Commission
In short
Commission is variable compensation paid to a salesperson based on sales results, typically a percentage of the revenue, bookings, or margin from deals they close. It sits on top of, or in place of, a base salary.
Commission exists to link pay to performance and steer rep behavior. How it is designed determines what reps sell, how they discount, and which customers they chase.
Common commission structures
- Flat rate: One percentage on all closed revenue. Simple to explain.
- Tiered: The rate rises as the rep passes quota thresholds, rewarding overachievement.
- Accelerators: Higher rates once quota is exceeded.
- Per-deal bounty: A fixed payout for each deal or each meeting booked, common in development roles.
- Draw: An advance against future commission, often used for new hires.
A worked example
Say a rep has a base salary and a 10% commission on first-year contract value. They close a deal worth $50,000 in first-year value. At a flat 10% rate, that deal pays $5,000. If the plan has an accelerator of 15% above quota, deals closed after the rep passes quota would pay $7,500 each. These numbers are illustrative only.
Design choices that matter
What you pay on
Paying on bookings, collected cash, or margin each pushes different behavior. Paying on bookings alone can encourage heavy discounting.
Quota and timing
Quotas should be reachable by a good rep and tied to real territory potential. Decide when commission is earned: at signature, at invoice, or at payment.
Clawbacks
A clawback recovers commission if a customer cancels or does not pay within a set period. It protects the company from low-quality deals.
Common mistakes
- Overly complex plans: If reps cannot calculate their own payout, the plan does not motivate them.
- Misaligned incentives: Rewarding only new logos can neglect renewals and expansion.
- Changing plans mid-period: It erodes trust. Announce changes in advance.
- Ignoring the legal side: Commission terms should be written down in the plan agreement. Rules vary by jurisdiction; this is not legal advice.
Commission FAQs
What is commission in sales?
Commission is variable pay a salesperson earns based on sales results, usually a percentage of the revenue or bookings from deals they close. It can be paid on top of a base salary or, in some roles, as the main source of pay.
How is sales commission calculated?
Multiply the commissionable amount, such as contract value, revenue, or margin, by the commission rate in the plan. Plans may add tiers, accelerators above quota, caps, or clawbacks, so the final figure depends on the specific compensation agreement.
What is a commission clawback?
A clawback is a plan term that lets a company recover commission already paid if a deal is cancelled, refunded, or goes unpaid within a defined period. It discourages closing low-quality deals just to hit short-term targets.
What is the difference between commission and a bonus?
Commission is tied directly to each sale or to revenue produced, usually through a formula. A bonus is typically a payment for reaching a target or goal, such as a quarterly quota or team result, and may be discretionary.
