What Is a Sales Commission? Types, Formulas and Examples

What is a sales commission? It is the part of a salesperson's pay that depends on what they sell. The company agrees on a rule in advance, for example 8% of every contract the rep signs, and pays that amount on top of (or instead of) a fixed salary. Sell more, earn more. Sell nothing, and the commission line on the payslip is zero.

A quick illustrative example. A rep closes a $50,000 annual contract on a plan that pays 8% of contract value. The sales commission on that deal is $50,000 × 0.08 = $4,000. That is the whole idea. Everything else in a commission plan is about which number the percentage applies to, when the money is earned and when it is actually paid.

How sales commission works

Every commission plan answers four questions. If one of them is fuzzy, the plan will cause arguments at the end of the quarter.

• What is the base? The commission can be a share of revenue (the deal value), of gross margin (revenue minus the cost of delivering it) or a flat amount per deal or per meeting booked. Subscription businesses often use first-year contract value, sometimes called first-year ACV, rather than the total value of a multi-year contract.
• What is the rate? The percentage or the fixed amount. It can be the same for every deal or change with volume, product or quota attainment.
• When is it earned? Usually when the contract is signed. Some plans wait until the customer has paid, or until the end of a trial.
• When is it paid? Monthly or quarterly, often one payroll cycle after the deal is booked or the invoice is cashed.

The gap between "earned" and "paid" is the question new reps ask first, and with good reason. A deal signed on March 28 might show up in the April or May payslip, depending on the plan. Write the rule down. Better yet, give a dated example in the plan document.

Most plans also link commission to a sales quota, the revenue target a rep is expected to hit in a period. The quota doesn't change the commission on a single deal in a flat plan. In a tiered plan, it decides when the rate goes up.

Sales commission structures

A commission structure is the rule that turns sales into pay. Eight commission structures cover almost every plan you will meet. Here they are with their formula, before the detail on each.

1. Base salary plus commission. Pay = base + (sales × rate).
2. Commission only. Pay = sales × rate.
3. Flat rate (straight commission on every deal). Commission = deal value × one fixed rate.
4. Tiered commission. Commission = sales in tier 1 × rate 1 + sales in tier 2 × rate 2, and so on.
5. Draw against commission. Pay = the higher of the draw or the commission earned; the draw is advanced, then deducted from future commission.
6. Gross margin commission. Commission = (revenue minus cost of goods sold) × rate.
7. Residual commission. Commission = recurring revenue from the account × rate, paid for as long as the customer pays.
8. Accelerators and multipliers. Commission = sales × rate × multiplier once a threshold, usually 100% of quota, is passed.

1. Base salary plus commission. The most common commission structure in B2B. The rep gets a fixed salary that covers the months when deals slip, and a commission that rewards results. The split between the two is usually agreed through on-target earnings (OTE): what the rep makes in a year if they hit 100% of quota. A 50/50 split means half of OTE is base and half is commission at target.

2. Commission only. No salary, a higher rate. It shows up in insurance, some agencies and with independent sales agents. It costs the company nothing when nothing sells, which is exactly why it attracts few candidates and high turnover. Check local minimum wage rules before using it with employees.

3. Flat rate. One percentage on every deal, whatever the size or the period. Easy to explain and easy to check. Its weakness: it treats the first deal of the quarter and the twentieth the same way, so it gives no extra push to sell beyond target.

4. Tiered commission. The rate rises as the rep sells more in the period. For example 5% up to $100,000, then 8% on everything above. Tiers reward top performers and keep reps pushing after they hit quota. Say clearly whether the higher rate applies only to the sales above the threshold (the usual rule) or to the whole period retroactively.

5. Draw against commission. The company advances a fixed amount each month, then deducts it from the commission the rep earns. It smooths income for new reps or long sales cycles. A recoverable draw has to be paid back if commission falls short; a non-recoverable one does not. We cover the mechanics in detail in our page on draw against commission.

6. Gross margin commission. The rate applies to profit, not to revenue. It stops reps from buying deals with discounts, because every point of discount comes out of their own commission too. It needs reliable cost data per deal, which not every company has.

7. Residual commission. The rep keeps earning on an account for as long as it pays: every month, every renewal. Common in insurance, telecoms and some subscription models. It rewards keeping customers, and it gets expensive when a rep leaves with a large book still paying out.

