All You Need to Know About Sales Commissions

Picture of Yoni Rouache
Vice President, Sales - Americas

Fair and competitive compensation is vital to attracting and retaining great employees, especially in sales. So, it’s not surprising that 65.3 percent of organizations say that changing their approach to compensation is important over the next 12-18 months. Sales commissions are essential to motivating and incentivizing your sales teams, irrespective of the industry in which you operate.

In this article, we’ll share information and answer your questions about sales commissions. We’ll explore the jobs that use a sales commission model, look at average sales commission rates, and clarify whether sales commission is taxed.
 

How Do Employers Pay Employees in Sales?

Employees in sales roles are often paid a base salary plus a sales commission for meeting or exceeding specific sales targets. This approach is effective because it allows sales reps to earn additional compensation as a token of appreciation and acknowledgement of their efforts and achievements.
 
It’s important to design an effective sales compensation plan that inspires the behaviors that help the organization meet individual and company goals. How commissions are paid will be influenced by whether sales are generated by individual team members or the team as a whole.
 
For example, suppose an inside sales team takes calls randomly without customer assignments and conducts multiple calls before closing a sale. In this scenario, sales commissions based on total team sales should be evenly divided between team members.
 

What Are Sales Commissions?

A sales commission is compensation the employee receives for meeting or exceeding designated targets. A properly designed sales commission program incentivizes sales team members to close more sales and rewards productivity. It’s an effective way to compensate salespeople while encouraging them to sell more products or services.
 

Understanding Sales Commission Structures

Sales compensation typically consists of two main elements that are fixed and variable, such as base salary plus commissions. Sales commission structures are the variable aspect of how your sales team members are paid and designate which behaviors they’re rewarded for. Since commissions fluctuate based on sales reps’ performance, they have the potential to be a powerful motivational tool.
 
You can tailor your sales commission structure to suit your organization’s strategy and goals. Types of sales commission structures include:
 
Straight salary – a set amount that salespeople will be paid regardless of how much they sell. This approach includes salary but no bonuses, no commissions, and few, if any, sales incentives.
 
Commission only – remuneration is based entirely on performance. Sales reps’ pay is calculated as a percentage of their sales.
 
Salary plus commission – is the most common type of plan. Sales reps receive a fixed annual base salary plus commissions.
 
Territory volume – often used where sales teams work collectively to serve prospects and clients in well-defined regions.
Compensation is calculated at the end of the pay period based on territory volume, then split evenly between all reps working that specific territory.
 
Tiered commission – combines a fixed salary with a stepped commission structure. Salespeople receive increasing commission percentages based on which tier they reach for the period.
 
Profit margin – reps selling at a higher gross margin receive greater compensation.
 
Learn more by reading our comprehensive article about sales commission structures—it’s a valuable read.
 

What Kind of Jobs Work Under a Commission Structure?

There are a variety of roles, primarily sales-type positions, that are paid a commission. These include functions like retail salespeople, recruiters, account managers, real estate sales professionals, and business development reps. The amount of compensation suitable for each one varies based on factors such as industry, product or service type, and geographic location.
 
If you don’t know what a fair commission rate is for your industry, here are some pointers to guide you:
 

Sales Commissions: Average Rates by Industry

Commission rates vary by industry. They’ll also depend on the nature of your business and the commission structure you’ve selected. When choosing a sales commission structure, it’s a good idea to start by considering common practices in your particular industry. This way, you’ll ensure that your commissions are competitive, make it easier to attract top talent, and gain an edge over your competitors. Here are some examples of median average pay rates by industry:
 
  • Wholesale and manufacturing sales representatives: $61,660
  • Insurance sales agents: $50,600
  • Advertising sales agents: $51,740
  • Real estate brokers and sales agents: $50,300
  • Securities, commodities, and financial services sales agents: $64,120
  • Door-to-door sales workers, news and street vendors, and related workers: $26,430
  • Sales and related workers, all other: $33,220
 

How Do I Calculate Sales Commissions?

How you calculate sales commissions will depend on the commission structure you select. Before determining the amount of commission each sales rep will be paid, you’ll need to formalize certain factors such as:
 
· Commission rate—percentage
· Commission basis—such as the number of sales, gross margin, net profit, or profitability.
· Reporting period—monthly, quarterly, or annually, for example.
· Number of team members when paying based on team sales.
 
We’ve created another article to provide you with everything you need to know about calculating sales commissions. Why not take a read if you’re interested in brushing up on your knowledge?
 
Next, we’ll address one of the most commonly asked questions about sales commissions: taxes.
 

Is My Sales Commission Taxed? 

The short answer to this question is “Yes.” The Internal Revenue Service (IRS) considers a commission a supplemental wage—an income payment received by an employee in addition to regular earnings. Examples of supplemental wages include bonuses, commissions, awards, and prizes.
 
How much tax will be withheld from your commission payments depends on how commission earnings are paid. If supplemental income is included in a regular payroll check and the types of income aren’t specified on the pay stub, this income is taxed at the same rate as other income. In this case, the normal state and federal withholdings are applied. If commissions are paid separately from regular pay such as base salary or are combined with regular pay and amounts for each are broken out, taxes can be calculated in one of the following ways:
 
· A flat 25% tax can be withheld from the commission portion of the pay.
· The aggregate method of withholding can be used. Then the commission payment is combined with regular wages, and withholding taxes are calculated for the total sum as if it were a single payment for the regular pay period.
 

Compelling Commissions for a Competitive Edge 

Designing a compensation plan that includes competitive sales commissions can give your organization a compelling competitive edge.
 
So, it’s well worth investing time and effort in crafting a model that makes you stand out and entices top talent to join your ranks.
 
We trust you’ll find the tips and guidance we’ve shared useful. And once you’ve developed your sales commissions program, the next step is to automate the process. Leveraging Varicent’s Incentive Commission Management (ICM) solution is a simple and cost-effective means to achieve this. It will ensure you reward your sales team members for their efforts accurately—on time, every time.
 
Find out more here.
Picture of Yoni Rouache
Vice President, Sales - Americas

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