Sales Commission Models Explained

I’ve experienced many forms of this, and I want to share the various available models with you, hoping it will shape how you approach it.

Sales teams are critical to the success of any organisation. These teams are responsible for generating revenue, and often, their compensation is based on the commissions they earn. However, commission models vary widely across organisations, and understanding the different models can be helpful for both sales teams and those responsible for managing them. This article will explore the most common commission models used in sales teams.

This article is structured in the following way:

1. I will outline the models with examples/commentary for each
2. I will add how other incentives are built into these models as one section
3. I will note T&Cs to consider at the end (taxes, deductions etc.)
4. I will talk through my favourite one at the end

Straight commission

Straight commission is perhaps the most straightforward commission model used in sales teams. In this model, salespeople earn a percentage of the revenue they generate. For example, a salesperson might make a 10% commission on each sale. This model incentivises salespeople to generate as much revenue as possible, as their earnings are directly tied to the revenue they generate. However, it can also be risky, as salespeople may not earn any money if they don’t make any sales.

Thoughts:

There can be no base salary in this case, and it can be risky for someone who does not have a network to begin with. This model is usually seen with programs like Herbalife or Tupperware, where the more you sell, the more +%s you get in commission.

As a business that might have a client base/network, this is the most common reseller model I have seen.

Base plus commission

Base plus commission is a hybrid commission model that combines a base salary with commissions. In this model, salespeople receive a fixed salary, typically lower than what they would earn in a straight commission model. They also make a commission on the revenue they generate, with the commission percentage typically being higher than what they would earn in a straight commission model. This model provides some stability for salespeople, as they have a guaranteed salary, but also incentivises them to generate revenue, as their earnings increase as they sell more.

Thoughts:

Most organisations do this as it complies with country regulations on employment but also drives retention. However, most AdTech players tier their models to make them even more attractive to sell.

Tiered commission

In a tiered commission model, salespeople earn different commission rates based on the amount of revenue they generate. For example, a salesperson might earn a 10% commission on the first $10,000 of revenue they generate, a 15% commission on revenue between $10,001 and $20,000, and a 20% commission on revenue above $20,000. This model incentivises salespeople to generate as much revenue as possible, as their commission rate increases as they sell more. It can also be used to incentivise salespeople to sell higher-priced products or services, as they may earn a higher commission rate on these sales.

Profit-based commission / Arbitrage

In a profit-based commission model, salespeople earn a commission based on the profitability of the sale, rather than the revenue generated. For example, a salesperson might earn a commission based on the profit margin of the sale, rather than the total revenue generated. This model incentivises salespeople to not only generate revenue but also to sell products or services that are more profitable for the organisation.

Thoughts:

This is an excellent example of when a media house (DSP) represents many publishers (SSPs) and they cannot reward based on total sales. For instance, if a DSP adds 15% to the total cost of inventory, they only have that to give away, so earning 10% here means you effectively only make 1.5% of the deal.

Another example of where this is applicable is with contractors (home and car) or even businesses offering equipment solutions. I used to work at a company that sold printers where they allowed us to take 30% of the profit. Here was the thing though, they did not care for how much more you sold the contracts/items for. Usually, we would sell ten printers over 5 years (60 months) that came with full servicing. Now, if it costs us $500 per printer, that’s a $5000 sale OR only $83pm for 60 months. That sounds rather low for a big company with ten floors that needs a printer per floor, no? So we would make it $299pm because the servicing was 24/7 call centre etc. was fully managed. Now you’re making a profit of $12,960 and taking home 30%. I saw people making this $599 or even worse. I lasted three weeks in this organisation due to these unethical practices, and I don’t even include it on my CV!

MBO-based commission

MBO (Management by Objectives) based commission is a commission model that ties salespeople’s earnings to specific goals or objectives that they need to achieve. For example, a salesperson might earn a commission based on the number of new clients they bring on board, or the percentage increase in revenue from existing clients. This model incentivises salespeople to focus on specific objectives aligned with the organisation’s goals.

Thoughts:

I see this more with junior/operational employees than I have with sales people. However, its not uncommon for a salesperson to be incentivised for calls/meetings (activity) they have made on top of the revenue they bring in.

Downside to this is that you can easily gamify calls/emails and the like. I was once required to hit a KPI of 20hrs of calls a month. So I would recall lines I knew had long holding periods to burn time or even call my mother or friends. It was awkward when my boss mentioned a detail about the call I had (it was all recorded)

T&Cs on commission

• Sometimes an organisation will only provide commission after taxes and other deductions are removed. So if you bring in 100K above target and you are meant to earn 5% (5K), the company might say that tax is 15%, and OPEX is 10%. You are only then entitled to 75K which is then only 3.75K.
• On this train of thought, don’t forget that in general, the more you earn yourself, the more you are taxed. All earnings are taxed.
• If you have to reach x% to earn a commission, always make sure that you hit that number. I once had to reach 90% to get my first bonus, but I achieved 89.7%. They refused to round up, and there was nothing I could do to make it happen.
• Sometimes commission relies on payments from clients being on time. Make sure you know about these regulations as you might just hit your % but realise that due to late payments, you are no longer eligible. It’s a tough pill to swallow, but your salary could be funded by debt if you have a lot of bad payers which is never great for a business that won’t take on more for your commission.
• Commission does not roll over into the next quarter. If you hit or don’t hit your target you always get reset and have to do it all over again.
• As a salesperson, you cannot change the model your organisation uses. You can try, but you will need to present a case whereby your model brings in more money or drive more action towards revenue.

My Favourite model: Base + Comm that is tiered

I enjoy stability and security. I know that I can work hard and get what needs to be done over the line. Here are some things I cannot control that always affect how you achieve your target no matter how much you throw yourself at an account:

• Currency fluctuations (if your reporting currency is different than from the country you are selling into)
• Pauses in campaigns
• Changes in organisational leadership that slows down campaigns
• Competitors providing better incentives to clients
• New entrants being shinier than your offering
• Political unrest or events
• Shift in budget strategy or overall strategy

With a good salary at the cost of potentially having a better commission structure, you have peace of mind knowing you can earn more when you do work hard, and your environment plays along with you too. I also enjoy the fact that with tiers you are rewarded even more money the more you bring in, its just more bait to work harder.

Closing thoughts:

In conclusion, there are many different commission models used in sales teams, and each has its advantages and disadvantages. Straight commission incentivises salespeople to generate as much revenue as possible, but can be risky. Base plus commission provides some stability for salespeople, while also incentivising them to generate revenue. Tiered commission incentivises salespeople to sell more, while also providing an incentive to sell higher-priced products or services. Profit-based commission incentivises salespeople to sell products or services that are more profitable for the organisation. Finally, MBO-based commission ties salespeople’s earnings to specific goals or objectives, incentivising them to focus on achieving those objectives.

Organisations should choose a commission model that aligns with their objectives, and how the rest of the industry is shaped. Without a great model, you are going to lose great salespeople.