how to set up a sales commission structure: clear steps
Learn how to set up a sales commission structure with clear pay rules, flat and tiered examples, salary options and a practical checklist for your first plan.
how to set up a sales commission structure: clear steps
To decide how to set up a sales commission structure, define what earns commission, which amount you will use, the rate and the payment date. Compare a flat rate, a tiered plan and base salary plus commission against actual completed orders, then give your salesperson a written calculation they can check.
Start with a blank pay sheet and a few recent orders. The business scenarios below are hypothetical exercises, not claims about typical earnings or promised improvements. Use your own costs and sales history before choosing a rate.
What is a sales commission structure?
A sales commission structure sets the rules for performance-related sales pay. Commission is variable compensation, commonly calculated from the revenue a salesperson generates. That basic definition appears in HubSpot's sales commission glossary.
For your first draft, complete this sentence: the salesperson earns an agreed percentage of a defined amount when a stated condition is met. Specify the condition rather than leaving it as “when the sale happens.”
Separate the sale amount from the payment trigger
Decide whether your calculation starts from the signed order, the invoice or the payment received. Record how you will treat discounts, taxes, delivery charges and partial payments. Keep the amount used for calculation separate from the date commission becomes payable.
Hypothetical exercise: a catering business accepts a booking and receives a deposit. Ask the owner, salesperson and bookkeeper to calculate the commission independently. If their answers differ, rewrite the payment trigger before applying the plan.
Also decide whether to calculate from revenue or gross profit. Gross profit means sales revenue less the direct cost of the goods or services sold. Xactly distinguishes revenue and gross-margin commission models; list the costs you would deduct before choosing the latter.
Which commission model should you test first?
Choose your first model around the salesperson's actual responsibilities. List prospecting, quoting, closing and customer follow-up. Then decide which results you want the variable payment to reward.
The model definitions below follow Xactly's commission structure guide. The final column gives practical questions for your own trial.
| Model | Payment rule | Question to test |
|---|---|---|
| Flat rate | The same percentage applies to eligible sales | Does the payout work across your product costs? |
| Tiered commission | Rates increase at stated sales thresholds | Can the seller calculate a threshold crossing? |
| Salary plus commission | Fixed pay sits alongside variable earnings | Have you described the work covered by salary? |
| Commission only | Pay consists of sales commission without a base salary | Does this arrangement fit the role and employment terms? |
My suggestion is to begin with the fewest rules that describe your intended arrangement. Add a separate product rate or customer category only when you can explain its purpose. Keep a written reason for each exception.
For the conversations around the plan, use the guide to motivating employees in a small business. Ask the salesperson what they need to understand before agreeing to the proposal.
How does a flat rate commission structure work?
A flat rate commission structure applies one percentage to each eligible sale. Xactly illustrates this with a hypothetical $100,000 sale at 5%, producing $5,000 in commission. Those are teaching figures, not a suggested rate for your business. See the worked example.
Formula: eligible sales amount × commission rate = commission earned. Write your definition of “eligible” directly beneath that formula. Have someone unfamiliar with the plan apply it to a completed order.
Test the rate against different orders
Hypothetical exercise: an online homeware shop sells both standard items and heavily discounted clearance stock. Apply your proposed rate to an order from each group. Compare the remaining amount after direct product costs and commission.
- Include an ordinary sale at the advertised price.
- Include a discounted order with its actual selling price.
- Include a partial payment and explain its treatment.
- Include a return and document the proposed adjustment.
Use revenue share commission to mean a share of the defined sales revenue, not automatically a share of profit. State that distinction in the document; revenue and gross-margin plans use different calculation bases. Xactly's comparison explains the difference.
When reviewing discounted deals, also review your pricing decision. The guide to raising prices without losing customers provides a related planning exercise.
Why might a tiered commission plan motivate more selling?
A tiered commission plan offers a higher rate after a salesperson reaches a stated threshold. The intended incentive is a larger reward for additional performance. HubSpot describes this benefit alongside the extra tracking and calculation required. Read its flat-versus-tiered comparison.
Specify what happens at the threshold
Write whether the higher rate applies only to the sales above the threshold or to all eligible sales in the period. Calculate both versions as alternatives before choosing. Do not leave the answer to interpretation after someone has crossed the line.
Hypothetical exercise: a small commercial cleaning company wants to reward additional contracts after the monthly target. Draft a plan that applies the higher rate only to revenue above the threshold. Show the salesperson calculations just below, exactly at and above that threshold.
