The main commission structures used across industries: (1) Straight Commission (100% variable pay)—no base salary, pure commission only, typical rates 20-40% of revenue, common for insurance agents (30-50%), real estate (2.5-3% per side), high-risk high-reward model, requires strong self-motivation and sales skills. (2) Base Salary + Commission (most common)—60/40 split typical (60% base, 40% commission at quota), tech SaaS: $60K base + $40K commission at 100% quota, base provides stability, commission drives performance, aligns company and rep incentives. (3) Tiered Commission (performance-based acceleration)—Example: 0-50% quota = 5% commission, 51-100% = 8%, 101-150% = 10%, 151%+ = 12%, rewards over-performance exponentially, motivates exceeding quota. (4) Revenue vs Gross Profit Commission—Revenue-based simpler: 10% of all sales revenue regardless of margin.

Profit-based better aligned: 20% of gross profit (revenue - COGS), prevents discounting, focuses on profitable deals. (5) Draw Against Commission—$3,000/month guaranteed minimum (recoverable draw), if commission < $3,000, company advances difference, rep owes company cumulative shortfall, next big commission pays back draw deficit.

Industry standards: SaaS/Tech 7-10% of ARR sold, Manufacturing 5-8% of revenue, Financial Services 20-40% of fees, Retail 1-3% of sales, Real Estate 2.5-3% of property price (split with buyer agent).

Team structures: Account Executive gets 70%, Sales Development Rep 30% for qualified lead, Manager override 5-10% of team total sales.

Best practice: align commission with company goals (revenue growth vs profitability), cap commissions only if necessary (demotivates top performers), pay commissions monthly or quarterly to maintain motivation, adjust structure annually based on market conditions and company stage.

Tiered commission calculations use progressive rates like tax brackets—each tier applies only to the amount within that range.

Example tiered structure: Tier 1: $0-$50,000 revenue = 5% commission, Tier 2: $50,001-$100,000 = 8% commission, Tier 3: $100,001-$150,000 = 10% commission, Tier 4: $150,001+ = 12% commission.

Calculation for $130,000 in sales: Tier 1: $50,000 × 5% = $2,500.

Tier 2: $50,000 ($100K - $50K) × 8% = $4,000.

Tier 3: $30,000 ($130K - $100K) × 10% = $3,000.

Total commission: $2,500 + $4,000 + $3,000 = $9,500 (7.3% effective rate).

Common mistake: applying highest tier rate to entire amount incorrectly gives $130,000 × 10% = $13,000 (wrong method, overpays by 37%).

Quota-based tiered structure (percentage of quota): 0-74% of quota = 4% commission rate, 75-99% = 6%, 100-124% = 8%, 125-149% = 10%, 150%+ = 12%.

Example with $100,000 monthly quota, achieved $140,000 (140% of quota): 0-74%: $74,000 × 4% = $2,960. 75-99%: $25,000 ($99K - $74K) × 6% = $1,500. 100-124%: $24,000 ($124K - $99K) × 8% = $1,920. 125-140%: $16,000 ($140K - $124K) × 10% = $1,600.

Total: $7,980 commission on $140K sales (5.7% effective rate).

Accelerator bonus: some plans add 5% bonus on all sales if quota exceeded, $7,980 × 1.05 = $8,379 total.

Implementation tips: clearly communicate tier breakpoints to sales team, show progressive calculation in commission statements, use CRM/spreadsheet automation to prevent calculation errors, adjust tiers quarterly based on actual sales performance distribution, set tier 1 threshold achievable by 80% of team, top tier should be reached by only 10-20% (aspirational), most reps should fall in middle tiers.

Revenue-based vs profit-based commission each have strategic tradeoffs: Revenue-based commission advantages—Simple calculation: 10% of invoice total regardless of costs, reps understand it immediately.

Fast payment: no waiting for cost accounting, commission paid when deal closes.

Motivates volume: encourages maximum sales activity, good for market share growth.

Industry standard: most SaaS, tech, service businesses use revenue.

Typical rates: 5-12% of total contract value depending on sales cycle length and complexity.

Revenue-based drawbacks—Ignores profitability: reps discount heavily to close deals, company makes sales but loses money.

Misaligned incentives: chasing low-margin business over high-margin opportunities.

Example problem: $100K deal at 40% margin ($60K costs) vs $80K deal at 70% margin ($24K costs).

