10 types of commission plans and how to choose the right one for your sales team

Your top sales rep just blew through their sales quota … by discounting every deal down to the bone. Revenue looks healthy, but you’ve got gross margin on life support. Meanwhile, another rep hasn’t closed a deal in weeks, but still squeaks by the target thanks to a single massive renewal. Meanwhile, you’re stuck wondering why you’re still missing financial goals while the sales team celebrates a banner quarter. Commission plans can align incentives with your goals, but the wrong one distorts your pipeline, drags down forecasts, and stalls growth. 

In this article, we’ll walk through the fundamentals of how to choose the best commission plan for your business; one that drives focus, boosts retention, and syncs your sales goals to your sales cycle. We’ll also break down the most common commission structures and how to choose one that fits.

What is a commission plan?

A commission plan is a type of compensation structure that pays employees based on performance. It’s typically tied to metrics like closed deals, sales revenue, or another specific quota. 

It introduces a variable component: compensation increases in tandem with results. 

Unlike a bonus, which employers generally pay out occasionally and at their discretion, a commission gets baked into the employee’s total compensation as an expected part of total earnings.

Example: Casey works in commercial real estate and earns a $70,000 base salary, plus a 5% commission on every deal closed. In Q2, Casey closes $200,000 in deals and earns a $10,000 commission. Management also issues the entire team a $5,000 performance bonus for hitting their quarterly targets. Casey takes home $32,500 for the quarter: $17,500 in base salary, $10,000 in sales commissions, and $5,000 in discretionary bonus.

You’ll most often see commission plans at work in organizations with dedicated sales teams responsible for driving top-line growth, like software-as-a-service (SaaS), real estate, recruiting, and insurance, but any business where you can track income against what a specific employee brings in can leverage commissions to incentivize performance. They’re usually a core component of any employee incentive program designed to link pay directly to output.

10 common types of commission structures

There’s more than one way to design a commission structure. Some work better for recurring revenue, others for high-ticket one-offs. The right fit can make it easier to align your compensation planning and your business goals, not to mention motivate your sales team. Below are ten of the most common commission plans, with quick examples to show how each one works.

1. Straight commission

Reps earn only a commission and no base salary. This model offers high earning potential, but zero guaranteed income.

Example: Taylor earns 10% of every deal and sells $150,000 this quarter, earning $15,000.

2. Base salary plus commission

A fixed base salary pairs with a variable commission on sales balances financial stability with a performance-based upside. Together, they may up the employee’s OTE salary: what they can expect to earn by hitting their targets.

Example: Jamie earns a $60,000 base salary, plus 5% on all sales. Jamie closed $200,000 in deals this quarter and earned a $10,000 commission, for total earnings of $25,000.

3. Tiered commission

Commission rates increase as reps hit higher sales targets, motivating them to keep selling past quota. It’s a way to reward top sellers without overpaying early. 

Example: Jordan earns 5% on the first $50,000, 7% on the next $50,000, and 10% on anything over $100,000. In one quarter, Jordan closes $160,000 and earns a total commission of $12,000. 

4. Revenue-based commission

Reps earn a percentage of the total revenue generated by each sale. It’s easy to calculate and helps drive top-line growth, especially in early-stage companies where volume matters.

Example: Riley sells a contract worth $20,000. Their commission rate is 8% of revenue, so they earn $1,600.

5. Gross margin commission

This model bases commission on gross margin, not total revenue, which should align rep incentives with company profit and discourage excessive discounting.

Example: Alex closes a $30,000 deal with $10,000 margin and earns a 15% commission worth $1,500.

6. Draw against commission

Reps receive an advance, called a “draw,” against future earned commissions. This helps with income stability in longer sales cycles and can help your business maintain control over cash flow.

Example: Morgan receives a $3,000 draw every month. In June, Morgan earns $5,000 in commission, so their paycheck includes an extra $2,000. In July, Morgan only earns $2,000 in commission. They still receive the full $3,000 draw, but the $1,000 deficit will be subtracted from next month’s commission earnings over $3,000. 

