The Great Resignation, as many experts have coined it, is upon us: the US Department of Labor reported that nearly 4 million professionals quit their jobs in June 2021. This resignation has a serious impact on the businesses. Gartner research estimates that each departing employee costs almost $19K.
One of the best ways to recruit top talent and maintain them in such a competitive market? Competitive pay.
Most sales reps choose their career based on their ability to make money, so how you compensate your team has a significant impact on the quality of talent you attract and how long they stay. In fact, research shows that 56% of employees that leave their current job say inadequate pay was the motivating factor. Another survey found that 43% of workers would be willing to quit at their current company for as little as a 10% salary increase.
Sales leadership has to walk a fine line: pay too much, and it could have a detrimental impact on other parts of your business. Pay too little, though, and your sales reps will walk. Plus, your sales structure can also have an effect on your team loyalty. Paying by commission encourages your reps to be as productive and effective as possible, but some may not appreciate the instability that it can bring.
Want to figure out how much to pay your sales team and where your compensation stacks up against others in the space? We’ve broken down everything about sales commissions, including what the averages are for some of the most common industries.
What is the Average Sales Commission?
Commissions are a percentage of the total sale value that a sales representative earns each time they close a deal. While not every company offers commission to salespeople, it is often an incentive for sales teams to be as productive as possible.
Unfortunately, it’s not possible to give you the typical sales commissions by representatives. (Believe us—we tried!) The truth is, commissions vary immensely based on industry, experience, and individual business goals. Some come in the form of a simple percentage, while others are much more complicated.
However, the typical commission rate for sales starts at about 5%, which usually applies to sales teams that have a generous base pay. The average in sales, though, is usually between 20-30%. What is a good commission rate for sales? Some companies offer as much as 40-50% commission. However, these are typically sales reps that require more technical skills and knowledge, plus have a compensation structure that relies more heavily on commission.
Generally, the size of your commission per sales depends on multiple variables:
- How difficult is the sale? How complex is the sales cycle?
- How long does it take to go from prospect to closing the deal?
- How much experience is needed?
- How much is the rep expected to do on their own?
If you want to see all the possibilities and variables, check out this article by Time to Hire, which suggests several commission structures for various industries. It’s in-depth and you’ll understand why you won’t ever find an “average sales commission by industry.”
How to Structure Your Sales Commissions
Let’s dive into different types of compensation packages. There are two types of pay: “fixed,” or guaranteed salary, and “variable,” or percentage that can be earned through commissions, bonuses, etc.
We wanted to analyze how leaders were structuring their commissions as part of our Field Sales Benchmark Report. In it, we found that there were two common options: base salary plus commission, or straight commission.
Click here to download the 2021 Field Sales Benchmark Report
Base Salary Plus Commission and/or Bonuses
In this structure, your team earns a fixed regular salary but has the opportunity to make more on top of this through sales. In our report, we found that 48.8% of businesses offered a base salary plus commission, while 25.6% offered base plus bonus.
The idea behind this structure is that reps are guaranteed a livable wage (and benefits), while still incentivizing working hard to earn even more. But, the bonus percentages reps earn will be lower than a straight commission since they’re already being compensated.
Our survey also revealed that the typical company calculates their commission on gross profit (41.4%), with a smaller portion basing it on quota (13.8%), or revenue (4.8%).
In general, this compensation structure fosters a more team-based culture. Your team has your basic needs met no matter what, so competition (in theory) won’t be as fierce. A base compensation also gives leadership more control and oversight to dictate how reps spend their time since they are being paid for more than the amount of sales they make.
The possibility of racking up some bonuses keeps a sales team on their toes. However, sales reps can also be responsible for things besides selling, like training new employees, because they have pay beyond commission.
Straight Commission
This structure is exactly what the name suggests—your team is only paid when they make a sale. Our report found that 11.6% of companies used total commission to pay their reps.
It’s a high risk, high reward situation where they generally get a much higher percentage commission (think two to three times more) than reps with the previous base salary plus commission. In this position, their job title is often “independent sales rep.”
Typically, independent sales reps have much more freedom than those who earn at least some money from the company. Leadership can expect to have less control and oversight over sales rep, such as their hours or their sales process. For those earning a straight commission, their paycheck is usually incentive enough to keep them motivated. It also allows leadership to hire bigger teams, since they only pay the reps if there are sales.