Revenue commission: $100K × 10% = $10K commission but $40K profit. $80K × 10% = $8K commission but $56K profit (company earns more but rep gets less).

Profit-based commission advantages—Aligns interests: reps motivated to maximize margin not just volume, prevents excessive discounting.

Rewards value selling: consultative approach over price competition.

Sustainable business: only profitable deals get commissioned.

Typical rates: 15-25% of gross profit (higher percentage because base is lower).

Example: $100K sale with $60K costs = $40K profit × 20% = $8K commission.

Rep negotiates better terms, reduces costs to $50K = $50K profit × 20% = $10K (more commission for more profitable deal).

Profit-based drawbacks—Complex accounting: requires cost data, product margins, allocation methodology.

Payment delays: wait for costs to be finalized (can take 30-90 days).

Disputes: reps question cost allocations they don't control, erodes trust if methodology unclear.

Best practice recommendations: Early-stage/growth mode: use revenue-based, simplicity and speed matter more than margin optimization.

Mature/profitability focus: switch to profit-based once cost systems sophisticated enough.

Hybrid approach: base commission on revenue (fast and simple) + profit bonus (20% additional if margin >50%), combines both incentives.

Service/project businesses: profit-based essential because costs vary dramatically by project scope.

Product sales with standard pricing: revenue-based sufficient if margins consistent.

Commission rate adjustment: profit-based rates typically 2-2.5x higher than revenue rates to maintain comparable earnings ($100K revenue × 8% = $8K vs $40K profit × 20% = $8K equivalent).

Commission rates depend on sales cycle, deal size, and industry economics.

Industry benchmarks by sector: SaaS/Software—7-10% of first-year ARR, 5-7% of multi-year TCV (total contract value), AE quota: $500K-$1M ARR annually, OTE (on-target earnings): $100K-$150K (60% base + 40% commission), example: $500K quota × 8% = $40K commission at 100% quota.

Manufacturing/Industrial—5-8% of revenue, longer sales cycles (3-6 months), higher deal sizes ($100K-$500K average), OTE: $80K-$120K for field reps.

Financial Services—20-40% of fees/revenue, insurance: 30-50% first-year premium + 5-10% renewals, wealth management: 25-40% of AUM fees, high rates due to regulatory requirements and licensing.

Real Estate—2.5-3% per transaction side (buyer or seller agent), typical $400K home: $400K × 3% × 50% split = $6,000 to individual agent (other 50% to brokerage), 100% commission but pay all expenses.

Retail/E-commerce—1-3% of sales for low-touch transactions, higher 5-8% for consultative selling (furniture, appliances), usually base salary + small commission.

Telecommunications—8-15% of contract value, heavy emphasis on long-term contracts, residuals on renewal subscriptions.

Commission as percentage of OTE: Target 40-60% of total comp at quota attainment, conservative: 30% variable (70% base), aggressive: 70% variable (30% base), 50/50 split most common for balanced risk/reward.

Deal size impact on rates: Transactional (<$10K deals): 5-8% commission sustainable, Mid-market ($10K-$100K): 8-12% commission, Enterprise ($100K-$1M+): 7-10% due to longer sales cycles but larger deal sizes.

Sales development reps (SDRs): $40K-$60K base + $15K-$25K commission, commission based on qualified meetings set (not closed deals), $500-$1,000 per SQL (sales qualified lead), or 10-30% of AE commission on deals sourced.

VP/Director overrides: 5-10% of team revenue, motivates management to coach and support reps.

Calculation method: determine rep quota ($500K ARR), set base salary ($60K = 60% of OTE), calculate commission needed: $40K to reach $100K OTE, commission rate: $40K ÷ $500K = 8% of revenue.

Accelerators: many plans pay higher rates above quota (100-120% quota = 10%, 120%+ = 12%), maintains motivation after hitting goal.

Important: cap commissions only if absolutely necessary (unlimited upside retains A-players), pay promptly (monthly or deal-close), simplify structure (reps should calculate commission in their heads), review competitiveness annually against market data.

A commission draw provides guaranteed minimum income to sales reps during low-earning periods, functioning as an advance against future commissions.

Two main types: (1) Recoverable Draw (most common)—Company advances minimum monthly amount (typically $3,000-$5,000), rep owes company any shortfall when commissions < draw, cumulative deficit carries forward, future high commissions repay previous draws, essentially an interest-free loan.

Example: Month 1: $2,000 commission earned, $3,000 draw paid = $1,000 deficit owed.

