A badly designed commission plan can push your sales team to chase revenue that makes no profit. A good one aligns their pay with the outcomes your business actually needs. This article shows you how to build a sales commission structure that motivates reps and protects margin at the same time. You will get the main models compared, the traps to avoid, and a checklist to design your own.
Why revenue-only commission backfires
The most common plan pays a percentage of sales revenue. It is simple, but it has a hidden flaw: it rewards volume regardless of profit. Reps discount aggressively to close deals, push low-margin products, and chase big but unprofitable accounts, because their pay rises even when your margin falls. The cause is a misaligned incentive. You are paying for the wrong outcome.
The fix is to tie commission to what you truly want more of, usually gross profit or margin, not just top-line revenue.
The main commission models compared
| Model | How it works | Best when |
| Revenue percentage | Pay a flat % of sales value | Margins are uniform and protected by fixed pricing |
| Gross profit percentage | Pay a % of the margin on each sale | Reps can discount and you want them to defend price |
| Tiered commission | Rate rises after hitting targets | You want to reward reps who exceed quota |
| Base salary plus commission | Lower fixed pay plus variable | Sales cycles are long and stability matters |
Most trading businesses are best served by a gross-profit-based or base-plus-commission model, because these reward profitable selling rather than reckless discounting.
Protect margin by controlling the discount lever
If reps can discount freely and still earn full commission, margin erosion is guaranteed. Two practical controls help. First, base commission on gross profit, so a discount directly lowers the rep’s own payout. Second, set discount authority limits, where deeper discounts require approval. Together these make the rep feel the cost of a discount instead of passing it entirely to you.
Use tiers and caps thoughtfully
Tiered rates that increase after quota reward your strongest performers and pull the team toward stretch goals. Be careful with hard caps that stop commission above a ceiling. Caps can quietly tell your best reps to stop selling once they hit the limit. If you cap, do it for a clear reason and communicate it, or consider a softer taper instead.
A real scenario
A distributor paid a flat 3% on revenue. Reps hit their numbers, but overall margin kept slipping because they discounted to win volume. The company switched to paying a percentage of gross profit and gave reps a small discount budget they had to manage themselves. Revenue stayed roughly stable, but average margin recovered because reps now defended price to protect their own earnings. Pay for top performers actually rose, since profitable deals earned them more. Everyone was aligned around the same goal.
Common mistakes and how to fix them
- Paying on revenue, not profit. Rewards discounting. Fix: switch the base to gross profit or margin.
- Making the plan too complex. Reps cannot predict their pay, so it stops motivating. Fix: keep the rule simple enough to calculate in their head.
- Changing the plan too often. Frequent changes breed distrust. Fix: commit to a plan for a defined period and change it with notice and clear reasons.
- Ignoring collections. A sale is not profit until it is paid. Fix: tie part of commission to paid invoices, not just booked orders, especially in credit-heavy trade.
- Setting unrealistic quotas. Impossible targets demotivate. Fix: base quotas on real historical performance and territory potential.
Action checklist
- Decide the single outcome you most want: profit, retention, new accounts.
- Choose a base that reflects it, usually gross profit.
- Set discount limits so reps feel the cost of a cut.
- Add tiers to reward exceeding quota, and think twice before hard caps.
- Tie a portion to paid invoices if you sell on credit.
- Model the plan on last year’s deals before launching it.
- Explain it clearly so every rep can calculate their own pay.
Conclusion and next step
A commission plan is a message about what you value. If you pay for profitable, collected sales, that is what you will get more of. Your next step is to take last quarter’s deals, recalculate what reps would have earned under a gross-profit model, and see how it changes behavior before you roll it out.
FAQ
Should I pay commission on booked orders or paid invoices?
In businesses that sell on credit, tying at least part of commission to paid invoices protects you from rewarding sales that never get collected. If you sell on immediate payment, booked orders are fine.
Is base salary plus commission better than pure commission?
It depends on your sales cycle. Longer, consultative cycles usually justify a base salary for stability, while short, transactional selling can run on a higher variable share. Match the mix to how sales actually happen.
How do I stop reps from over-discounting?
Base their commission on gross profit so discounts reduce their own pay, and set discount authority limits that require approval beyond a threshold. The two controls reinforce each other.
How often should I change the commission plan?
As rarely as you can. Frequent changes erode trust and make earnings unpredictable. Set a plan for a defined period, and adjust only with clear reasons and advance notice.
References
The core idea that incentives shape behavior, and that you get what you reward, is a well-established principle in management, most famously summarized in Steven Kerr’s classic article On the Folly of Rewarding A, While Hoping for B. The specific plan structures here are drawn from common sales-management practice.