What is a sales commission? How the common structures work, with examples
A plain explanation of sales commission: the main structures, how rates and accelerators are calculated, worked examples, and the clauses that cost reps money.
, 4 min read, Compensation
Key takeaways
- Commission is the variable part of pay earned on results, as opposed to base salary, which is paid regardless. Together they make up on-target earnings.
- The five common structures are straight percentage, tiered, quota-based with accelerators, gross margin commission, and draw against commission.
- Accelerators above 100% of quota are where most of the difference between a good year and a great one comes from, and they are often capped.
- The clauses that quietly cost money are recoverable draws, clawbacks on churn, and commission paid on cash collected rather than on signature.
Commission is the part of a sales job that makes it a sales job. Everything else about the role, the title, the territory, the product, sits on top of one question: what do I get paid when something sells, and when do I get it?
The mechanics are not complicated, but the clauses around them are where most of the money is won and lost.
The basic vocabulary
Base salary. Paid regardless of results.
Commission, or variable. Earned on results.
OTE, on-target earnings. Base plus the commission earned at exactly 100% of quota. It is a projection, not a promise.
Quota. The amount you are expected to sell in a period. Usually set at four to six times OTE.
Attainment. The percentage of quota achieved. This is the number that determines what actually lands in your bank account.
A rep with a $160,000 OTE, an $80,000 base and a quota of $800,000 who finishes the year at $600,000 closed has 75% attainment. They earn their $80,000 base plus 75% of the $80,000 variable, so $140,000. Not the $160,000 on the offer letter.
The five common structures
Straight percentage
A flat rate on everything sold, with no quota gate. Sell $500,000 at 8% and earn $40,000. Simple, transparent, common where there is little or no base salary.
The weakness is that it pays the same on the easy hundred thousand and the hard hundred thousand, so it does not push anyone past a comfortable number.
Tiered
The rate rises as cumulative sales pass thresholds.
| Band | Rate |
|---|---|
| First $250,000 | 6% |
| $250,001 to $500,000 | 8% |
| Above $500,000 | 10% |
A rep closing $600,000 earns $15,000 plus $20,000 plus $10,000, so $45,000. The structure rewards pushing through the next threshold, which is the point.
Quota-based with accelerators
The standard in B2B software. A rate applies up to 100% of quota, and a higher rate above it.
A rep with a $100,000 variable on an $800,000 quota earns 12.5 cents per dollar up to quota. Above quota, a 1.5x accelerator pays 18.75 cents. Closing $1,000,000 against that $800,000 quota earns $100,000 plus $37,500, so $137,500 of variable.
This is where the gap between a good rep and a great one becomes visible. Twenty-five points of extra attainment produced nearly 40% more commission.
Gross margin commission
Paid on the profit of a sale rather than its value. Standard in freight brokering, distribution, and anywhere the rep controls pricing. It removes the incentive to discount your way to quota, because discounting cuts the margin the commission comes out of.
Draw against commission
An advance paid in a period where commission is low, most often during ramp.
Recoverable draw. You pay it back out of future commission. If you draw $4,000 a month for six months and then start earning, the first $24,000 of commission repays the company before you see anything.
Non-recoverable draw. You keep it. Effectively a guaranteed minimum.
The difference between the two over a ramp period is often larger than any base salary difference being negotiated, and it is rarely volunteered.
The clauses that cost money
When commission is paid. On signature, on invoice, or on cash collected. A cash-collected plan on net-60 terms means a deal closed in March pays in June, and a deal closed in late December may fall into next year's plan entirely.
Clawbacks. If a customer cancels or fails to pay within a window, commonly 90 or 180 days, the commission is reclaimed. Reasonable in principle, punishing when the window is long or when it applies to churn the rep could not have foreseen.
Caps. Some plans stop paying above a certain attainment. A cap tells you the company would rather limit an outlier year than pay for one, which is worth knowing about a prospective employer.
Plan resets. Quarterly plans reset attainment every three months, so a strong Q1 does not carry into Q2 and accelerators are much harder to reach. Annual plans let a rep accelerate through the back half of the year.
Quota changes mid-year. Ask whether quotas can be raised during the plan year, and under what circumstances.
Reading a plan before you sign it
- What is the quota, and what multiple of OTE is it?
- What percentage of the team hit quota last year?
- Is the draw recoverable?
- Is commission paid on signature, invoice or cash collected?
- What is the clawback window and what triggers it?
- Where do accelerators start, and is there a cap?
- Does the plan reset quarterly or annually?
A plan that answers all seven clearly is usually a plan written to be fair. A plan where three of the answers require chasing someone in finance is telling you something about how the year will go.
Frequently asked questions
- What is a sales commission?
- A sales commission is pay earned as a result of selling something, usually a percentage of the deal's value or of the gross margin on it. It sits alongside base salary, which is paid whether or not anything sells. The two combined at exactly 100% of quota are what a company calls on-target earnings, or OTE.
- What is a typical sales commission rate?
- It varies enormously by industry and by how much base salary accompanies it. In B2B software a common shape is a 50/50 split between base and variable, with the variable working out to roughly 8% to 12% of the revenue a rep closes. In commission-heavy fields such as real estate, solar or car sales, rates are quoted differently and the base is much smaller or absent.
- What is the difference between commission and bonus?
- Commission is tied directly to sales results and usually scales with them: sell twice as much, earn roughly twice as much. A bonus is a fixed amount paid when a condition is met, such as a company hitting its annual target or an individual completing an objective. Commission is variable and proportional, a bonus is binary.