Use the sales commission calculator (sales compensation calculator) to compute sales commissions in multiple ways. You can choose from the below options according to the sales compensation plan that best represents your business:

  • Based on total gross sales (revenue commission);
  • Based on sales profit (gross margin commission structure);
  • Excess above sales target;
  • Excess above margin target; and
  • Tiered sales commission structures (with multiple sales quotes).

You can also check how other sales-related figures and metrics result in different sales commission structures. For example, you can use the tool as an OTE calculator to compute on target earnings, which is basically the sum of the base salary and the projected sales commission, or you can compare different profitability ratios.

Below we also show you how to calculate sales commission through different sales compensation plan examples.

What is sales commission?

In general, sales commission is an additional compensation the employee receives, the size of which depends on a specific sales commission structure. For example, a business owner provides it when a salesperson's transaction meets or exceeds a minimum sales threshold or sales quotes. Employers pay employees a sales commission to motivate them to realize more sales and reward and recognize salespersons who performs most profitably. To see why sales commission is an effective way to compensate salespeople and boost sales of the product or service, let's see what may happen without such sales motivational quotes.

When an employer pays a salesman only a base salary, that salesman may put forth less effort, take longer breaks, and typically have less motivation to increase their sales figures. In other words, the representative is not interested in the result (i.e., revenue), but in getting their salary with minimal effort, while the business owner is primarily interested in the result. Such a situation refers to asymmetric information between the salesman and business owner, leading to a moral hazard, in which the salesperson knows that the business owner will bear the consequences (potentially lower revenues) of his lack of effort and so less effort is carried out.

For this reason, compensation may provide salespeople with a greater incentive to work harder because they will bear the cost of any missed sales opportunities in the form of lower paychecks.

Sales compensation plans - a bonus threshold

It is crucial to choose and design an adequate sales compensation plan according to your business type. For example, if a sales team deals with the same customer group, sales commission based on individual performance might not be the best choice. In such a case, probably it's better to share the sales bonus equally across members and designate the sales motivational quotes for the sales team instead of individually. In this way, you can encourage more teamwork as employees who work in a shared commission environment typically help each other.

On the other hand, when employees work individually, a bonus threshold or inspirational sales quotes can motivate them to perform better and bring in more revenue.

Sales compensation plan examples and sales commission structures

As we mentioned, an employer generally pays salespeople a fixed base salary (for time not spent directly on selling, i.e., administration, traveling) and a variable sales commission (as an incentive and reward). However, it is critical that the right structure of the compensation's allocation is found, one that make sales commissions dependent on what salesperson can influence. While designing the most efficient structure involves linear optimization with complex calculations, you can set the following five most applied ways for determining sales commission in the present sales compensation calculator:

1. Sales commission based on the total gross sales

Suppose you choose this option, also known as the revenue commission plan. In that case, the salesman will receive the extra compensation as a percentage of the total gross sales or single sale’s revenue. It is one of the simplest and most commonly used sales commission structures. For example, if a rep makes $10,000 (gross sales) with a sales commission rate of 10 percent, the individual sales reps would receive $1,000 for the given period.

Revenue commission plans are beneficial for smaller sales teams which deal with homogenous product or service with fixed prices.

2. Sales commission based on sales profit

This type of model refers to the gross margin commission structure where the bonus depends on each transaction's profit. Therefore, the costs associated with making the sale (such as cost of goods sold, selling expenses, base salary, and possible discounts) are also considered. Considering the previous example of a $10,000 revenue with an additional cost of $6,000 (i.e., $4,000 cost of goods sold, $1,000 base salary, and $1,000 selling expenses), the commission's base becomes $4,000, resulting in a $400 commission.

This sales commission structure can guarantee bottom-line profitability while motivating employees. When, however, expenses directly related to the production of goods (i.e., cost of goods sold) takes a high proportion of the total cost, instead of producing incentive to the salesmen, this model may bring more risk into the business contract.

3a. Commission based on the excess above sales threshold

In this case, the sales commission is an additional compensation the employee receives for meeting and exceeding the minimum sales quota or threshold. For example, if the gross sales were $10,000 with a $6,000 sales threshold, the commission's base is $4,000 resulting in a $400 commission. If the sales didn't reach the threshold, the commission is not provided.

3b. Commission based on the excess above a specified sales margin target

When you choose the excess above margin target, the commission will be computed on the sales exceeding the threshold (quota) adjusted for a given margin. Since the minimum gross sales will always cover the base salary (without commission) with the given margin rate, it can be possible for a business to avoid the additional cost (in the form of a bonus) before realizing a required profitability level. For example, if the operation margin (or sales margin) of 58% with a margin target of 50% results in a $2,000 excess in gross sales, the commission with 10% rate would provide $200 commission.

4. Commission based on gross margin and base pay target

With this option, you can determine a sales threshold by setting a specific gross margin target (gross profit/gross sales) and a base pay target (base salary/gross sales). For example, if you set 10% for base pay and 50% gross margin target when your actual gross margin rate is 60%, you will obtain the sales threshold in the following way.