8. Accelerators and multipliers. Not a full structure on their own but a layer added on top of another one. Past 100% of quota, each dollar sold pays 1.5 or 2 times the normal rate. They are the cheapest way to tell a rep that the company wants the extra deal this quarter, not next.

You will also see territory volume commission, where a team shares commission on everything sold in a region, and revenue commission with a ramp for new hires. Both are variations on the eight above.

How to calculate sales commission

The basic sales commission formula is short:

Sales commission = commission base × commission rate

The base is whatever the plan says: the deal value, the gross margin or the first-year contract value. The rate is the percentage. Two worked examples, both illustrative.

Simple percentage. A rep on a flat 7% plan closes three deals in a month: $12,000, $30,000 and $8,000. Total sales: $50,000. Commission: $50,000 × 0.07 = $3,500.

Tiered plan. A rep has a quarterly quota of $150,000. The plan pays 6% up to quota and 10% on everything above it. The rep sells $200,000. Commission on the first $150,000: $150,000 × 0.06 = $9,000. Commission on the $50,000 above quota: $50,000 × 0.10 = $5,000. Total sales commission for the quarter: $14,000. On a flat 6% the same quarter would have paid $12,000. The $2,000 difference is the price of the extra push.

For a gross margin plan, do the subtraction first. A $40,000 deal that costs $25,000 to deliver has a $15,000 margin. At 20% of margin, the commission is $3,000.

Most teams track this in a spreadsheet at first, then move to a dedicated commission tool or their CRM once the plan has tiers, splits and clawbacks. What matters more than the tool: the rep should be able to redo the math on their own deals and land on the same number as payroll.

The three plans below are illustrative. They show how the commission structures above work for different roles, not what the market pays.

1. An account executive on base plus commission (SaaS)

An account executive at a software company has OTE of $120,000, split 50/50: $60,000 base and $60,000 of target commission. The annual quota is $600,000 of first-year contract value. The rate is the target commission divided by the quota: $60,000 ÷ $600,000 = 10%.

In Q2 the rep signs a customer on a three-year contract worth $36,000 a year. The plan pays on first-year value only, so the sales commission is $36,000 × 0.10 = $3,600, paid in the month after the first invoice is cashed. Years two and three count toward renewals, which belong to the account manager's plan.

This is the standard SaaS sales commission setup. Paying on first-year value keeps the company from paying commission today on money it will only collect in three years.

2. An SDR paid per qualified meeting

A sales development representative doesn't close deals, so a percentage of revenue makes little sense. Instead the plan pays a flat $150 per meeting that an account executive accepts as qualified, plus a $300 bonus when one of those meetings turns into a signed deal.

In a month the SDR books 14 meetings and 12 are accepted. Commission: 12 × $150 = $1,800. Two of last quarter's meetings closed this month: 2 × $300 = $600. Total variable pay for the month: $2,400.

The "accepted as qualified" clause does the heavy lifting. Without it, the plan pays for calendar invites, not pipeline.

3. A tiered plan with an accelerator

A field sales rep sells equipment with a quarterly quota of $250,000. The plan has three tiers:

• 4% on sales from $0 to $250,000 (up to 100% of quota).
• 6% on sales from $250,000 to $375,000 (100% to 150%).
• 8% on sales above $375,000.

The rep sells $400,000 in the quarter. Tier 1: $250,000 × 0.04 = $10,000. Tier 2: $125,000 × 0.06 = $7,500. Tier 3: $25,000 × 0.08 = $2,000. Total: $19,500, against $16,000 on a flat 4%.

The plan also has a 90-day clawback: if a customer cancels within 90 days, the commission on that deal is taken back from the next payout. That clause is written in the plan with an example, so nobody discovers it on a payslip.

Commission is more than a payroll line. It is the clearest message a company sends its sales team about what to sell, to whom and how fast. Reps read the plan carefully, and they do what it pays for.

• Paid on revenue only? Expect bigger discounts to close faster.
• Paid on margin? Expect firmer prices and fewer giveaways.
• Paid on first-year value? Expect reps to push for longer prepaid terms only if the plan rewards them.
• Paid per meeting? Expect a lot of meetings. The quality depends on who accepts them.

That is why the commission structure belongs to sales strategy, not just to finance.

What are sales commissions used for?

