What is Commission Management in Sales? Everything You Need to Know

Every sales leader understands that an effective commission structure is crucial to achieving business growth targets.

Without one, sales reps may lack the drive required to keep prospecting, outreaching, and pitching, day after day.

But with 91 per cent of sales leaders reporting that they were failing to hit quota expectations in 2023, it seems that current approaches to commission management might not be working as they should be.

Fortunately, you’re in the right place to start tackling the problem.

This article will dive deep into sales commission management to help you design the perfect commission plan and navigate common commission-related challenges.

By exploring crucial aspects of commission management, we’re empowering sales leaders with the knowledge and insights needed to optimise sales performance, motivate their teams, and drive sustainable revenue growth through strategic commission planning.

Let’s get into it…

Exploring the Essence of Sales Commission

Before we get into the practical guidance, let’s start with some theory:

What is sales commission? And how does sales commission work in practice?

Simply put, a sales commission is any financial reward paid to sales professionals for achieving specified targets, like the revenue generated or the volume of products sold.

This monetary sum is often based on a set percentage of the rep’s sales volume — so they might earn a 2.5 per cent cut of a $10,000 deal. Commission payments can be made monthly, quarterly, or in a single yearly lump sum.

The biggest reason to pay sales commissions is to motivate your reps: the more they sell, the more they earn.

It can also encourage specific, desirable behaviours. For instance, you might pay higher commissions on a new product, incentivising reps to support the launch by promoting it over other, better-established products.

How To Craft Your Commission Management Strategy

Every effective commission management starts with a strategic planning stage designed to navigate common pitfalls.

Here are three key considerations you’ll want to bear in mind at this stage:

1. Planning With Commission Management Stakeholders in Mind

Sure, sales reps are the ultimate beneficiaries of any commission structure.

But they’re far from the only people involved in the sales commission process.

It’s important to consider all the following stakeholders when planning your commission management strategy:

• Sales leaders: These senior figures are responsible for setting team-level and individual sales goals, deciding on commission rates, tracking performance, and motivating reps to hit quota.
• Sales reps: The frontline sales professionals who earn commissions by selling their employer’s products or services.
• Finance team: Sales and finance teams work together to ensure commissions are paid accurately and logged correctly during payroll.
• Operations team: Ops teams are on hand to support sales and maintain the commission management system.

Your commission management strategy has to satisfy all stakeholders, which can be difficult to achieve.

For instance, sales leaders might prefer a more aggressive commission structure with a lower base salary to reward top performers, whereas the average rep might favour the opposite.

2. Understanding Key Elements of Effective Commission Management Implementation

While every successful commission management implementation looks a little different, they tend to share the following common elements:

• A logical, transparent, and fair commission structure
• The ability for reps to track sales performance management data for metrics that affect their commission payments
• Clarity around commission calculations and payment dates
• Relevant, personalised data access for all stakeholders
• Processes for reps to challenge potential errors in commission payments
• Training to ensure all stakeholders understand parts of the sales compensation plan that most affect them

3. Developing a Fair and Transparent Commission Structure

The intricacies of commission management might vary from one organisation to another, but it’s ultimately always about motivating sales reps to sell more.

However, if reps don’t feel their commission structure is fair and transparent, it might have the opposite effect, leaving them demotivated and disengaged.

Let’s take a closer look at those two key words — “fairness” and “transparency”:

• Fairness: This means that reps are rewarded equally for their performance and that it’s simple for them to understand how to hit the target, with no easy-to-miss loopholes that might cost them money.
• Transparency: Transparent commission management means reps understand how commissions are calculated and can track their performance toward commission-generating goals.

Designing the Perfect Commission Plan

Sorry to disappoint you, but there’s no such thing as the “perfect commission plan”.

However, there is a perfect plan for your organisation — and it’s your job to design it.

But whatever the specifics of your business, you’ll be on the right track if you follow these sales commission plans best practices:

1. Consider Your Sales Goals

It’s easy to think of a commission plan as simply a way to attract and retain top sales talent.

Sure, it’s partly about that. But it’s also about ensuring your reps' performance aligns with your overarching business goals.

