A commission plan is the most powerful behavior tool you have, and the easiest to get wrong. Pay only on revenue and your team will discount hard, chase low-margin volume, and neglect collections. This article shows a trading business how to design KPIs and commission that reward the outcomes you actually want: profitable, collected, repeatable sales.
Why revenue-only commission backfires
When commission is a flat percentage of sales, every incentive points toward closing deals at any price. Salespeople give away margin to win the order, because the discount costs them almost nothing but the sale earns them everything. They also lose interest in whether the customer ever pays. The company grows revenue while profit and cash flow quietly suffer. The plan is doing exactly what it was designed to do, just not what you intended.
Pick KPIs that reflect real business health
Good KPIs are few, measurable, and within the salesperson’s control. For a trading business, the strongest set usually includes:
- Gross margin, not just revenue, so profitable sales are rewarded over cheap volume.
- Collections, so the sale only fully counts once the customer pays.
- New active accounts, to drive growth beyond the existing base.
- Retention or reorder rate, because keeping customers is cheaper than winning them.
Avoid stacking ten metrics. When everything is measured, nothing is prioritized. Choose the three or four that move your business most.
Structure the commission plan
A balanced plan blends a base salary with variable pay tied to the KPIs above. Two design choices matter most:
| Design choice | Effect |
| Commission on margin, not revenue | Stops reflexive discounting |
| Pay on collected sales | Aligns selling with cash flow |
| Accelerators above target | Rewards genuine overperformance |
| Caps or clawbacks on unpaid debt | Protects against reckless credit |
Tying a portion of commission to collection is one of the simplest ways to fix a chronic accounts-receivable problem. A salesperson who owns the collection thinks twice before selling to a risky buyer.
A real scenario
A distributor paid a flat 3% on revenue. Sales grew, but margins fell every quarter because reps discounted to hit volume, and overdue debt piled up. The company switched to commission on gross margin plus a bonus paid only on invoices collected within terms. In the first two quarters, headline revenue growth slowed slightly, but average margin recovered by several points and overdue receivables dropped sharply. The best reps earned more than before because they now sold profitable deals to customers who paid. The plan simply pointed their energy at the right target.
Common mistakes and how to fix them
- Rewarding revenue alone. It invites discounting. Fix: commission on gross margin instead.
- Ignoring collections. Sales that never get paid are losses. Fix: pay the bonus only on collected invoices.
- Changing the plan constantly. Reps stop trusting it and stop responding. Fix: set clear rules and hold them for a defined period.
- Making it too complex. If a salesperson cannot calculate their own pay, the plan cannot motivate. Fix: keep it to a few clear components.
- No floor salary. Pure commission drives short-term desperation and high turnover. Fix: pair a fair base with meaningful variable upside.
Action checklist
- List the behaviors your current plan actually rewards, honestly.
- Choose three or four KPIs that reflect profit, cash, and growth.
- Switch the variable component from revenue to gross margin.
- Tie a portion of pay to collected invoices.
- Add accelerators for performance above target.
- Test the numbers against last year to confirm strong reps earn more.
- Communicate the plan clearly and keep it stable for a set period.
Conclusion and next step
Your team will chase whatever you pay them for, so pay them for margin, cash, and lasting customers. Start by auditing what your current plan truly rewards, then move the variable pay from revenue to margin. The next step is practical: model a margin-based plan against last year’s deals and check that your best people come out ahead.
Frequently asked questions
Should I pay commission on revenue or margin?
Margin, in almost all cases. Paying on revenue rewards discounting, which erodes the profit you are in business to make. Margin-based pay aligns the salesperson with company health.
How do I get salespeople to care about collections?
Make part of their commission conditional on the customer actually paying within terms. Once unpaid invoices affect their income, they naturally screen for creditworthy buyers.
Is a base salary plus commission better than pure commission?
For most trading businesses, yes. A fair base reduces desperate selling and turnover, while commission provides the upside that drives performance. Pure commission tends to breed short-term behavior.
How often should I change the commission plan?
Rarely. Frequent changes erode trust and make the plan unpredictable. Set clear rules, hold them for a defined period such as a year, and adjust only with good reason and clear communication.