Sales commissions do three jobs. They tie pay to results, so the company pays more when it earns more. They attract and keep sellers who like that deal. And they steer effort toward the products, customer types or contract lengths the company wants to grow. A broader view of how base pay, commission, bonuses and SPIFFs fit together is in our page on sales compensation.

What affects a commission rate

There is no single good commission rate. It depends on how the plan is built, and you should be wary of a benchmark that doesn't say which roles, industries and pay splits it measured. These are the factors that move the commission rate up or down:

• Base versus variable. The higher the base salary, the lower the commission rate needs to be. A commission-only rep earns a much higher rate than one with a full salary.
• Role. Reps who close deals are paid a percentage of revenue. Reps who book meetings are often paid a flat amount per meeting. Account managers on renewals usually earn a lower rate than reps who win new customers.
• Deal size and sales cycle. A long sales cycle with few large deals often means a lower rate on a bigger base. Short cycles with many small deals often mean flat amounts per deal.
• Margin. A product with thin margins can't carry the same commission rate as software with high margins.
• Quota. A practical way to set the rate: target commission at OTE divided by quota. That is how the 10% in the first example above was built.

To check whether a quota is even reachable with your current pipeline, run your numbers through the sales velocity calculator. A rate set on an impossible quota is not a 10% plan. It is a much lower one in disguise.

Commission vs bonus

A commission is tied to each sale through a formula: sell this, earn that. A bonus is a lump sum paid when a goal is met, such as hitting quarterly quota, launching a product or keeping churn under a threshold. Commission scales with every deal. A bonus is all or nothing, or paid in steps. Many plans use both: commission on revenue, plus a bonus for a goal the commission doesn't capture, like multi-year deals.

Sales commission terms to know

• Quota: the sales target for the period. See how sales quotas are set.
• OTE: total pay at 100% of quota, base plus target commission.
• Accelerator: a higher rate above a threshold, usually quota.
• Decelerator: a lower rate below a minimum attainment, rarer.
• Cap: a maximum commission per period. Caps save money and cost motivation; most sales leaders avoid them.
• Clawback: commission taken back if the customer cancels or doesn't pay within a set period.
• Split: how commission on one deal is shared when two or more people worked on it.
• SPIFF: a short-term cash incentive on top of the plan, for example on one product for one month. More in our page on SPIFFs.

A note on accounting. In the US, the revenue standard ASC 606 and its companion guidance ASC 340-40 generally require companies to capitalize commissions paid to win a contract and expense them over the life of that contract, with exceptions for short contracts. Tax and accounting treatment varies by country and by plan, so check with your accountant before you design one.

• A plan nobody can explain. If a rep can't calculate their own commission on a deal in two minutes, the commission structure is too complex. Every extra tier, multiplier and exception adds disputes. Keep the formula short and put a worked example in the plan document.
• Paying late or unpredictably. Commission that arrives three months after a deal, or on a date nobody can predict, loses most of its effect. Fix the payout date and stick to it.
• A clawback nobody heard about. Taking money back after a customer cancels is fair if it was written down, explained and limited in time. Discovered on a payslip, it costs trust you won't get back easily.
• Changing the plan mid-period. Moving the quota or the rate in the middle of a quarter tells reps the rules don't hold. Change plans at the start of a period, with notice.
• Paying on revenue when margin is the problem. If discounts are eating profit, a pure revenue commission structure makes it worse. Add a margin component or a discount limit.
• Unclear splits. When an SDR, an AE and a solutions engineer all touch a deal, decide in advance who gets what share. Deal crediting rules settled after the deal closes are a fight, not a policy.
• Paying on deal count without looking at the accounts. A plan that pays per deal or per meeting rewards volume. If nobody checks that the accounts fit your ideal customer profile, reps spend weeks on companies that churn or never buy, and the commission plan pays for the noise.

Start with the right accounts

A commission plan paid on signed deals works best when reps spend their time on accounts that can actually sign. That part is upstream of the plan. In the Derrick web app you can build a target account list and fill it in with Enrich Leads, which adds the name, job title, company and location from each contact's LinkedIn profile. You need to connect your LinkedIn account to Derrick to use it. Reps then start their outreach on complete, well-targeted rows instead of half-empty ones, and the commission they earn comes from deals that were worth chasing in the first place.

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