A quota is the sales target assigned for a defined period. Realistic quotas, fair account allocation and transparent calculations matter when designing commission plans. These considerations appear in HubSpot's guidance on fair compensation.
Before setting the target, review the accounts and opportunities available to the seller. Use the guide to choosing business performance measures to select what you will monitor. Keep the commission calculation separate from any wider management scorecard.
How do you combine a base salary with commission?
Write the fixed salary and the expected commission at target as separate amounts. Their sum is often called on-target earnings, meaning total expected pay if the salesperson meets the target. This definition is explained in the commission remuneration overview.
Build your base salary plus commission proposal around the complete job description. Identify which ongoing duties you expect regardless of sales volume. Then describe the specific sales results that earn the additional payment.
Show more than the target scenario
Prepare a below-target scenario, an at-target scenario and an above-target scenario. Show base pay, variable pay and the combined amount in each. Ask the employee to explain the differences back to you.
Hypothetical exercise: a small design agency's salesperson also prepares proposals and handles existing client requests. Put those duties in the role description. Separately decide whether commission applies to new projects, repeat projects or both.
Commission only sales jobs have no base salary in the commission arrangement described by Xactly. If considering this option, spell out the no-sales scenario and have the proposed employment terms reviewed locally before using them.
How can you launch a clear plan this week?
Write a short sales rep compensation plan, then test it before introducing it. I suggest the following sequence for a small team. Use existing completed orders wherever possible.
- Define scope. Name the covered roles, products, customers and sales channels.
- Document the calculation. State the eligible amount, rate and any thresholds.
- Assign ownership. Explain who receives credit when several people contribute.
- Set timing. Separate when commission is earned from when payment is scheduled.
- Describe adjustments. Include cancellations, returns and payment delays.
- Name the reviewer. Tell the employee who checks calculations and resolves questions.
Create a pay sheet anyone involved can check
In Excel or Google Sheets, prepare columns for order reference, salesperson, eligible amount, rate, calculated commission and payment status. Add an explanation for each adjustment. Keep the calculation beside the underlying order record.
HubSpot describes its customer relationship management system, or CRM, as a source of deal data that can be exported into spreadsheets or specialist commission software. Do not assume the deal record itself is a verified commission calculation. Its calculation section explains this distinction.
For a spreadsheet workflow, use the guide to organizing business workflows with Google Sheets. Start with a manually checked version of your pay sheet before adding automated steps.
Run a joint review with the seller and the person responsible for payments. Ask each person to calculate the same ordinary sale, shared sale and returned order. Rewrite any rule that produces different answers.
Finally, put proposed payment dates into your cash plan. The guide to managing small-business cash flow can help with that step. Set a review point and record the reason and effective date for future changes.
What should you clarify before agreeing to the plan?
What should my first commission document contain?
Write the eligible sales amount, rate, payment trigger and payment date. Include the rules for shared sales and adjustments, then test them on completed orders.
Should I start with a flat rate?
Consider it as your first test when you can clearly define eligible sales. Check discounted orders and different product costs before approving the rate.
What is the first decision in a tiered plan?
Decide whether the higher rate applies only above the threshold or to all eligible sales in the period. Show calculations at the boundary.
How should I present salary plus commission?
Show fixed salary, expected commission at target and their combined total separately. Include a below-target example so the proposal is clear.
How should I handle a sale involving two people?
Agree the credit split before the sale is completed. Record each contributor and name the person responsible for approving the allocation.
Which sources explain these models?
- HubSpot: Sales Commission explains variable pay, tiered incentives and transparent plan design.
- Xactly: 6 Typical Sales Commission Structures compares revenue, gross-margin and other commission arrangements.
- Wikipedia: Commission (remuneration) explains commission and on-target earnings.
Use these sources to check definitions. Choose your own rate through the order calculations and written employment arrangements you have reviewed.
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I'm Anar Rustamli - a strategist, entrepreneur, and AI adoption leader working at the edge of growth, technology, and human thinking. Since 2016, my work has focused on helping businesses evolve in a rapidly changing digital landscape. I design growth systems, AI-powered workflows, and strategic frameworks that align performance with purpose. I believe real growth happens when strategy, data, and human insight work together - and my mission is to help businesses adopt AI in a way that strengthens both their results and their identity.
