Commission formulas that actually work? Here's what we figured out after 2 years of trial and error

Been seeing this question come up a lot lately, so figured I'd share what we learned going from startup chaos to actually having commission formulas that work.

We grew from 5 people to 85 in about two years. Commission "system" started as me and my co-founder splitting deals 50/50. Ended up with 12 sales reps, 4 different payment methods, and a CFO ready to quit over the mess we'd created.

Took us about 8 months to figure out formulas that actually work for different types of sales roles. Made every mistake possible along the way, so sharing what we learned in case it helps anyone else avoid the pain.

The Formulas That Actually Work (After Testing Everything)

Straight Percentage - For Simple, Transactional Sales

Formula: Sales Revenue × Commission Rate = Commission

We use 4% for our inside sales team. Clean, simple, everyone gets it.

Why this works: When Jake was selling our standard packages ($5K-$15K deals), straight percentage was perfect. Consistent deal sizes, short sales cycle, clear motivation.

Why it doesn't: Tried this with enterprise sales initially. Sarah was closing $200K deals, Marcus was doing $50K deals, both working equally hard. Sarah made 4x the commission for what was honestly just luck of territory assignment. Marcus quit after three months.

Current setup: 4% for inside sales only. Works great when deal sizes are consistent.

Base + Commission - For Longer Sales Cycles

Formula: Fixed Monthly Base + (Sales Revenue × Commission Rate)

Discovered this was essential for field sales. $5,000 base + 3% commission.

Why this works: Enterprise deals take 4-6 months to close. Lisa was having $15K commission months followed by $800 commission months. Couldn't budget her life. Base salary fixed that while keeping sales motivation.

Why it doesn't: Tried giving everyone a base initially. Top performers got comfortable and effort dropped. Jake went from $180K average sales to $110K because the base covered his lifestyle.

Current setup: Field sales only. $5K base + 3% commission. Inside sales stays commission-only because deals close faster.

Quota-Based Tiers - For Driving Specific Performance

Different commission rates based on quota achievement:

• 0-85% quota: 2% commission
• 85-100% quota: 4% commission
• 100-120% quota: 6% commission
• 120%+ quota: 8% commission

Example: $150K sales with $125K quota

• First $106K (85%): $2,120 commission
• Next $19K (to 100%): $760 commission
• Final $25K (above 100%): $1,500 commission
• Total: $4,380

Why this works: Once we figured out proper quota setting, this drove massive performance improvements. Team quota attainment went from 65% to 89% in six months.

Why it doesn't: Quota setting is everything. Our first attempt was terrible - gave Lisa $120K monthly quota and Marcus $80K for the same role just because Lisa was already performing well. Lisa nearly quit over the unfairness.

Current setup: Senior reps only, with carefully researched territory-based quotas. Reset quarterly to avoid gaming.

Gross Margin Commission - For Variable Profitability

Formula: (Sales Revenue - Product Costs) × Commission Rate

We use 10% of gross margin for custom solutions team.

Example: $100K sale with $35K product costs = $65K margin × 10% = $6,500 commission

Why this works: Stopped the price-cutting games immediately. Marcus was discounting deals to close faster since he got paid the same percentage regardless. Gross margin commission fixed that overnight.

Why it doesn't: Requires reps to understand cost structure. Also created arguments about cost allocation on custom projects. "Why is my commission lower when the customer wanted premium support?"

Current setup: Custom solutions only, where margins vary 30-70%. Standard products stay on straight percentage.

Accelerator Model - For High-Performing Teams

Base commission rate with multipliers at achievement levels:

• Base: 3% on all sales
• 100% quota: 1.5× multiplier
• 125% quota: 2.5× multiplier

Example: $150K sales with $125K quota (120% achievement)

• Base commission: $4,500 (3% of $150K)
• Achievement: 120% triggers 2.5× multiplier
• Total: $11,250

Why this works: Creates massive motivation spikes. Lisa hit 130% quota first month and made $14K commission. She was basically vibrating with excitement and closed three more deals that quarter chasing the high.

