What it means
Under a commissioned sales model the employer accepts that a good quarter costs more in wages and a poor one costs less, because compensation moves with revenue. The alternative, a straight salary, gives predictable costs but relies entirely on management and culture to drive selling effort.
Most companies land somewhere in between, splitting pay between a base that keeps people solvent and a commission that keeps them hungry. The split ratio does real work.
A 50/50 base-to-commission split suits short, transactional sales where the rep controls the outcome, while a 70/30 or 80/20 split suits long, complex, team-based deals where a single person's influence is diluted and the sales cycle can run past a year. Push variable pay too high in a long-cycle business and you mostly succeed in driving good people out during the dry months.
Commission plans are usually built around a quota, the sales target a rep is expected to hit, with on-target earnings describing what they take home when they hit it exactly. Above quota, accelerators typically raise the rate; below a threshold, some plans pay nothing at all.
The design is deliberate, aiming to reward the reps who carry the number rather than those who nearly do. Administration is where good intentions go wrong.
Plans need explicit rules on split credit between team members, on when commission is earned, on how renewals and upsells are treated, and on what happens if a customer cancels. Ambiguity here consumes management time, damages trust and occasionally produces legal claims, so the plan document deserves as much care as the rate itself.
There are also legal and accounting nuances. In many jurisdictions commission earned before someone leaves must still be paid, and under current revenue recognition standards, incremental commission costs of winning a contract are capitalised and amortised over the expected customer life rather than expensed on day one.
Both facts routinely surprise founders designing their first plan.
In practice
Real-world examples.
Example
A car dealership pays its sales staff a $28,000 base plus 22% of the gross profit on each vehicle. A salesperson who generates $190,000 of gross profit in a year earns $41,800 in commission, and the dealership's compensation cost automatically falls when margins are squeezed.
Example
A business services firm hires its first enterprise seller on an 80/20 split, with $120,000 base and $30,000 of commission at a quota of $1,000,000, because deals take nine months and depend heavily on the technical team. The lower variable proportion reflects how little of the outcome one person controls.
Example
A telecoms reseller discovers reps are churning through low-quality customers who cancel within ninety days. It rewrites the plan so half the commission is paid at signature and half after the customer's third paid invoice, and cancellations inside the first quarter fall sharply.
Think of it
“Commissioned sales pays based on what you sell-compensation tied to sales performance.
Formula
Calculation
Total earnings = Base salary + (Sales achieved x Commission rate), and the cost to the business is usually judged as Sales compensation ratio = Total sales compensation / Revenue generated.
Consider a representative on a base salary of $45,000 with a quota of $600,000 and a flat 5% commission on all revenue. If she closes $750,000, her commission is $750,000 x 0.05 = $37,500, so total earnings are $45,000 + $37,500 = $82,500 and the sales compensation ratio is $82,500 / $750,000 = 11%.
Now add an accelerator that pays 5% up to quota and 8% above it. Up to quota she earns $600,000 x 0.05 = $30,000. On the $150,000 of overachievement she earns $150,000 x 0.08 = $12,000, so commission totals $42,000 and earnings reach $45,000 + $42,000 = $87,000. The compensation ratio rises to $87,000 / $750,000 = 11.6%, an extra $4,500 of cost that the company pays willingly because it only ever arises on revenue above target.Case study
Seen in the real world.
Here is an illustrative and clearly fictional case. Harrow Fieldworks, an invented supplier of surveying equipment, ran a straight-salary sales team of six people costing $390,000 a year against revenue of $5,200,000. Growth had been flat for three years, and management suspected the team was servicing existing accounts rather than opening new ones.
The company moved to a commissioned sales model: base salaries were cut to $48,000 each, totalling $288,000, with 6% commission on new-customer revenue and 2% on repeat orders. In the first full year the team produced $1,100,000 of new-customer revenue and $5,000,000 of repeat business, generating commission of $66,000 plus $100,000, so total sales pay reached $454,000 against revenue of $6,100,000.
Sales compensation therefore rose from 7.5% of revenue to 7.4%, essentially flat, while revenue grew by $900,000 and two reps earned more than they ever had on salary. The fictional finance director's summary was blunt and worth borrowing: a commission plan does not reduce the cost of selling, it changes what the company is buying with it.
Watch out
Common mistakes.
- Designing the plan around the top performer. Plans should be modelled at target, below target and well above it, because the version that pays a star fairly can bankrupt the margin if everyone hits the same numbers.
- Leaving split credit and deal-crediting rules undocumented. Nothing corrodes a sales team faster than two people believing they own the same commission.
- Expensing all commission in the month a deal closes. Accounting standards generally require incremental costs of obtaining a contract to be capitalised and amortised over the expected customer relationship.
Questions
People also ask.
What is on-target earnings?
It is the total pay, base plus commission, that a salesperson receives for hitting quota exactly, and it is the standard way roles are advertised and benchmarked.
What is a draw against commission?
It is an advance paid in lean months that is recovered from future commission, useful when someone is new or the sales cycle is long, but it becomes a debt trap if quotas are unrealistic.
Can commission be withheld if a customer cancels?
Usually yes, if the plan document contains a clear clawback clause, but the wording must be explicit and local employment law limits how far back an employer can reach.
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