A sales team is the growth engine of a trading business, but the wrong commission plan can push staff toward the wrong sales. This article shows you how to structure commission that rewards profit rather than just volume, set targets your team can believe in, and manage performance without micromanaging. You will finish with a comparison of commission models and a checklist to design or fix your own plan.
What commission is really paying for
Commission is not just a reward; it is a set of instructions. Whatever you pay for, you get more of. Pay purely on revenue, and staff will chase big-ticket sales even at thin or negative margin, extend credit to risky customers, and ignore small but profitable accounts. The core principle: align commission with the outcomes your business actually needs, which usually means gross margin and collected payment, not top-line sales.
Choose a commission model that fits your business
There is no single best model. Each shapes behavior differently.
| Model | Rewards | Best when | Watch out for |
| Flat % of revenue | Volume | Margins are stable across products | Discount-heavy, low-margin deals |
| % of gross margin | Profit | Margins vary by product | Needs accurate cost data |
| Tiered | Growth | You want to reward stretch | Can feel unfair near thresholds |
| Base + commission | Stability + drive | Long sales cycles | Base too high dulls the drive |
For most trading businesses with varied margins, a base salary plus commission on gross margin, paid only after the customer pays, aligns effort with real profit and cash collection.
Set targets people believe in
A target nobody thinks is reachable demotivates as much as no target at all. Build targets from the bottom up: territory size, account potential, and last year’s actuals, not a number picked to hit a company goal. Explain the logic. A salesperson who understands how the target was built will trust it; one handed an arbitrary number will assume it is unfair and stop trying once it slips out of reach.
Tie pay to collected payment, not just the invoice
In trading, a sale is not complete until the money arrives. If commission is paid on the invoice, sales staff have no reason to care whether the customer pays on time. Pay commission on collected revenue, or hold it until payment clears. This single rule aligns your sales team with your cash flow and turns them into partners in credit control rather than a source of bad debt.
A real scenario
A distributor paid a flat 3% on revenue. Their top seller had the highest sales but the lowest profit contribution: he won volume by giving deep discounts and selling to slow-paying customers. When the owner switched to commission on gross margin, paid after collection, behavior changed within a quarter. The same seller began defending price and steering customers toward higher-margin lines, and days-to-collect on his accounts dropped. Total revenue dipped slightly; profit rose. The plan had simply started paying for the right thing.
Common mistakes and how to fix them
- Paying on revenue when margins vary. Fix: switch to gross-margin commission so a discounted sale earns less.
- Paying before the customer pays. Fix: pay on collected revenue to align sales with cash flow.
- Changing the plan often. Frequent changes destroy trust. Fix: set a plan for a defined period and communicate any change well in advance with the reasoning.
- Capping commission. A cap tells your best people to stop selling once they hit it. Fix: reward overachievement, even at a lower rate, rather than capping.
- Rewarding only new sales. Fix: also recognize retention and repeat orders, which are cheaper to serve and steadier.
- Managing only by the number. Fix: pair the plan with coaching; the number tells you who needs help, not how to help them.
Your action checklist
- Decide the single outcome you most need: profit, growth, or retention.
- Pick a commission model that rewards that outcome.
- Base commission on gross margin if your margins vary.
- Pay commission on collected revenue, not the invoice.
- Build targets from territory and account data, and explain them.
- Avoid caps; reward overachievement at a fair rate.
- Fix the plan for a set period; announce changes early with reasons.
- Review each rep’s margin and collection, not just their revenue.
Conclusion and next step
Your commission plan is the clearest message you send your sales team about what matters. Make it reward profit and collected cash, set targets people trust, and pair pay with real coaching. Your next step: pull last quarter’s sales by rep alongside gross margin and days-to-collect. If your top revenue earner is not your top profit earner, your plan is paying for the wrong thing.
FAQ
Should I pay a base salary or commission only?
For trading with longer cycles and relationship selling, a base plus commission usually works best. It reduces desperation selling and retains staff through slow periods, while commission keeps the drive. Commission-only suits fast, transactional sales.
Is capping commission ever a good idea?
Rarely. A cap signals your best sellers to stop once they reach it. If a windfall deal worries you, use a lower rate above a threshold rather than a hard cap.
How often should I change the plan?
As little as possible. Frequent changes erode trust and make staff suspect you are clawing back their earnings. Set a plan for a full period, and give clear notice and reasons before any change.
How do I stop sales staff from over-discounting?
Pay commission on gross margin instead of revenue. When a discount directly lowers their own pay, staff defend price without you policing every deal.
References
- Sales compensation principles linking pay to margin and collections, common practice in sales management.
- Goal-setting research on specific, attainable targets, widely applied in performance management.