4 sales commission structure options for small businesses
- Sales reps are usually paid on a combination of base pay and commission rate
- A competitive sales commission structure considers both your company goals and sales targets
- Incentive compensation can attract top performers who see upward potential working for you
For small business owners, getting new customers is crucial to making sales. More than 1.5 million people work in sales in the United States—and just one of those sales reps might make all the difference on your team.
However, sales is a competitive field with a variety of pay structures that are built around a commission compensation plan. Before you expand your sales team, educate yourself on what attracts and keeps top performers.
Learn the pros and cons of each sales commission structure to find the one that works for your small business and helps your sales talent achieve their goals.
Selecting the right sales commission structure matters
Employee engagement should be a big concern for any company owner right now. The pandemic prompted many workers to re-evaluate their work and lives, and many decided to resign to seek better opportunities.
An incentivized pay structure is one way that companies can retain employees. Often used in sales, it’s also a proven tool across departments. A 2019 TinyPulse study found that over 40% of workers would think about leaving their current position for just a 10% pay increase.
In sales, these incentives often take the form of a commission—an amount that is paid out on top of a regular salary and is based on the percentage of sales that an employee generates. Sales commission rates range from 5% to as much as 50%, but most companies pay between 20-30%.
To find the right fit that aligns with your sales goals, start by estimating how much it would cost to hire people under different sales commission structures—both for full-time staff and independent contractors. Projecting these finances will help you with overall budgeting, plus you can communicate these projections and goals in onboarding and training material for sales team members.
You should also consider these three major components when setting your compensation plan for salespeople:
- Base salary (sometimes called a base rate)
- Commission rate and/or caps (maximum limits on commission amounts)
- Other incentives, like vacations or special prizes
If you’re not sure where to start, research your competitors or job postings for similar positions in your region. This will help you find a baseline as you build your pay structure and put together a sales force.
Four sales commission plan types
Whether you’re a startup owner crafting your first business plan or an experienced owner ready to grow your team of sales reps, the right sales incentive plan can attract sales leaders that will help grow your business.
To hit your business goals, consider these four types of sales commission structures to find the right commission for your team.
Base salary only
Base salary is the simplest sales compensation plan. In this pricing structure, sales reps earn a set amount—a base rate or base salary—no matter how much they sell. Few companies use base pay for a team focused on sales since there’s no incentive for employees to close deals. It’s also difficult to attract new sales reps with base pay if they’re accustomed to a commission rate structure.
However, a base salary-only plan may work for full-time employees who play multiple roles in the company since it aligns with other employee salary structures.
Note that while this plan is the most straightforward, it’s also less popular among salespeople compared to commission compensation plans. One 2017 study found that performance-based pay was one of the most important factors for trusting management, commitment to the organization, and job satisfaction.
Base salary and uncapped commissions
With uncapped commissions, the sky’s the limit for the worker—meaning there is no limit to the amount of commission a salesperson may earn. This structure is typically paired with a lower base salary. However, the earning potential is often higher for experienced and eager sales reps. For this reason, base salary plus commission attracts employees with a strong track record in sales because they increase their earnings as they close deals.
Here’s an example of what base salary plus commission might look like:
- Base salary of $40,000
- Commission of 15% on all closed deals
This structure works well for small business owners who want to limit extra costs. If a new hire has poor sales performance, it keeps your payroll costs down. This plan also has the potential to draw in reps with extensive sales experience, reducing the amount of training needed.
The downside for your team, however, is that workers who are unable to close deals can rarely live off a low base salary alone. You might end up creating a cutthroat environment and miss out on an opportunity to mentor employees and encourage growth.
Base salary and capped commissions
With base salary and capped commissions, a sales representative earns their base pay, but there is a limit to the amount of commission they can earn (based on a fixed and predetermined amount of sales revenue).
If you’re concerned about your bottom line, base salary and capped commissions make sense. This is the easiest model to plan for financially, as there’s no “surprise” sale that starts cutting into the company profits. It can also be a good fit if you’re worried about a sales leader earning too much and financially jeopardizing other aspects of the business.
However, in some industries, this structure may stagnate your growth. For example, if you pay a 30% commission on all sales up to $50,000, a sales rep has no incentive to bring in any more sales beyond that $50k mark. This could limit your revenue if you rely on salespeople to upsell into bigger packages or ongoing work. Review your small business accounting plan or your business plan to see if capped commissions are the best fit for you.
Straight commission means there is no base pay, and the sales rep makes money only from the sales they close. Compared to other mixed commission models, employees receive a higher commission percentage per sale.
This structure works well for highly motivated employees with a strong sales background. Still, your commission percentage must be high enough to compensate for the lack of base salary.
With these straight commission payment options, note that while there’s no financial business loss associated with lower-performing employees, there’s also no financial gain. Make sure you provide realistic expectations to sales reps when they join your sales team. Rather than advertising what they could make, stress the average income for sales reps in your company.
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What to consider when setting salesperson compensation plans
Whether you’re starting fresh or updating your business plan, you’re not limited to these four sales commission structures. You can also combine elements from several structures. For example, a tiered commission structure can incentivize sales reps to close more deals—paying 20% commission for all sales up to $10,000 in a month, then increasing the commission rates to 30% from $10,001 to $20,000.
You can also use sales cycles to your advantage. If your sales reps have nothing to do after hitting a cap, consider resetting sales quotes monthly or quarterly. This payout structure will keep your sales reps on a regular cadence to close deals.
Once you choose a commission model, train your staff on the structure and how to track their numbers with spreadsheets or accounting software. Everyone should be informed of sales commissions, payout dates, percentages, and other compensation plan details before they get their check.
As your team progresses, set benchmarks and total sales quotas for each employee to help evaluate whether your company goals are reasonable. Based on their performance, provide more training to salespeople to help them do their jobs more effectively.
Create your sales commission structure plan today
After reviewing the options of base pay and commission caps, you should have an idea of the best sales commission structure for your business. Sales professionals will calculate the number of sales they need to hit to make a living, so evaluate commission rates carefully to improve employee retention.
Being strategic in how you pay your employees is a great way to attract talent and give them incentives to convert sales. Once you’ve taken care of your crew, focus on how you can collectively attract more customers to your business.
The information above is provided for educational and informational purposes only. It is not intended to be a substitute for professional advice and may not be suitable for your circumstances. Unless stated otherwise, references to third-party links, services, or products do not constitute endorsement by Yelp.