Straight commission jobs are much more volatile and unstable, leading to a much higher turnover rate. The competitiveness inherent in straight commission can also take a toll on company culture. However, it encourages top performers who can expect to cash in big.
Activity-Based Commission
Base salary plus commission and pure commission are the two most common forms of payment structures. However, sales leaders are finding more innovative ways to encourage healthy behaviors in their teams.
While a sale is one indicator of sales productivity, there are dozens of mundane tasks that lead to a robust sales pipeline. Learning all about the industry, inputting data and recording interactions in the CRM, writing emails, and qualifying prospects are just a few activities that reps must accomplish that require diligent effort. Not only do these activities eventually lead to a sale, but they create loyal customers that are committed for the long-haul.
Activity-based commissions reward reps for their activities that might not be directly tied to a present sale but set up the company for success. Mark Roberge, the former Chief Revenue Officer of HubSpot’s Sales Division, outlined this more data-driven approach in Harvard Business Review as his key to sales success at the company.
As Roberge noted in his article, a sales team will tend to concentrate on sales activity that is compensated. However, that means that they may skimp on the grunt work that eventually leads to a sale. Creating incentives tied to these unglamorous activities, such as call attempts, follow ups, demos, proposals written, or CRM usage, can help motivate sales reps to perform more of these typically unattractive behaviors.
Gamification is one way that leaders encourage these behaviors in their teams. By tracking and openly rewarding vital sales activities, many sales leaders find that they can have a healthier sales pipeline.
Territory Volume Commission
This model gives commission to their sales team based on territory, as opposed to individual performance. This means that commission is calculated based on the total sales numbers in a region and split equally among all of the reps within the region.
This type of structure works best for companies with a team-oriented structure. It helps promote collaboration versus competition, since one sales rep’s win is a win for everyone in the region.
Other Options
There are other options beyond the two basic structures we discussed above. For example, some companies choose to tier their commissions. (reps get 5% for their first $1000 in sales, then 10% for the next $1000, and so on)
Some companies operate on a salary-only payment structure, which means employees have sales goals they are expected to meet but have a steady paycheck. This is great for boosting loyalty (if the set salary is high enough) and fostering a positive work environment. However, it can also mean that there is less motivation to go above and beyond—which is what makes this structure pretty rare in sales.
Average Sales Commission Rates by Industry
Determining what is a fair commission rate for your sales team depends on a variety of factors. If your company tends to offer a larger base salary, commission typically runs small. For sales reps that work on commission-only, though, they tend to be larger. Also, depending on how much research and technical knowledge is required, a larger commission will make you competitive.
According to the BLS Occupational Employment Statistics (OES) survey, the latest sales commission averages for industries are:
- Insurance Sales Agents: $69,100
- Wholesales and Manufacturing, Technical and Scientific Products: $99,680
- Real Estate Sales Agents: $62,990
- Door-to-Door Sales: $36,740
- Retail Sales: $30,940
Typically, the sales reps from the higher-earning jobs tend to require a bachelor’s or even secondary degree to get the technical knowledge required to succeed. The more technical knowledge required, the higher the commission rate.
How to Calculate Commission for Sales
With the various ways to calculate salary for sales reps, it can be difficult to compare how your company stacks up to your competitors. This is especially true if you use a tiered structure or variable commission rates. However, taking time to calculate the commission of the sales team can give you a valuable look at the average salary of your team to ensure your company is competitive.
Here is a guide to calculate the commissions for your specific company:
Step 1: Set Up a Time Period
Typically, payments are made on a monthly or bi-monthly basis. If you’re looking for an average, you may want to compare different times of the year. For example, the holiday season can be busy for retail sales reps, but summers tend to be slower.
Keep in mind that your commission period can vary according to your policy. For example, some companies delay payment until they receive a full payment from the customer. If that is the case, they may not see the commission until weeks later.
Step 2: Calculate the Total Commission Base
Once you have determined what time periods to calculate, add up the total amount of products sold. If there are different commission rates depending on the product, calculate each commission rate separately.
