When commissions exceed the draw, the rep receives the difference. When they fall short, the shortfall carries forward.
A recoverable draw is a loan, and it must be paid back from later earnings. A non-recoverable draw is a floor, and any shortfall is forgiven at the end of the period. The word recoverable is doing enormous work in that sentence, and it belongs in the plan document in bold.
Draws suit long sales cycles and new hires who need a runway. They turn dangerous when a rep accumulates a deficit large enough that no realistic quarter clears it, at which point the plan has quietly stopped being an incentive and become a debt.
Gross margin commission
Commission is paid on profit instead of revenue. A rep selling $100,000 of product that cost $60,000 is paid on the $40,000 of margin.
This is the correct structure wherever reps can discount, because a revenue plan actively rewards them for giving away price. Under a margin plan a discount comes straight out of the rep's own earnings, which changes negotiating behaviour within about a week.
The cost is that it requires trustworthy cost data at the line item level, and many companies do not have it. A margin plan built on stale or estimated costs pays confidently wrong numbers and is harder to dispute than a revenue plan, because the rep cannot see the cost side.
Residual and recurring commission
The rep is paid each period for as long as the customer keeps paying. Standard in payment processing, insurance, telecoms and increasingly in subscription software.
It aligns the rep with retention as well as acquisition, and it builds an income that compounds. An agent with a mature book can earn well in a month where they sold nothing, which is either the model working as designed or a problem, depending on the company.
It is also the structure that breaks the most tooling. The amount changes every period based on customer behaviour, the calculation reruns forever, and a single customer can involve several people with different shares.
Split and team commission
One deal, several claimants. A setter who books the meeting and a closer who signs it. An overlay specialist brought in for a technical evaluation. A house account where the company takes a share.
Splits are simple to state and awkward to administer, because they are agreed per deal instead of per person and they are frequently agreed verbally. The plan needs a default, a way to record exceptions, and a rule for what happens when the two people disagree about what was promised.
Milestone and multi-stage commission
Payment is broken across events instead of landing in full at signature. Common in home services, solar and construction, where a contract signed in March may not be installed until June.
A typical shape pays a portion at contract, a portion at install, and the remainder once the customer has passed a cancellation window. It protects the company against paying in full for revenue that never arrives, and it gives the rep a reason to stay involved after the signature.
The administrative burden is real. Every deal is now several payments spread across months, each waiting on an event in another system, and any of them can be reversed.
The eight structures compared
The same $100,000 of sales, and what each structure tends to produce in a team. Behaviour column reflects what these plans reliably cause, which is seldom what they intend.
| Structure | Typical shape | Behaviour it produces |
|---|---|---|
| Flat rate | 5% to 10% of revenue | Volume, with no extra push past target |
| Tiered | 5% / 7% / 10% by band | Late-period surges around thresholds |
| Base plus commission | 60/40 split at on-target earnings | Stability, with motivation set by the split |
| Draw against commission | Advance recovered from earnings | Runway for new hires, debt risk if unmanaged |
| Gross margin | 20% to 40% of profit | Discipline on discounting |
| Residual | Share of recurring revenue | Retention focus, income that compounds |
| Split or team | 60/40 setter and closer | Collaboration, plus disputes over credit |
| Milestone | Staged across contract, install, retention | Involvement after signature |
Structure shapes are the common ranges in business to business sales. Behaviour column is observed pattern rather than a cited study, and is stated as opinion.
Questions people actually ask
- What is a sales commission structure?
- A sales commission structure is the set of rules deciding how much a salesperson earns from what they sell. It defines the rate, what the rate applies to, when payment happens, and under what conditions payment can be reduced or reversed. Most structures are a variation of eight common models.
- What is the most common sales commission structure?
- Base salary plus commission is the most widely used arrangement in business to business sales, most often with a 60/40 or 70/30 split between base and variable pay at on-target earnings. Flat rate plans remain common in smaller teams and in industries where the sales cycle is short.
- What is a good commission rate?
- It depends far more on what the rate applies to than on the rate itself. Twenty percent of gross margin and eight percent of revenue can produce identical pay. Compare plans by expected annual earnings for a rep hitting target. The headline percentage on its own carries almost no information.
- What is the difference between tiered and retroactive commission?
- In a marginal tiered plan each band pays its own rate only on the dollars inside that band. In a retroactive plan, crossing a threshold applies the higher rate to everything sold in the period, including sales already made. Retroactive plans motivate harder and cost considerably more, particularly at period end when many reps cross at once.
- Should commission be paid on revenue or profit?
- Pay on profit wherever reps can influence price. A revenue plan pays a rep the same for a heavily discounted deal as a full-price one, which quietly rewards discounting. The requirement is reliable cost data at the line item level, and a margin plan built on stale costs causes worse disputes than the revenue plan it replaced.
The structure is the easy half
Choosing between these eight takes an afternoon. Running the one you choose is the part that consumes a finance team, because every structure above generates exceptions within a quarter: the deal that spanned two tiers, the split nobody wrote down, the milestone that reversed. Commish exists for the second half. If your plan is a flat rate on revenue and it fits in a spreadsheet, keep the spreadsheet.
Bring the plan you have,
not the one you meant to write
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