7. Residual commission

Reps keep earning commission on recurring revenue, like renewals or subscriptions. It’s a model that works well in SaaS companies, insurance firms, and real estate.

Example: Casey earns 5% on all active accounts, whether or not it’s a new customer. In one month, Casey renews subscriptions worth $100,000, which works out to a commission of $5,000.

8. Commission by product or service

Different offerings earn different commission rates, depending on value or strategic focus. This commission structure steers reps towards high-priority services or products.

Example: Taylor earns a 4% commission on basic packages and an 8% commission on the premium version. In August, Taylor sells $30,000 worth of basic packages and earns $1,200 in commission. That same month, Taylor closes premium deals worth $50,000 and earns $4,000 in commission.

9. Territory volume commission

Commission is based on total sales volume within a defined territory, typically shared by a team of multiple reps. Done right, it supports collaborative selling across teams and regional sales strategies.

Example: The Northeast sales team has five reps that together bring in $500,000 in revenue. The commission pool is 10% of total sales, with each rep’s payout based on their share of closed deals. Taylor closed $200,000—40% of the total revenue—they earn $20,000.

10. Multiplier commission

A rep’s payout is adjusted by a multiplier tied to a non-revenue KPI, like win rate, product mix, or margin, with the goal of rewarding both quality and quantity of deals.

Example: Jamie earns $8,000 in base commission, multiplied by 1.2 for hitting a product mix goal. Total payout? $9,600.

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How to choose the proper commission structure

Choose the right commission structure and you’ll guide reps towards deals that support your growth, margin, and long-term value. Choose poorly, and you may end up incentivizing sales tactics that hurt your bottom line. There’s no one-size-fits-all formula, and the right choice depends on what you’re selling, who’s selling it, and what kind of results you’re trying to scale.

Sales cycle length and complexity

Matching your commission structure to your sales cycle keeps incentives tied to the outcomes that match your priorities. Short sales cycles tend to pair well with straightforward commission models like flat rates or small bonuses tied to volume, for example. But if your reps are running multi-month enterprise deals, a flexible or tiered system that rewards effort as much as speed may be the better fit. 

Type of product or service

Your commission plan should reflect how your sales team actually creates value. High-margin SaaS companies operating on a subscription model might choose to reward recurring revenue and residual value. A retail outfit focused on low-margin physical goods might do better with a gross margin model. Some businesses also offer different commission payments for new customers vs renewals. 

Company financial capacity and risk tolerance

Your budget and risk tolerance should directly shape your compensation structure. If cash flow is tight, commission draws, quarterly payments, or a heavier base salary can make costs more predictable. Working with a larger financial cushion that can absorb bigger swings in your commission liability? Aggressive accelerators or uncapped commissions can attract top talent. 

Sales team experience and culture

Newer sales reps still honing their skills might need the stability and structure that come from a higher base salary. More experienced and confident reps may prefer less base but more upside. Culture matters, too. A hyper-competitive plan might spur one sales team to greatness, while leaving another cold and discouraged.

Desired sales behaviors and outcomes

Every compensation plan sends a message about what matters to your business. If you want your reps to prioritize particular products, land long-term contracts, or focus on a specific territory, make sure your commission structure rewards those behaviors. And if you’re wondering why your team keeps chasing quick closes with low margin, take a look at what your plan pays them to do.

How to create an effective commission plan

A well-built commission plan goes beyond rewarding your sales reps for a job well done. It drives outcomes your business needs to thrive. If you’re just beginning to figure out how to create a commission structure, remember that the most effective plan will balance motivation, fairness, and financial sense. Stick to proven sales commission plan best practices like the ones below, and you’ll set your team up to perform with a clear understanding of what success looks like.

Step 1. Define clear sales goals and KPIs

Start by zeroing in on key priorities for your sales team. Are you trying to grow your revenue? Expand into a new territory? Push a specific product? Your commission structure needs to reinforce specific goals and go beyond, “Smash your quota.” Define KPIs that reps can influence directly, like closed deals or upsells, not vague metrics they can’t control.

