How to calculate sales commissions: common plans, with examples

A good commission plan is simple enough for every sales rep to check their own figures. Here are the common plans, a worked example and the question many companies forget: when is a commission due?

Commissions should motivate your sales team, not start arguments at the end of every month. The plans that work best are the ones each sales rep can check on their own, invoice by invoice.

The basic formula

Commission = commission base × rate. Two choices decide everything: what the base is (revenue or margin, usually before VAT) and when the commission is earned (when the order is signed or when the customer pays).

Common commission plans

• Flat rate on revenue: for example 5 % of every invoice before VAT. Easy to explain and to check; it rewards volume, not profit.
• Rate on gross margin: for example 20 % of the margin (sale price minus cost). It protects your profit when reps give discounts, but each rep needs to see the cost.
• Tiered rates: for example 3 % up to €20,000 a month and 6 % above. It pushes for the extra sale; say clearly whether the higher rate applies to the whole month or only to the part above the tier.
• New-customer rate: a higher rate on a customer’s first order (for example 10 %) and a lower one on repeat orders (for example 4 %). It rewards winning new business without forgetting existing customers.
• Salary plus commission, or commission only: the rate is usually lower when there is a fixed salary. Freelance agents often work on commission only and send you an invoice for it.

A worked example

Anna sells for a company with a new-customer rate of 10 % and a repeat rate of 4 %. In March her customers pay these invoices (amounts before VAT):

• Bellavista Hotel, a new customer: €1,560 × 10 % = €156.
• Café du Parc, an existing customer: €2,400 × 4 % = €96.
• Orion Systems, an existing customer: €800 × 4 % = €32.

Her commission for March is €284. A €1,200 invoice sent to another customer in March but not yet paid does not count yet: it will count in the month it is paid.

On orders or on paid invoices?

Paying when the order is signed motivates quickly, but it costs you money when the customer cancels or never pays, and taking a commission back is never pleasant. Paying on paid invoices ties the reward to real cash and gives the sales rep a good reason to help collect late payments. Many small companies choose paid invoices for that reason.

Rules to write down

• The base: before VAT, after discounts, with or without delivery costs.
• What happens with credit notes and cancelled orders.
• Who gets the commission when a customer moves to another sales rep.
• When commissions are paid: with the next salary, or against an invoice from a freelance agent.
• How each sales rep sees the invoices behind their figure.

Write the plan down and give each sales rep a statement every month: most disputes about commissions come from figures nobody can check.

How Tavalle does it

Tavalle calculates commissions from paid invoices, on the amount before VAT, with two rates per sales rep: one for a customer’s first order and one for the following orders. Each commission goes from Pending customer to OK to be paid to Paid; managers pay them in one click and the sales rep receives the statement by e-mail. Invoices from freelance reps are kept next to the payment. See sales commissions.