What is a sales commission?

Commission links a rep's income to what the company earns. How it is set shapes what reps sell, to whom and at what price.

Why commission matters

People respond to how they are paid. A plan that rewards revenue pushes reps toward big orders. A plan that rewards margin pushes them to protect price. A plan that is hard to understand makes them distrust it.

For a team selling products, the plan also needs to suit long sales cycles, repeat orders and shared work between a field rep and an inside rep.

Common types of commission

• Straight percentage of revenue: a flat rate on every sale.
• Tiered rate: the percentage rises as the rep sells more.
• Percentage of gross profit: pay follows margin, not revenue.
• Commission on collected cash: paid only once the customer pays.
• Salary plus commission: a base salary with a variable part on top.
• Commission only: no base pay, often for agents or independent reps.

How to calculate commission

Start with the basis (revenue or profit), apply the rate, then apply any rules for tiers, splits or caps.

Flat rate. A rep sells $40,000 at 5%. Commission = 40,000 × 5% = $2,000.

Tiered rate. A plan pays 4% on the first $50,000 of sales in a month and 6% on anything above. The rep sells $70,000.

• First tier: 50,000 × 4% = $2,000
• Second tier: 20,000 × 6% = $1,200
• Total: $3,200

On gross profit. A rep sells $10,000 of product at a 30% gross margin, so gross profit is $3,000. At 20% of gross profit, commission is $600.

You can try your own figures with our sales commission calculator.

Questions a plan should answer

• When is commission earned: at order, at shipment or at payment?
• What happens if the customer returns the goods or does not pay?
• How are deals split between two reps?
• Is there a cap or a minimum?
• Do discounts reduce the commission?

Settle these in writing. A rule nobody wrote down is where a commission dispute starts. This is a general explanation, and the legal side of pay plans is for your own advisers.

Related terms

• Sales quota: the target a commission plan is often tied to.
• Gross margin: the profit measure used in margin-based plans.
• Win rate: how often a rep turns opportunities into deals.
• How to set sales targets: the method behind fair quotas.

How PromptLab handles it

Commission is worked out and paid through payroll or finance. PromptLab gives you the data a plan runs on: the deals each rep owns, the sales orders on each account, and reports and dashboards on pipeline and revenue. Finance or the sales manager can read the numbers there and apply the plan.

Frequently asked questions

What is a typical sales commission rate?

It varies widely by industry, margin and deal size, so there is no standard rate. Set yours from the margin your products carry and what you can afford to pay on each sale.

What is the difference between commission and a bonus?

Commission is a percentage linked to each sale. A bonus is usually a fixed amount paid for reaching a target or goal.

Should commission be paid on revenue or profit?

Revenue is simple to track. Profit protects your margin by discouraging deep discounts. That is why some product companies pay on gross profit.

When should commission be paid?

Common points are when the order is booked, when it ships or when the customer pays. Paying on collected cash lowers the risk of paying for sales that never convert to cash.

What is a commission clawback?

It is a rule that lets the company take back commission if a sale is cancelled, returned or not paid. If you use one, put it in the plan in writing.