  1. Your actual sales is 120% of the 50% target (60%/50%=120%).
  2. The base pay is, let's say, $780, the gross sales with the 10% base pay target is $7,800 ($780/0.1=$7,800).
  3. You will get the sales threshold by dividing $7,800 by 1.2 ($7,800/1.2=$6,500).

In this way, the base of the commission will be the excess of sales above this threshold.

5. Tiered sales commission structure

Tiered commission plans are constructed in a way that salespeople can earn greater commission rates as they surpass specific levels of revenues. For example, the below table represents a tiered sales commission structure, where a 5% rate is offered for sales below $1,000, 10% above $1,000, and 15% above $2,500. If the realized sales are 3,000 dollars, the total commission will be $275.

From To Rate Commission
$0.00 $1,000.00 5% $50.00
$1,000.00 $2,500.00 10% $150.00
$2,500.00 $3,000.00 15% $75.00

This type of commission structure helps maintain motivation over a period of time and encourages employees to over-perform because their commissions progressively increase the more they sell. High-performing salespeople have extra motivation to continue selling and earn higher commission rates.

How to calculate sales commission?

If you've read until this point, you probably have a fairly solid idea about calculating sales commission. In any case, you can find a summary of the computation with an example below for the different commission structures:

1. Sales commission based on the total gross sales

sales commission = gross sales * commission rate.

2. Sales commission based on sales profit

sales commission = sales profit * commission rate.

3. Commission based on the excess above sales threshold

sales commission = (gross sales - sales threshold) * commission rate

4. Commission based on the excess above a specified margin target

sales commission = (gross sales - gross sales threshold) * commission rate.

The computation of gross sales threshold involves linear programming, for which we used the Newton method in the present calculator.

5. Tiered sales commission structure

sales commission = excess above specific tier * commission rate.

How to calculate sales margin and other sales figures?

Sales margin or operational margin is the profit generated from the sale of a product or service. By sales margins figure, you can measure the profitability of different products being sold. To calculate the sales margin, subtract all costs related to a sale from the sale's revenue. The exact components of this calculation may depart from the one we apply here but will generally include the following items:

sales margin = operational profit / gross sales

where:

operational profit = gross profit - operational cost

gross profit = gross sales - cost of goods sold

operational cost = labor cost + selling expenses + discount

labor cost = base salary + commission

Thanks to these equations, now you should understand how to calculate sales margin. Proceed to the next section to see how to calculate OTE for sales and what sales commission is with our calculator.

How to use the sales commission calculator?

You can make the sales commission calculator work by following the below steps:

  1. Determine gross profit by setting the gross sales and the cost of goods sold (COGS).

  2. Set the sales related costs elements:

  • Selling expenses - Include here indirect expenses, for instance, costs related to distribution (i.e., logistics, shipping, and insurance costs) and marketing cost (such as advertising, website maintenance, and spending on social media).
  • Discount rate and discount.
  1. Fill out the labor cost elements:
  • Base salary - The fixed compensation the employee receives.
  • Commission rate - The percentage rate applied to the given base.
  • Commission based on - Here, you can choose the desired commission structure.
  • Total labor cost - Represents the OTE (on-target earnings), which is the sum of the base salary and the commission.

After setting the above variables, the following figures will appear instantaneously:

  • Operational cost - The sum of labor cost, selling expenses, and discounts.
  • Operational profit - The gross profit reduced by operational costs shows a company’s ability to manage its indirect costs.
  • Sales profit - This is also the gross profit reduced by the operational costs except for commissions.

Further metrics:

  • Operational margin - The ratio between the operational profit and the gross sales.
  • Gross margin - The ratio between the gross profit and the gross sales.
  • Labor cost to sales.

FAQ

What is on-target earnings?

OTE refers to On Target Earnings or On Track Earnings. OTE is essentially the compensation a salesperson can expect to earn if they manage to achieve 100% of their designated quota. This number is typically an annual figure.

How to calculate OTE for sales?

You can compute OTE or on-target earnings by adding together your base salary and on-target (expected) commissions. It means that if your base salary is $70,000 and your on-target commission is $30,000, your OTE would be $100,000 if you hit all your sales goals.

What is a fair commission rate for sales?

A commission rate for sales starts from about 5% added to the base salary. It is usually between 20-30%, but some companies offer even as much as a 40-50% commission.

What is a sales quota?

Sales quotas are a particular total sales target set over a period that each salesperson should reach. These are set at the beginning of the period.

Tibor Pal, PhD candidate
Gross profit elements
Gross sales or revenue
$
Cost of goods sold (COGS)
$
Gross profit
6,000
$
Sales related costs
Selling expenses
$
Discount rate
%
Discount
$
Labor cost elements
Base salary
$
Commission rate
%
Commission based on...
gross margin and base pay target
Base pay target
%
Gross margin target
%
Sales threshold
6,500
$
Commission base
3,500
$
Commission
350
$
Total labor cost or OTE
1,130
$
Operational profit elements
Operational cost
1,330
$
Operational profit
4,670
$
Gross sales margin
5,020
$
Further metrics
Operational margin (Sales margin)
47
%
Gross margin rate
60
%
Labor cost to sales
11.3
%
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