Step 3: Multiply Commission Rate by the Commission Base
Multiplying the commission rate by the commission base will yield total commissions made. If the commission rates vary by product or service, calculate them separately, then add together. For example, if you offer a 5% commission rate for selling $100,000 worth of product:
$100,000 x .05= $5,000
If your company works by a traditional commission structure, it’s as easy as that. You can add that to any bonuses or base salary to get a sense of what your team typically earns.
However, many companies offer variable commission rates. Not all products or services are as easy to sell as others, so sometimes the commission will vary. For example, if your team earns a commission of 10% off of Product A (which totaled $100,000) and 15% off of Product B (which also totaled $100,000), their commission would be:
Product A: $100,000 x .1= $10,000
Product B: $100,000 x .15= $15,000
From there, you can calculate the total by adding all the variables together. In this example, for instance, the total commission would be $25,000.
Other companies like to encourage high achievers by offering tiered commission rates. For example, your company might have a 10% commission rate for up to $100,000 in sales, then 15% for anything over and beyond that. If your sales rep made $150,000 the math would look like:
$100,000 x .10= $10,000
$50,000 x .15= $7,500
Together, the total commission would be $17,500. Once you calculate your team’s commissions, you can compare them to your industry to decide whether you need to reconsider your commission structure.
What’s the Most Common Compensation Plan?
The most common payment structure for outside salespeople is base pay plus commission. According to Harvard Business Review, this structure usually works out to 60% fixed pay and 40% variable in the form of commissions, bonuses, etc.
Additional Considerations for Sales Commissions
While the company’s compensation structure and average pay are a strong draw for talented sales reps, it is far from the only consideration. Some extra considerations help protect your business and create additional compensation for your sales team.
Clawbacks for Accountability
To increase customer retention, some companies will penalize sales representatives if their client churns within a set period of time. For example, at Hubspot, if a customer cancels their service in fewer than four months, the rep must give back their commission.
This strategy is powerful for companies with more generous compensation plans. It ensures that you are truly compensating your sales team for building the company. It also encourages your sales reps to consider whether a customer is truly staying for the long-haul, instead of only short-term gains.
Now, this isn’t necessarily a dealbreaker for most sales reps–it’s actually pretty common–but you should make this clear to your sales team. It essentially means that your reps commission will be “pending” until a specific benchmark is met, which may be quite a ways down the road.
Bonuses: What’s the Deal?
If you thought that commission was complicated, let me introduce you to another common practice in sales practice: bonuses. Not every company offers bonuses, but every company that does has its own way of structuring them.
Unlike commission, bonuses are not a percentage of your total sales. Instead, they are an extra sum of money you earn by achieving some sort of business goal. (Think video game achievements.)
The point of bonuses is to motivate sales representatives to go above and beyond. Often, these can be used by business owners and executives to address the company’s most pressing concerns. For example, if churn is high, bonuses can be given to reps who have the lowest rate.
What About Other Perks and Benefits?
When comparing your compensation package, it would be remiss to skip over the other perks and benefits offered by your company. Of course, things like healthcare, retirement plans, and paid time off are always a plus. But there are other sales-specific perks you want to check for as well, like:
- Car and mileage reimbursement (if you’re an outside sales representative)
- Cell Phone/data plan reimbursement
- Computer and tablet and data service
- Customer entertainment expense account (take those prospects out for a nice lunch!)
The reimbursement greatly depends on how the business operates. Consider how much you expect your reps to be driving, if they’ll be using their personal phone, and if they’ll need data on the move.
Beyond compensation, the perks that your company offers can be a draw for talent. It also encourages your sales team to go above and beyond if they know they will be compensated for it. They might take more time on phone calls away from the office, for example, or drive to see a prospect that might otherwise cost them too much in gas.
Perks for your employees also signal to them that you are a company that will care for their needs and equip them to succeed. This can be another tool for recruiting and keeping your current sales reps happy.
Things to Think About
Companies cannot thrive without a talented sales team. Sales is what turns leads into paying customers and ensures the growth of your organization. The best way to attract and retain the best possible team is by offering competitive pay. Without understanding the averages of their industry, many businesses fall short and miss out on critical talent.
Take some time to review your company’s compensation strategy. Whether you need to pay your team more, offer more benefits, or overhaul the entire structure, you can create an enticing package that will allow your business to grow.
