Sales Commission Schemes for a Small Team: Four Structures and How to Choose

A distributor pays 2 percent commission on every sale. Sales grow by a third in a year and profit falls. The salespeople, quite rationally, sold whatever was easiest: the low-margin lines, at the largest discount they were allowed, to customers who took ninety days to pay. Nobody misbehaved. The plan paid for revenue, and revenue is what it got. Choosing among sales commission schemes is choosing what behaviour to buy.

Decide the goal first

Before any percentages, answer three questions.

1. What do you want more of? Revenue, gross profit, new customers, repeat orders, a particular product line, faster payment?
2. How much does the salesperson influence the result? Someone who finds, persuades and closes deserves a larger variable share than someone who takes orders from walk-in customers.
3. What can the business afford? Commission comes out of gross profit. Know your margin before promising a share of it.

A plan that is clear on these is easy to design. A plan that tries to reward everything rewards nothing.

Structure 1: flat rate on sales

A fixed percentage of every sale.

Example: base salary 4 million, commission 2 percent of sales. Sales of 200 million in the month give 4 million commission, total 8 million.

• Good for: simple products with similar margins, new teams, short sales cycles.
• Risk: rewards revenue regardless of margin or discount. A sale at full price and a sale at 20 percent off pay almost the same.

Add a simple guard: no commission on sales below a minimum price, or a lower rate on discounted deals.

Structure 2: tiered rate

The rate rises as sales pass thresholds.

Example: 1 percent on the first 100 million, 2 percent on the next 100 million, 3 percent above 200 million. Sales of 250 million give 1 + 2 + 1.5 = 4.5 million.

• Good for: pushing people past a comfortable level. The best months are rewarded most.
• Risk: people hold orders back to the next month, or pull them forward, to land in a higher tier. Thresholds set too high are ignored, and too low they are just an expensive flat rate.

Set the first threshold at what an average salesperson achieves, and the top tier at what the best achieve in a good month.

Structure 3: commission on gross margin

A percentage of the gross profit of each sale, not of its price.

Example: commission 10 percent of gross margin. A sale of 50 million with a cost of 35 million has a margin of 15 million and pays 1.5 million. The same sale discounted to 45 million has a margin of 10 million and pays 1 million.

A 10 percent discount cut the commission by a third. The salesperson feels the discount as the business does.

• Good for: businesses with varying margins, negotiated prices, or frequent discounting.
• Risk: needs reliable cost figures per product, and salespeople must be able to see the margin, or at least a commission value, when quoting. Some owners are uncomfortable sharing cost. A workable alternative is to give each product a commission value or category without revealing the cost.

Structure 4: salary plus target bonus

A higher fixed salary and a bonus for reaching defined targets, monthly or quarterly.

Example: salary 7 million. Bonus of 2 million for reaching the sales target, plus 1 million for five new customers, plus 1 million if collections are above 90 percent.

• Good for: long sales cycles, team selling, account management, roles where service matters as much as closing.
• Risk: weaker link between effort and reward. Once the target is clearly out of reach, or already met, motivation drops for the rest of the period.

Choosing

Limit the plan to two components. A salesperson should be able to work out their pay on a napkin.

The rules that prevent disputes

Most arguments about commission are about rules nobody wrote down.

• When is it earned? On order, on invoice, on delivery or on payment. State it.
• When is it paid? For example, with the salary of the month after payment is received.
• Returns and cancellations. Commission on a returned or cancelled sale is reversed.
• Bad debts. If commission was paid before the customer paid, state the clawback.
• Who owns the customer? The person who brought them, for how long, and what happens to repeat orders.
• Split deals. How commission is shared when two people contribute.
• House accounts. Customers handled by the owner or inherited from the past, and whether they count.
• Leaving. What is paid on deals closed before departure and collected after.
• Discounts. Who may approve them and how they affect commission.
• Changes. The plan may be revised from a future date with notice, never backwards.

Put these on one page, have each salesperson sign it, and keep it with their employment papers. Check the plan against the employment rules where you operate, including how variable pay relates to minimum wage and statutory benefits, with someone qualified.

Test before launch

Take last year's actual sales and calculate what each person would have earned under the new plan.

• Is total pay close to what you intended?
• Who earns more, who earns less, and is that fair?
• What would the best month have cost? Can the business afford it?
• What would the worst month have paid? Can the person live on it?

Then ask: what is the easiest way to earn the most under this plan without helping the business? If you can find it, so will they.

Common mistakes

• Paying on revenue when the problem is margin.
• Paying on invoice when the problem is collection.
• Caps. A ceiling on commission tells your best salesperson to stop selling in the third week.
• Changing the plan after a big month.
• Too many components.
• Late or opaque calculation. If people cannot check their own numbers, they assume the worst.
• No base salary at all where the sales cycle is long. Good people cannot wait three months for their first pay.

Make the numbers visible

A plan works when each salesperson can see, during the month, their sales, their collections and their commission so far. This needs sales recorded by person and payments matched to invoices. In Polynusa, deals and invoices carry an owner, so the base figures for a commission calculation come from the same records the team already uses. See the pricing page.

Summary

Decide what you want more of and what you can afford. Choose one main structure: flat rate for simplicity, tiered to stretch, margin-based where prices vary, target bonus for long cycles. Pay on money received, or include a clawback. Write the rules for ownership, splits, returns and leavers on one page. Test the plan on last year's numbers, avoid caps and retroactive changes, and let people see their own figures.

FAQ

Should commission be paid on sales or on payments received?

On payments received, for most small businesses. A commission paid when the invoice is issued rewards selling to customers who pay late or not at all, and the business pays out cash it has not collected. If you pay on invoice to keep motivation high, include a clawback when the invoice is not paid within a stated period.

What is a reasonable commission rate?

There is no universal figure. It depends on your gross margin, the length of the sales cycle, how much the salesperson contributes to winning the deal, and the fixed salary. Work backwards: decide what total pay a good salesperson should earn at target and what share of gross profit the business can afford to pay for selling, then set the rate to fit both.

How often should a commission plan change?

Review it once a year and change it only with good reason and advance notice. Frequent changes, especially ones that reduce pay after a strong month, destroy trust in the plan. If something is clearly broken, fix it from the next period, never retroactively.