How Sales Commissions Work

A sales commission is a form of variable compensation paid to salespeople based on the value of sales they generate. Commission structures incentivize sales performance by directly linking earnings to results — the more you sell, the more you earn. Commission plans vary enormously across industries, companies, and roles, ranging from pure commission (no base salary) to base-plus-commission to salary-plus-bonus structures.

Straight Commission

Straight commission pays a fixed percentage of every sale with no base salary. If your commission rate is 5% and you close $50,000 in sales, you earn $2,500. This structure offers unlimited earning potential but provides no income security during slow periods. It is common in real estate (where agents typically earn 2.5% to 3% of the sale price), insurance sales, and some direct sales roles.

Base Plus Commission

The most common structure combines a fixed base salary with commission on sales. A salesperson might earn a $4,000/month base plus 5% commission on all sales. In a month with $25,000 in sales, total compensation is $4,000 + $1,250 = $5,250. The base provides income security during slow periods while commission maintains the performance incentive. On-target earnings (OTE) — the total expected compensation when hitting quota — is typically disclosed in sales job descriptions.

Tiered Commission Structures

Tiered commission pays increasing rates as sales volume increases, creating a strong incentive to exceed targets. A typical tiered structure might pay 4% on sales up to $20,000, 6% on sales from $20,001 to $40,000, and 8% on sales above $40,000. On $45,000 in total sales: (20,000 × 4%) + (20,000 × 6%) + (5,000 × 8%) = $800 + $1,200 + $400 = $2,400. Tiered structures reward high performers significantly more than standard commission rates.

Draw Against Commission

A draw against commission provides salespeople with an advance on future commissions. The advance (draw) is deducted from future commission earnings. A recoverable draw requires repayment if commissions do not cover the draw amount. A non-recoverable draw does not require repayment and functions essentially as a minimum guaranteed income. Draws are common for new salespeople who need time to build their pipeline.

How to Use Our Free Sales Commission Calculator

Our free sales commission calculator at cookiescursor.com calculates your total compensation from base salary, total sales amount, commission rate, and commission structure. Supports straight, tiered, and draw against commission models. Results show commission earned, total compensation, effective commission rate, and monthly/annual projections. Currency selector supports 40+ currencies. No signup required.

Frequently Asked Questions

What is OTE in sales?
On-Target Earnings (OTE) is the total compensation a salesperson can expect to earn when hitting 100% of their sales quota. It typically combines base salary and target commission.

What is a good commission rate?
Commission rates vary widely by industry. Technology sales typically pay 8% to 12% commission. Real estate pays 2.5% to 3%. Insurance pays 5% to 10%. Retail sales may pay 1% to 5%.

Is commission income taxable?
Yes. Commission income is fully taxable as ordinary income in the US, UK, and Australia. In the US, employers may withhold at a flat supplemental rate of 22%.

What is quota attainment?
Quota attainment is the percentage of your sales target you achieved. Hitting 100% of quota is meeting target. Many commission plans include accelerators that pay higher rates above 100% quota.

What is clawback in sales?
A clawback provision requires salespeople to return commissions if the customer cancels or does not pay within a specified period. Common in SaaS and subscription businesses.

How do I negotiate a better commission structure?
Research industry benchmarks, demonstrate your track record, and propose specific structures that reward high performance. Tiered commission with meaningful accelerators above quota is generally favorable for high performers.

Calculate Your Commission Now

Use our free sales commission calculator to estimate your total sales compensation. No signup required.