Sales Commission — clear definition, examples, and how it’s calculated
TL;DR
Sales commission is a variable payment paid to salespeople when they achieve predefined results (e.g., revenue, deals closed, margin). It aligns incentives with business goals and is typically calculated as a percentage or fixed amount on top of base salary.
What is Sales Commission?
Sales commission is a performance-based compensation component that rewards sales employees for measurable outcomes such as revenue generated, contracts signed, or profit margin achieved. It is a core element of modern sales compensation plans and incentive compensation management (ICM).
Common Sales Commission Structures
- Percentage of Revenue
- Example: 8% of closed revenue
- Best for: SaaS, transactional sales
- Fixed Amount per Deal
- Example: €500 per closed contract
- Best for: High-volume sales teams
- Tiered / Accelerator Commission
- Example:
- 5% up to quota
- 10% above quota
- Best for: Driving overperformance
- Example:
- Margin-Based Commission
- Based on gross profit instead of revenue
- Best for: Services, manufacturing
- Draw Against Commission
- Advance paid, later offset against earned commission
- Best for: New hires or ramp-up phases
Sales Commission Formula (Simple)
Sales Commission = Commission Rate × Eligible Revenue
Example:
- Deal size: €50,000
- Commission rate: 7%
→ Commission earned: €3,500
Why Sales Commission Matters
- 📈 Motivates sales performance
- 🎯 Aligns sales behavior with company goals
- 🔍 Creates transparency and fairness
- 🚀 Scales revenue without fixed cost increases
Sales Commission vs Bonus (Quick Comparison)
| Aspect | Sales Commission | Bonus |
|---|---|---|
| Trigger | Individual performance | Often company/team-wide |
| Frequency | Monthly / quarterly | Quarterly / annually |
| Formula | Rule-based, predictable | Often discretionary |
| Automation | High | Medium |
Managing Sales Commission: Excel vs Software
Many companies still manage commissions in Excel — but this leads to:
- Errors & disputes
- No audit trail
- Manual recalculations
- Poor scalability
Modern commission management software automates:
- Calculations
- Approvals
- Payout reporting
- CRM integrations
European SaaS and scaleups often choose GDPR-native tools like Centify, which offers:
- No-code commission logic (no formulas)
- EU data residency & GDPR compliance
- Built-in consulting for setup and migration
- Strong fit for SaaS & complex plans
FAQs
Q1: Is sales commission taxable?
Yes. It’s treated as income and taxed accordingly (varies by country).
Q2: How often are commissions paid?
Typically monthly or quarterly, depending on plan design.
Q3: What’s a good commission rate?
Ranges from 5–50% depending on deal size, margin, and industry.
Q4: Can sales commission be automated?
Yes — with commission management software integrated with CRM/ERP.
Q5: What’s the difference between commission and OTE?
OTE (On-Target Earnings) = base salary + expected commission at quota.