For instance, imagine a company — let’s call them Compu-Global-Hyper-Mega-Net — sells two products.

Product A undercuts your rivals, making it an easy sell — but the profit margins are poor. 

Product B targets a less competitive niche market, priced less aggressively, which translates to healthier margins. But finding prospects, engaging them, and closing the deal takes longer.

If Compu-Global-Hyper-Mega-Net paid the same compensation, reps would prioritise Product A.  So the company’s sales leaders might decide to skew the commission structure to promote Product B.

2. Find Relevant Rewards for Different Sales Roles

A sales manager commission structure should look different for an entry-level rep or a regional sales director because they perform very different roles.

So while a revenue or sales volume-based commission plan might be the obvious approach, it may not accurately reflect the day-to-day actions of individuals on your team.

Let’s consider how goals and commissions might vary across a sales team (N.B. for simplicity’s sake, we’ll look at entry-level, mid-level, and senior roles rather than specific positions):

3. Analyse Industry Standards

How much commission does a sales rep make?

That all depends on your industry.

Per Monster, the following industries have some of the UK’s most attractive commission structures…

• Financial advice
• Luxury products
• Digital media
• Medical devices
• Tech
• Consumer packaged goods

If you’re in one of those sectors, expect to pay more generous commissions to attract top sales talent. But whatever your niche, it’s worth digging into benchmark data to ensure you don’t end up under or over-paying commissions.

At this stage, there’s another important question: what is a typical sales commission to salary ratio for your industry?

Unsurprisingly, there are also significant differences from one industry to the next.

In some, it’s possible to find jobs paying 100 per cent commission, meaning the salesperson theoretically doesn’t have any base salary (although they still need to be guaranteed at least the national minimum wage).

But a more typical salary-to-commission ratio is around 70:30.

So someone earning the average UK sales rep base salary of £38,244… 

…would expect the potential to earn up to ~£11,500 in commission per year.

You’ll also have to consider any industry-specific quirks affecting your commission structure.

For instance, reps selling software-as-a-service products — which typically feature subscription-based pricing models — might expect to earn sales commission on recurring revenue they generate.

4. Calculate Total On-Target Earnings

On-target earnings (OTEs) are the amount you pay a sales rep who hits quota, comprising their base salary and commission. So a rep earning a £30,000 salary with a commission target of £10,000 would have an OTE of £40,000.

When designing your commission plan, it’s essential to ask yourself: can we afford it if every rep makes their OTE?

Sure, you’d presumably be swimming in new business. But existing clients might cancel, or your costs might increase.

Make sure the numbers add up before signing off your commission structure.

5. Align With Your Company Culture and Values

Company values and culture play a crucial role in attracting and retaining talent.

Indeed, two-thirds of people in the UK believe it’s important to work for a company that shares their values, with three in five saying they wouldn’t work for a company with conflicting values.

But developing a set of values and a defined culture is one thing; sticking to them is another.

By its very nature, sales can be a cut-throat world. It’s fine to encourage a dog-eat-dog mentality if this matches your culture — but if you preach about being one big, happy family who works together to hit common goals, don’t build a commission plan that prioritises individual performance.

At best, it makes you look a little hypocritical. At worst, it’ll demotivate your team and ruin your reputation.

Navigating Common Challenges and Solutions in Commission Management

Once upon a time, commissions were tracked manually in spreadsheets (or on paper). There was no other option.

That’s no longer the case today.

This is fantastic news for sales managers because tracking sales commissions manually presents business challenges. Manual commission management can be:

• Error-prone: Any manual process is open to the risk of human error. Compensation calculations are no different — especially when they rely on spreadsheets full of manually inputted data and breakable formulas.
• Time-consuming: Data entry is a slow and monotonous process. Sales managers shouldn't waste time on low-value, repetitive tasks like this.
• Unscalable: As a sales team grows, it takes longer to track and calculate commissions yourself. Manual processes just don’t scale.
• Untransparent: Remember, your commission structure should be fair and transparent. That’s hard to achieve if you’re working out all the figures by hand.
• Hard to verify: Manual commission tracking often doesn’t leave a paper trail, which can pose serious problems in auditing season.
• Uncollaborative: Remember, the sales reps and managers aren’t the only stakeholders affected by your commission structure. Finance teams need access to your data, too — and manual tracking doesn’t always play nicely with accounting and payroll platforms.