Why it doesn't: Extremely volatile commission costs. Also brutal for people who just miss thresholds. Marcus hit 99% quota once and made $3K while Lisa hit 101% and made $9K. The $2K difference in sales created $6K difference in commission.

Current setup: Only for our top 20% performers who specifically asked for high-risk/high-reward structure.

Draw Against Commission - For New Reps

Monthly advance against future commissions with payback requirement.

Setup: $4,000 monthly draw, 5% commission rate, 90-day evaluation period.

Example:

• Month 1: $2,500 commission earned, keep $4,000 draw, owe $1,500
• Month 2: $3,200 commission earned, keep $4,000 draw, owe $2,300 total
• Month 3: $8,000 commission earned, get $5,700 after paying back debt

Why this works: Saved Jake during his ramp period. Enterprise sales learning curve is brutal - had some $500 commission months early on. Without draw, he would have quit.

Why it doesn't: Debt tracking becomes administrative nightmare. Some reps stress about owing money, which kills motivation instead of helping.

Current setup: First 90 days only for new enterprise reps, then transition to appropriate long-term structure.

What We Learned About Implementation

Start with the simplest thing that could possibly work

Our first "sophisticated" system had base + quota tiers + product mix bonuses + territory adjustments. Nobody could calculate their potential earnings. Simpler systems always outperformed complex ones.

Quota setting makes or breaks tier-based systems

Spent 3 months fixing our quota-based system because initial quotas were basically random. Now we analyze territory potential, competitive landscape, and historical performance before setting any quotas.

Reset frequency matters more than the formula

Monthly resets created gaming behavior (holding deals for next month). Annual meant people gave up after bad quarters. Quarterly resets hit the sweet spot.

Split deal rules are non-negotiable

Define upfront how commission splits work. We use: "Total commission divided equally among all reps involved." Simple, fair, no arguments.

Build calculators for everything

Whatever formula you use, create a tool where reps can model scenarios. Cut commission disputes by 90% and became an unexpected motivational tool.

Common Mistakes That Cost Us Money

Changing formulas mid-period Switched from percentage to quota-based in February. Reps had different expectations for deals already in pipeline. Created chaos and trust issues.

Not testing with historical data
Our accelerator model looked great on paper. Ran it against 6 months of actual sales data and discovered it would have tripled our commission costs in good months.

Ignoring rep psychology When we announced the new quota system, reps immediately calculated what they would have made last year. Even though most would have earned more, they focused on the few months where they'd have made less.

Underestimating edge cases Territory changes, product returns, partial months, customer payment delays - all became commission disputes because we didn't define rules upfront.

Our Final Setup (What Actually Works)

Inside Sales: 4% straight commission

‍Field Sales: $5,000 base + 3% commission

‍Senior Reps: Quota-based tiers (2%/4%/6%/8%)‍

Custom Solutions: 10% of gross margin

‍New Reps: 90-day draw system, then move to role-appropriate formula

Universal Rules:

• Monthly commission payouts
• Quarterly resets for quota-based systems
• Split deals = equal division of total commission
• Commission calculators available for all formulas
• No mid-period formula changes ever

Key insight: Different roles need different formulas. Trying to use one formula for everything was our biggest mistake early on.

How to Pick Your Formula

Deal size consistency: Consistent deals → straight percentage. Variable deals → base + commission or quota-based.

Sales cycle length: Short cycles → percentage or accelerator. Long cycles → base + commission or draw.

Rep experience: New reps → simple percentage or draw. Experienced reps → quota-based or accelerator.

Company stage: Early stage → keep it simple. Growth stage → can handle more complexity.

Team motivation: Individual achievers → accelerator model. Team players → base + commission.

The Bottom Line

Pick the simplest formula that matches your sales process. Get it working perfectly for two quarters before adding any complexity.

Build the calculator first, pick the formula second. If reps can't easily model their potential earnings, the formula is too complex.

Test everything with historical data before launching. Look for unintended consequences and edge cases.

Most importantly: stick with whatever you choose long enough to actually see if it works. We changed systems 4 times in 8 months early on and created trust issues that took a year to fix.

Anyone implementing commission formulas now? Happy to share more details about what worked/didn't work for specific situations.