How to Design a Tiered Commission Plan
When designing a tiered commission structure, it is important to consider several best practices to ensure that the plan is effective and fair for your entire team. Here are a few key considerations to keep in mind when you set out to build a tiered commission model:
- Set clear and measurable goals: It is important to set clear and measurable sales goals that align with the company’s overall revenue goals. These goals should be communicated clearly to all sales representatives so that they understand what is expected of them.
- Offer competitive commission rates: The commission rates offered should be competitive with industry standards and aligned with the company’s revenue goals. This will ensure that sales representatives are motivated to sell more and that the company is able to achieve its revenue targets.
- Define your performance tiers: The performance tiers should be clearly defined, and your sales team should have a clear understanding of what they need to do to earn the maximum amount of sales commission. Each tier should be challenging but achievable, progressively increasing in both difficulty and reward for achievement.
- Consider the product or service being sold: The commission structure should be aligned with the type of product or service being sold. For example, if the product or service has a high profit margin, the commission rates can be higher, whereas if the profit margin is low, the commission rates may need to be adjusted accordingly.
- Balance team and individual incentives: The commission structure should balance team and individual incentives to promote a sense of teamwork, but also to incentivize individual achievement.
- Regularly review and adjust your plans: Your commission plan should be reviewed regularly to ensure that it is effective and fair. Adjustments may need to be made based on changes in the market or the company’s revenue goals.
By following these best practices, companies can design a tiered sales compensation plan that motivates reps to close deals and also helps your organization achieve its revenue goals.
What Types of Teams and Companies Should Use Tiered Commission Structures?
Tiered commission structures are most effective for sales teams and companies with a large sales force, where individual performance can have a significant impact on the company’s revenue. Companies that sell high-ticket items, such as real estate, luxury cars, or technology, can benefit from using a tiered commission structure.
Examples of Tiered Commission Structures:
There are different types of tiered commission structures that companies can use, depending on their goals and the nature of their sales activities.
Example 1:
One type of tiered commission structure is the step commission plan. This example starts with a basic revenue commission model. From there, sales reps receive a higher commission rate for every additional step or level of sales they achieve. For example, a salesperson may receive a 5% commission rate for sales up to $50,000, a 7% commission rate for sales between $50,000 and $100,000, and a 10% commission rate for sales above $100,000.
This example shows a plan you might implement if you’re trying to motivate reps to close bigger deals, attempting to move up market, or focused on increasing average deal size. Not only do reps earn more commission for closing bigger deals, but the rate of commission is also higher– making it far more profitable for the rep to spend their time and energy on bigger deals.
Example 2:
Another example of a tiered commission plan is one based on the number of deals a rep closes. For example, if a rep has a quota based on a goal to close 15 deals in a quarter, their commission structure might look something like this. A rep may earn 5% commission for the first five deals they close, 6% for the next five, 7% for deals 11 through 15, and 8% for any additional deals they may close.
This type of plan is intended to incentivize reps to continue closing deals even after they hit their goal. The example illustrated below shows how much commission a rep may earn if they were to close 12 deals out of their 15 deal goal.
Example 3:
A third type of tiered commission structure is sometimes referred to as a threshold commission plan. In a threshold commission plan, the commission rate increases once the sales rep reaches a certain sales threshold. For example, a sales representative may receive a 5% commission rate for all sales, but once they achieve quota attainment, any additional deals earn the rep 10% commission. This may be done in an effort to incentivize reps to continue working hard even after hitting important sales targets.
In this example the rep has a quarterly quota of $475,000. You can see that once that threshold is met, the commission rate increases.
The Pros and Cons of Tiered Commission Plans
There are both advantages and disadvantages to using a tiered commission structure. Let’s take a look at some of the most commonly cited pros and cons:
The Pros
One advantage of using a tiered commission structure is that it tends to be more motivating than other commission structures– particularly towards the end of a year or quarter when motivation may wane. By offering higher commission rates for higher levels of performance, sales reps are incentivized to work harder. This not only encourages reps to sell more but also leads to more total sales and increased revenue for your organization.
Another advantage of using a tiered commission structure is that it can help to combat sales turnover and keep top-performing sales representatives happy and engaged. Sales representatives who are consistently achieving high levels of performance are more likely to stay with a company that offers a tiered commission structure, as they can earn a higher income and feel appropriately compensated for their work.
The Cons
One potential disadvantage of a tiered commission structure is that it only works well for teams compensated for the revenue they bring in. If you’re looking to compensate your teams for their activities, you may want to avoid this type of plan. Because a tiered compensation structure places emphasis on sales performance level, it may inadvertently encourage a quantity over quality mindset on teams that are compensated for the number of activities they perform.
Another disadvantage is that a tiered commission structure is often more difficult to design, implement, and manage than other types of commission structures. There are more factors to keep in mind and more variables to keep track of. New companies or companies who don’t have access to commission automation may find it more difficult to manage a tiered compensation structure than say an established sales team or organization with access to more resources.
The ROI of a Tiered Commission Structure
The return on investment (ROI) of a tiered commission structure can be significant if implemented properly. A well-designed and executed tiered commission structure can motivate sales representatives to sell more, leading to increased revenue for the company.
In addition, a tiered commission structure can help to identify top-performing sales representatives, who can then be recognized and rewarded for their work. This can help to retain top talent and reduce employee turnover.
However, it is important to consider the costs associated with implementing and administering a tiered commission structure. The commission rates offered must be competitive with industry standards and aligned with the company’s revenue goals. Additionally, the administrative costs associated with tracking and managing the commission structure must be taken into account.