Given all those headaches, it’s no surprise that 90 per cent of sales leaders don’t trust their sales compensation structure, or 75 per cent of reps don’t trust that they’re being paid fairly.

This explains why more sales managers are turning to automated commission management solutions.

For instance, a sales commission tracking solution can automatically calculate commissions, saving sales managers time and mitigating the risk of human error.

Leveraging Technology for Enhanced Commission Management

So we’ve agreed that an automated sales commission management system is good.

With that in mind, here are some key features to look for in a commission management platform:

Native Data Integrations

Think of all the tools in your sales tech stack:

You’ve got your CRM. A prospecting platform. A meeting scheduler. Email automation. Reporting and analytics. Sales performance software.

All those tools (and more besides) chew up and spit out data — much of which will affect your commission calculations. So you need a commission management solution that integrates with most, if not all, of them.

Real-Time Performance Data

You want your commission structure to motivate your team each and every day.

So it’s essential that when a rep sits down at their desk each morning, they can instantly find out whether they’re on track to hit quota.

That’s why you should prioritise tools that display this information in an attractive, user-friendly sales commission dashboard.

👉 Learn more in our guide on how to measure sales performance

Built-In Approval and Dispute Workflows

Once again, we’re back to fairness and transparency.

The fact is, every salesperson wants to feel their commission is being accurately calculated. 

They want to see when their commissions have been approved — and if they think their earnings have been misreported, they need to know what to do next.

Dealing with disputes via email is a real headache, so choosing a platform with a built-in dispute process makes sense.

👉 For more information on using tech to level up sales performance, read our roundup of the top sales productivity tools

The Impact of Effective Commission Management on Sales Teams and Organisations

With the right planning, commission management can be a major competitive advantage for your organisation.

Here are some of the advantages it offers:

1. Improved Sales Team Performance

Giving reps the ability to track real-time sales performance management data allows them to connect small, daily actions — like finding a prospect or emailing a qualified lead — to tangible financial rewards.

Simply put, every call they make or email they send brings them a step closer to achieving quota.

This can motivate sales teams to keep performing, even when they’re not feeling it.

2. Greater Team Trust

No one wants to feel like they’re being scammed out of money — least of all by their employer.

Historically, reps have often spent time adding up their commissions to ensure they’re not being short-changed. Of course, the longer they crunch their sales numbers, the less time they have left for revenue-generating activities, hurting your sales performance.

Sales commission management software eradicates this issue by making it easy for reps to see their commission and how it’s calculated, helping you build a trusting and productive sales environment.

3. Time Savings Through Automation

Across a year, automation can save sales managers whole days of lost productivity spent on tracking sales commissions manually, freeing them up to focus on the stuff that matters — like strategic planning and supporting their reps to hit targets.

Final Thoughts

It’s easy to view commission management as just another dull admin task.

But, with a little planning and the right software in place, it can unlock a whole new level of performance from your sales team.

When reps understand how their commission is calculated, how much they’ve earned, and how they can earn more, they feel motivated. Plus they know they can trust you to pay them fairly for their efforts. 

All of which means they’ll go the extra mile to help you smash quota.

FAQs

What Is Commission Management?

Commission management is the process of tracking, calculating, and paying commissions earned by your reps. Because commission is a key motivator for many sales teams, commission management is crucial in attracting and retaining sales talent and driving team performance.

What Is the Average Sales Commission?

Average sales commission rates vary by industry, but salary-to-commission ratios in the UK are typically around 70:30. That means 70 per cent of a salesperson’s on-target earnings come from their base salary, with the potential to add the other 30 per cent by hitting agreed performance targets.

What Is a Commission Strategy?

A commission strategy governs every element of your incentive-based sales compensation, from your commission structure to how you track and pay on-target earnings. Successful commission strategies encourage reps to prioritise actions that contribute to business success, such as targeting a certain type of prospect or selling a specific product.