Capped Commission

We think no, and there’s a couple of reasons why you should not cap sales commissions. For starters, it’s demoralizing. If your rep closes the biggest deal the company has ever seen and the commissions don’t reflect that, your rep is going to leave. You should reward your reps for bringing in that sizable revenue and not penalize them by putting a ceiling on their earning potential. Some companies cap sales earnings in an effort to spread out deals consistently throughout the year. However, unless your product has zero competitors and if you can control when your buyers buy, this logic is greatly flawed. For 6 other compensation plan principles, check out this blog.

If you feel you simply must cap your reps’ commissions, you should do it in a way that doesn’t encourage your team to do the bare minimum. Capping at exactly 100% of quota will mean that as soon as your reps hit their quota, they’re hitting the golf course. So what should that cap be? We recommend 200% as a starting point. If your reps are still hitting over 200% of their quota, maybe you should look into increasing their quota!

Most companies cap commissions because they don’t want their reps to have an outrageously large commission check. If that’s your justification (and we can’t talk you out of it!) then consider a decelerator beyond a certain point. So say a salesperson earns 10% commission until they hit 200% of quota, then they earn 5% thereafter. Yes, it’s still discouraging overperformance… but not as much!

Single rate commission plans are the simplest variable compensation plan out there. It’s for that reason that around 10% of all compensation plans follow this rule. The math is simple to calculate and since reps easily understand their compensation plans, they focus on closing deals rather than wasting time thinking about how to maximize their compensation.

The math to find your commission rate is fairly easy! Take the variable compensation that a rep earns for hitting their target (say $50k a year) and divide that number by their target (say $500k a year). Using this example, $50k/$500k, gives you a commission rate of .10 or 10%. Boom. You’re done!

If you’re building out your team and need your first comp plan, the single rate one is a solid one to start with. Additionally, a single-rate commission plan allows you to add complexity to the plan via accelerators, bonuses, or SPIFs later on, which can act as a good test for future sales commission structures.

Sales commissions are a form of variable pay that pay reps based on a percentage of the total revenue from a sale. There are many forms of commissions, including the tiered commission structure, gross-margin commission and single rate. Keep in mind that sales commissions are not the same as bonuses. If a rep collects 10% on every deal closed, that classifies as commissions. However, if the rep takes home $400 on every deal they close, that’s a bonus — a Single Rate Bonus.