A poorly designed commission plan can quietly work against the business that created it. Pay too little and top performers leave for a competitor offering better upside. Pay too much on the wrong metric and salespeople chase easy, low-margin deals while ignoring the harder, more profitable ones. Change the plan too often and even good salespeople stop trusting that their effort will actually translate into predictable pay. Getting commission structure right is less about finding some universally correct formula and more about matching the plan to what the business actually needs salespeople to prioritize.
Start with what behavior you're actually trying to reward
Before settling on a percentage or a structure, it's worth being explicit about the goal. A business trying to grow revenue quickly wants a plan that rewards new customer acquisition. A business trying to protect margins wants a plan that pays more on profitable deals than on discounted ones. A business focused on account retention and expansion wants a plan that rewards renewals and upsells, not just the initial sale. The commission plan is one of the most direct levers an owner has over salesperson behavior, and a plan built without a clear goal in mind tends to reward whatever's easiest to sell rather than what's best for the business.
Straight commission versus base plus commission
Straight commission, with no base salary, puts all the income risk on the salesperson and can attract highly motivated performers, but it also creates income volatility that drives away good candidates who have financial obligations and can't tolerate unpredictable pay, and it can push desperate behavior when a salesperson is having a slow month. Base plus commission provides income stability that broadens the pool of candidates willing to take the job and reduces desperate short-term decision-making, at the cost of a higher fixed expense for the business regardless of sales results. Most small businesses land somewhere in between, with a modest base that covers basic living expenses and commission that provides the majority of high performers' total income.
Flat rate versus tiered commission structures
A flat percentage on every sale is simple to explain and easy for salespeople to calculate in their head, which has real value, but it doesn't reward pushing past comfortable performance levels. A tiered structure, where the commission rate increases after a salesperson hits certain thresholds, creates a stronger incentive to keep selling through the end of the month or quarter rather than coasting once a comfortable number is reached. The tradeoff is complexity: tiered plans require clear communication and can create disputes over how thresholds are calculated if the plan isn't documented precisely.
Commission on revenue versus commission on margin
Paying commission as a percentage of the total sale price is simple and easy to track, but it rewards salespeople for closing any deal, including heavily discounted ones that barely clear the business's cost. Paying commission based on gross margin instead directly aligns salesperson incentives with business profitability, since a salesperson earning more by protecting price rather than discounting has a direct financial reason to hold the line during negotiations. Margin-based commission requires more bookkeeping and more transparency with the sales team about how margin is calculated, which is worth the added complexity for businesses where discounting has been an ongoing problem.
Setting quotas that actually motivate rather than demoralize
A quota set too low doesn't stretch anyone and leaves money on the table; a quota set unrealistically high demoralizes the sales team and can push desperate, margin-destroying behavior as a deadline approaches. Quotas built from actual historical performance data and adjusted for known factors like seasonality or a new territory tend to land in a realistic range far more often than quotas set from a top-down revenue target with no connection to what any individual salesperson has actually been able to achieve.
Clawbacks and what happens when a deal falls through
Commission plans need clear rules for what happens when a customer cancels, returns a product, or fails to pay after a salesperson has already been paid commission on the sale. A clawback provision, where unpaid or reversed commission is deducted from a future paycheck, protects the business from paying commission on revenue it never actually collected, but it needs to be clearly disclosed upfront, since salespeople blindsided by a clawback months after a sale tend to lose trust in the entire plan.
Why plan stability matters more than plan optimization
A commission plan that's tweaked every few months to close small loopholes or capture marginal additional value for the business erodes trust faster than almost anything else an employer can do to a sales team, because salespeople structure their entire selling strategy and personal financial planning around how the plan currently works. A slightly imperfect plan that stays stable for a full year, reviewed and adjusted deliberately rather than reactively, produces better long-term sales performance than a technically optimized plan that keeps shifting under salespeople's feet.
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