When it comes to designing an effective commission plan, simplicity is often deceptive. Getting a plan to work well requires effectiveness on multiple fronts: driving the right behaviors, supporting the business’s bottom line, attracting top talent and maintaining easy administration. Here’s why each of these elements matters — and why falling short on any one can be a costly mistake.
4 Parts of a Great Commission Plan
- Find the right incentives.
- Protect your margins.
- Offer an upside, but make it achievable.
- Keep it simple and quick.
Find the Right Incentives
A good commission plan should drive the right selling behavior, not just incentivize closing new deals at any cost. Simply paying on closed deals can lead to salespeople signing bad-fit clients who never truly settle in, spiking your churn rate and taking a toll on your team’s time and reputation. On the other hand, if sellers are paid solely on monthly recurring revenue (MRR), they might lean back and let existing accounts carry their income, ultimately stalling new growth. Finding that balance where new business matters — but healthy new business matters more — is key.
Protect Your Margins
For commissions to work, you need to ensure a sustainable cost-to-revenue ratio per salesperson, or at least across the sales team. Many companies offer a percentage of sales, which works if you have strong product margins. But if those margins are thin, your profitability can flip upside down. No commission plan is worth the cost if it sends revenue out faster than you can bring it in.
Commission based on new customer gross profit scales best in my opinion. But this works best if leaders are willing to share insights on profit margins and costs to their frontline sellers since they’re the ones getting commissioned based on those margins.
Let’s say you run an agency that provides outsourced accounting for startups. Your costs look something like this:
- Retail Price to Customer: $9,000
- Accountant Salary: $5,342
- Software: $204
- Ops: $296
- Total Costs: $5,842
- Gross Profit: $3,158 (35 percent)
In this example, the business should prioritize keeping their gross profit margin above 30 percent, or ideally closer to 40 percent. So where and how do you commission a salesperson to sell this product?
You should frame the discussion to your salespeople as, “You earn 5 percent commission on each sale.” In practice, that 5 percent equates to $450 and would drop your gross profit margin to 30 percent.
As a percentage, perhaps a savvy salesperson would pitch the product at $10,000 instead of $9,000, but even then they’d only be netting an incremental $50, which isn’t much juice to squeeze.
To maintain profitability as a business, a percentage of gross margin would be my recommendation, but the onus will fall back on you to provide sellers with enough pipeline to earn an attractive monthly commission.
Offer an Upside, but Make It Achievable
A commission plan is an attractive carrot for top talent, but it’s only valuable if the targets are genuinely attainable. Any savvy salesperson will ask how many people on the team are hitting that target and how long it takes to get there. When you can prove that your best performers achieve (and ideally, exceed) those numbers within a reasonable timeframe, you’re not only attracting talent — you’re motivating them to stay.
Keep It Simple and Quick
You should be able to explain your commission plan in 30 seconds flat. If it’s so complex that it requires a spreadsheet tutorial, you’re setting up your team to prioritize poorly or misunderstand their goals. The best commission plans can be explained like this:
“Your objective is to ________. You earn _________ each time you achieve that objective.”
The end.
As soon as you include words like “accelerator” or “tier” or “residual” or “quarterly bonus,” you’re creating a business challenge that might not rear its ugly head right away, but it inevitably will sooner or later.
And administration matters too; if calculating commissions takes more than 30 minutes at month’s end for your finance team (or whoever is tasked with totaling the numbers), the plan is too complicated. Organizations pay in lost productivity and engagement when sales teams spend hours trying to calculate what they think they’re going to earn in commissions or when finance departments need to untangle combinations of numbers rather than staying focused on results.
The best commission plans can be calculated with a similar level of simplicity as explaining them to the salespeople:
“Sam/Sally sold _______ widgets. They earn ______ percent of each widget.”
The end.
Commission plans are hard. It can be so easy to fall back on something that’s ineffective. In the end, a solid commission plan is as much about balance as it is about motivating success. It’s about ensuring that success for your sellers aligns with sustainable success for your business.
