What Is Sales Commission?
A sales commission is compensation paid to a salesperson based on the value of sales they generate. It is usually expressed as a percentage of the sale amount. Commission-based pay is common in industries like real estate, insurance, retail, and technology sales because it directly incentivizes performance.
The Basic Commission Formula
Total Earnings = Base Salary + Commission
Step-by-Step Example
A salesperson sells $25,000 worth of products with a 7% commission rate:
- Convert rate: 7% = 0.07
- Calculate commission: $25,000 × 0.07 = $1,750
- If base salary is $3,000: Total earnings = $3,000 + $1,750 = $4,750
Commission Structures
1. Flat Rate Commission
The same percentage applies to all sales regardless of volume. Example: 10% on every sale.
2. Tiered Commission
The rate increases as the salesperson hits higher sales thresholds. This rewards top performers and encourages pushing beyond targets.
Tiered Commission Example
| Sales Tier | Commission Rate | Example (on $85,000 sales) |
|---|---|---|
| $0 - $25,000 | 5% | $25,000 × 5% = $1,250 |
| $25,001 - $50,000 | 8% | $25,000 × 8% = $2,000 |
| $50,001 - $100,000 | 12% | $35,000 × 12% = $4,200 |
| Total Commission | $7,450 | |
3. Revenue vs Profit Commission
Some companies pay commission based on profit rather than revenue. If you sell a $10,000 product with a $3,000 profit margin and earn 20% commission on profit, you receive $600 instead of a potentially higher amount on revenue.
Common Commission Rates by Industry
| Industry | Typical Commission | Structure |
|---|---|---|
| Real Estate | 2.5-3% per side | Flat per transaction |
| Insurance | 5-15% | Flat + renewals |
| Car Sales | 20-30% of profit | Profit-based |
| Software / SaaS | 8-15% | Often tiered |
| Retail | 1-10% | Flat rate |
| Financial Services | 1-3% of assets | Asset-based |
| Advertising / Media | 10-20% | Flat or tiered |
Calculating Your Effective Commission Rate
If you earn different rates on different products, calculate your effective rate to understand your true earnings percentage:
Example: You earned $5,200 in commission on $65,000 in total sales. Effective rate = $5,200 ÷ $65,000 × 100 = 8%.
Tips for Maximizing Commission
- Know your tiers: Understand when the next tier kicks in and push to reach it before the period ends.
- Focus on high-value sales: One large deal may earn more commission than many small ones.
- Track your numbers: Maintain a personal spreadsheet so you always know where you stand.
- Negotiate your structure: If possible, negotiate for a structure that rewards your strengths.
- Understand clawbacks: Some companies reclaim commission if a customer cancels — factor this into your planning.
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