Step 2. Choose the right commission structure

Flat rate, tiered, residual, or tied to gross margin, every commission structure sends a different signal. A long sales cycle might call for fewer tiers and more patience. A fast-paced BDR role might benefit from quick-hit bonuses. Not sure how to structure sales commission plans? Focus on the behavior each model encourages and try to match it to how your team sells. You’ll also want to consider how commission fits in alongside other rewards like equity, bonuses, or a long-term incentive plan.

Step 3. Set realistic and motivating rates

There’s no magic percentage, but your commission rate should reflect both the effort your reps put in to close a deal and the value that deal brings to your business. If everyone regularly hits their targets with minimal effort, you may be overpaying. If nobody ever hits their quota, on the other hand, you’re probably already seeing the effects of low motivation on your finances. Leverage data on past performance, deal size, and time-to-close to find a rate that incentivizes your sales team to chase opportunities without risking your gross margin. 

Step 4. Align plan with company objectives

Your commission plan is part of your broader compensation management strategy, which means it’s also an important piece of your business model and growth strategy. It might make sense to prioritize top-line revenue if you’re a growth-stage startup, but that approach may not fit your needs as your business matures and you start to focus on profit and retention. 

Step 5. Build in transparency and simplicity

Your commission structure shouldn’t need a finance degree to understand. Go beyond plain language explanations and develop whatever resources the team needs to track earnings. Wherever you can, remove guesswork and friction so your sales team can see how their effort translates into income. You’ll know you’ve hit the mark if a junior sales rep cornered in an elevator can answer, “What are the sales commission structures here?” without calling their manager. 

Step 6. Plan for payout timing and disputes

Be explicit and over-communicate about when and how commission payments happen. Is it at contract signature or when the first payment clears? What happens if a deal churns in under a month? Putting your policies in writing can help prevent disappointment from escalating into a dispute when things don’t pan out. 

Step 7. Include caps or safeguards 

Not every deal delivers the same value, and tools like caps, clawbacks, and commission draw systems protect your profitability and keep your commission structure financially sustainable. Some contracts bring in revenue but barely touch gross margin. Others churn before the ink is dry. Without safeguards, a single outlier deal can throw off your entire compensation plan and feel unfair to sales reps who consistently hit targets with less exciting deals. 

Step 8. Review and update regularly

As your business evolves, so should your commission plan. Market conditions shift, along with roles, products, and your expectations. A quarterly or biannual review can help ensure that your plan still supports your key business outcomes and keeps your sales team incentivized.

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Examples of commission plans

There’s no universal blueprint for a good commission plan. The ideal setup depends on your sales cycle, goals, and definition of success. That said, the structure you choose sends a clear message to your sales team about what matters. These real-world sales commission structure examples show how different models incentivize different behaviors.

Example 1: base salary plus commission

Alex is a midlevel account exec with a $50,000 base salary and a flat 5% sales commission on all closed deals. Alex benefits from the financial stability of fixed base pay, but also enjoys the upside of strong performance. It’s also a simple plan to track and explain, which helps Alex stay focused on closing deals rather than trying to figure out how earnings get calculated. 

Example 2: tiered commission

Morgan works under a tiered commission model: 5% on the first $50,000 in monthly revenue, 7% for the next $50,000, and 10% on anything above $100,000. This approach rewards Morgan for overperforming and keeps momentum high even after hitting initial sales targets. The closer Moran gets to passing the quota, the more valuable each deal becomes.  

Example 3: gross margin commission

Casey sells hardware with tight margins. To protect profit, the company pays a 10% commission on gross margin for each closed deal—not total revenue. The structure helps keep sales reps aligned with the business, because discounting pricing too heavily will eat into their commissions.

Mistakes to avoid in commission plan design

A commission plan that only works on paper is one of the fastest ways to kill motivation. Whether it’s confusing logic, missed payments, or unrealistic targets, your sales team will notice. These kinds of mistakes erode trust and drag down performance. Here’s where most plans go sideways, and how to keep yours on track.

