How to pay your sales team: Commission, bonuses and salary

3-minute read

Your sales team is your connection to your customers. As such, you want to design a compensation package that helps you attract and retain the best people.

Before you decide how you will pay your sales team, consider your business objectives, the role your salespeople will play with customers, the aggressiveness of your sales targets and the flexibility of your budget.

Once you have clarified what you want to achieve, the next step involves finding the right mix of base salary, commission pay, and/or bonuses to reach those goals.

What are the benefits of paying a salary?

A steady salary provides employees with stability and security. A substantial base salary can be used if your sales representatives need technical knowledge to sell your products or services or if they have to establish a long-term relationship with clients.

When salary is the main compensation method for your sales team, it is a good idea to establish performance standards for both customer service and sales targets. Quarterly or annual can then be designed so employees will achieve the desired level of sales and quality of services.

The other advantage of using mostly base salary as compensation is that it simplifies the budgeting process, as it is relatively easy to forecast fixed salary budget costs.

What does it mean to be paid by commission?

Commission pay ties the earnings of the employees directly to their performance, typically based on the sales they generate. Instead of receiving a fixed salary, employees earn a percentage of the revenue from each sale they make.

From a salary budgeting point of view, costing is based on sales projections, and increased revenues handle increased commission costs.

How do you calculate commission?

The commission pay should be based on a percentage of revenue or profit. Tying commission to a quantity of goods or services sold can lead to heavy discounting and negatively hurt your margins.

Calculating commission is straightforward and typically involves a few basic steps.

Determine the sale price of the product or service.
Identify the commission rate.
Calculate the commission amount using the formula:

Commission Amount = Sale Price × Commission Rate

For example, if a salesperson sells a product for $500 and the commission rate is 10%, the commission amount would be:

Commission Amount = 500 × 10% = $50

There are also more complex ways to pay by commission. In a tiered commission, for example, the rate increases after reaching specific sales targets.

The benefits of commission pay

Straight commission is a great way to attract aggressive, skilled sales representatives.

This group will typically have some basic technical knowledge, but their skill is more focused on finding customers, pitching your products or services and closing the deal. Others in the company will have more in-depth technical skills and provide direct services to the customer.

With this type of remuneration, the reward for performance needs to be clear and financially attractive. You must pay the commission on time and regularly. Many organizations tier the sales goals with bonuses given for achieving quarterly or team goals.

Using a mixed compensation model

Most companies pay a base salary that is complemented by commission pay and bonuses.
The right balance between base salary, commission and bonuses depends on the specific context.
For example, an experienced salesperson or manager might ask for a higher base salary, while a new recruit could accept a salary based almost exclusively on commission.

Tweaking this split can also encourage different behaviors. For example, you can increase the share of commission pay if you need your sales representatives to be very aggressive. Or you can make base salary a bigger part of the total compensation package to inspire a more consultative sales approach.

You might also want to consider a tiered commission structure, where salespeople earn a given percentage of sales up to a target, with the rate increasing for sales beyond that goal.

Review your compensation plan from time to time

You’ll want to periodically review your compensation plan as your results come in and as the economic environment changes. If sales are falling, for example, it might be because your base salary is too high and your employees aren’t properly motivated. Also, consider raising the value of your compensation package if you are losing team members to your competition.

You might also want to discuss your compensation plan as part of an overall HR plan with an outside consultant.