Month 2: $2,500 earned, $3,000 draw = $1,500 additional deficit, cumulative $2,500 owed.

Month 3: $8,000 earned, $3,000 draw = $5,000 surplus, $5,000 - $2,500 previous deficit = $2,500 net paid to rep.

Running balance: rep eventually pays back all draws from commissions. (2) Non-Recoverable Draw (rare, more generous)—Guaranteed minimum with no payback obligation, rep keeps full amount even if commissions fall short, essentially higher base salary during ramp period, typically 3-6 months for new hires, converts to recoverable draw or pure commission after ramp.

Example: new hire gets $4,000/month non-recoverable for first 3 months, months 1-3: earns $1,000, $2,000, $3,500 in commission, company pays $4,000 each month regardless, no repayment required, month 4+: switches to $3,000 recoverable draw.

Draw vs base salary differences: Draw counted as commission advance, base salary is fixed guaranteed compensation, draw creates debt obligation if performance weak, base salary never requires repayment, draw typically higher amount than base would be, IRS treats both as W-2 income.

Industry usage patterns: Insurance sales: heavy draw usage, 6-12 month ramps with $2,000-$4,000/month draw.

Real estate: less common due to 100% commission structure, new agents often work part-time initially.

SaaS: minimal draw, prefer $50K-$60K base salary instead, 3-6 month ramp to full quota.

Financial advisors: common, $36,000-$48,000 annual draw during 1-2 year build period.

Risks and concerns: Rep perspective: accumulating debt feels demotivating, may quit if deficit grows too large, prefers higher base salary over recoverable draw for stability.

Company perspective: draw advances tied up as receivables, rep may leave owing significant balance, difficult to recover legally, non-recoverable draws expensive for unproductive reps.

Best practices: cap maximum deficit (e.g., 3 months of draw), forgive deficit on involuntary termination, transparent monthly statements showing draw balance, combine with training and pipeline development, phase out draw as rep productivity increases, convert to pure commission after 6-12 months.

Legal considerations: some states limit recoverable draws, must comply with minimum wage laws, termination may trigger draw forgiveness, employment contracts must clearly define draw terms.

Commission income faces higher tax withholding than regular salary, impacting take-home pay significantly.

Federal tax treatment: commissions are supplemental wages taxed at flat 22% federal withholding (37% if annual supplemental wages exceed $1 million), separate from regular paycheck, many reps surprised by lower take-home on commission checks.

State taxes: vary 0-13.3% depending on state, California 9.3-13.3%, Texas/Florida 0%, New York 6.5-10.9%, applied to gross commission before receipt.

FICA taxes: 7.65% (Social Security 6.2% + Medicare 1.45%) on all commission income up to $168,600 (2025 Social Security wage base), 1.45% Medicare only above wage base, additional 0.9% Medicare tax on earnings over $200,000 single/$250,000 married.

Example calculation $10,000 commission check: Gross commission: $10,000.

Federal withholding (22%): -$2,200.

State tax (assume 5%): -$500.

FICA (7.65%): -$765.

Take-home: $6,535 (65.35% of gross).

Effective tax rate: 34.65%.

Compare to annual tax reconciliation: many reps over-withheld, receive refund when filing taxes, annual income determines real tax bracket (not flat 22%), $100,000 AGI might only pay 18% effective federal rate, difference refunded April following year.

Quarterly estimated taxes for 1099 contractors: if self-employed, no automatic withholding, must pay quarterly (April, June, September, January), owe both employee + employer FICA (15.3% total self-employment tax), plus federal income tax, California contractor example: $100K commission - 15.3% SE tax - 24% federal - 9.3% state = $51,400 take-home (51.4%).

Pre-tax deductions reduce tax bite: 401(k) contributions (up to $23,000 in 2025), HSA contributions ($4,150 individual), reduce taxable income before withholding, $10,000 commission - $1,000 401(k) = $9,000 taxable, saves $340 in taxes on that commission.

Net commission calculation accuracy: use paycheck calculator (Gusto, ADP), input gross commission + annual salary, see exact withholding per pay period, general rule: expect 60-70% take-home on commission, higher earners keep less (37% federal + 13% state + 2.35% Medicare = 52% marginal rate in CA).

Planning implications: budget on 65% net of gross commission, set aside extra 10% for state/local taxes if not withheld, maximize pre-tax retirement to lower tax burden, consider timing large commissions across tax years, high earners: make estimated tax payments to avoid underpayment penalty.