Overly complex structures that confuse employees

If you need a flowchart to explain your sales commission structure, you may want to reconsider. Sales reps should understand exactly what they need to do to earn more. Keep formulas simple, tiers clear, and avoid exceptions unless essential. If you must add nuance, include real-world commission structure examples in your rollout to make sure everyone’s on the same page.

Misaligned incentives

When reps chase deals that hurt gross margin or ignore the sales quote entirely, something’s off. Your commission plan needs to incentivize behaviors that drive the business, whether that’s upselling, increasing long-term contracts, or reducing churn. If you’re trying to grow profit, don’t just pay based on top-line revenue. If a rep blows through the quota and you’re upset, that’s a sign that you need to make some structural revisions.

Not accounting for team-based selling

Ignoring team dynamics can fracture your sales team in ways that no amount of bonus cash can fix. If multiple sales reps contribute to a deal, your commission plan needs to acknowledge the contributions of each. Spiffs and split commissions can help avoid resentment and stop turf wars before they start. 

Failing to communicate or train teams on how it works

Even a well-designed commission plan will fail if your reps don’t understand how it works well enough to see how they benefit. Take the time to develop tools like cheat sheets and commission calculators to help them see the value, and always make time for questions. If someone asks, “How does commission work?” you should have a straightforward answer ready to go. 

Setting unrealistic sales targets

It’s a fine line between ‘aggressive’ and ‘out of reach’ when it comes to sales quotas, and you don’t want to push so far that your motivated sales team starts to disengage. If nobody’s earning commission, your plan becomes fixed base pay, which is another way of saying ‘overpayment for underperformance’. Use historical data and market context to set targets that stretch the limits (not break them).

Not integrating with payroll or tracking systems

If you can’t calculate commissions accurately or pay them on time, you’re going to lose the trust of your sales team. For your own sanity, automate the math. Tools that sync with your CRM and payroll systems can also give reps the transparency they need to track their own earnings and match them to commission payments on their pay stubs.

How Rippling simplifies commission management

 If you want payroll so powerful it runs itself, you want Rippling. Rippling offers full-service payroll built on top of a single source of truth for employee data. That means your employee data isn’t tied to one specific app—it’s the same across payroll, time and attendance, onboarding, performance management, and any other apps you use within our unified platform. 

That means Rippling’s natively built payroll software offers a seamless data pipeline that consolidates all your payroll functions on a single platform for a globally compliant pay run.  Combined with Rippling’s suite of benefits management and time and attendance tools, it transforms operations for a 42% efficiency lift across payroll, HR, and finance..

With Rippling, you can: 

• Pay employees and contractors in the same platform

• Manage time and attendance natively 

• Run unlimited off-cycle pay runs at no extra cost 

• Set up multiple pay schedules, pay rates, and pay types in just a few clicks 

• Add recurring reimbursements (like cell phone payments, gym memberships, etc.) that are automatically paid out every pay period, monthly, or at whatever interval you choose

• Automatically calculate prorated pay runs for new or promoted employees 

• Make changes after submitting payroll

Sales commission structure FAQs

What are commission-based jobs?

Commission-based jobs are roles where all (or part) of the employee’s earnings comes from closing deals or hitting sales targets to generate revenue. Selling more means earning more, at least in theory. This kind of compensation structure is common in real estate, software sales, recruiting, and finance. Some include a base salary, others are pure commission. It means less income stability, but often a higher upside for top performers who know how to close. 

What is a good commission plan?

A good commission plan is clear, fair, and tied to business outcomes. It needs to motivate your sales team, but not encourage shortcuts that hurt your gross margin. Top salespeople should feel like they can earn well above base salary, while newer reps see a path to progress. If your team consistently hits its quota and the business makes money, you’ve probably done it right.

How do you write a commission plan?

You write a commission plan by setting clear sales targets, choosing a structure that fits your sales cycle, and defining how reps earn based on revenue, gross margin, or other metrics. Build in guardrails, like caps or, draws if you need them, then check your work. Is your new commission plan easy to explain? Does the sales team understand the terms, or do you need to simplify? A good commission rewards performance without requiring a calculator to work out what you’re earning.