How you compensate your sales reps shapes everything about how they sell: which accounts they prioritize, which products they push, how aggressively they pursue new accounts versus tending existing ones, and whether they're managing their pipeline for this quarter or next year. A commission structure that seems straightforward can create perverse incentives that cost you more in lost margin and unhealthy sales behavior than it saves in simplicity. Getting compensation right requires thinking through not just what you want to pay, but what behaviors the structure will actually create.
Straight Commission
Straight commission — a percentage of revenue or gross margin on every sale, with no base salary — is the simplest structure and is common in distribution, particularly for independent reps or brokers.
Advantages: Low fixed cost for the business. Reps are highly motivated because their income is directly linked to their output. Aligns rep interests with business revenue goals.
Disadvantages: Reps may prioritize high-volume, easy-to-close accounts over strategic accounts that take longer to develop. In downturns or slow seasons, rep income drops dramatically, creating turnover risk among your best people. Straight commission tends to attract transactional salespeople rather than relationship-builders.
When it works best: Independent broker relationships where the rep carries multiple lines; new business development roles where the expectation is high activity and fast closes; markets where accounts make quick decisions and the selling cycle is short.
Typical rate: 3-8% of revenue, or 8-15% of gross margin on completed sales. Commission on gross margin is generally preferable — it aligns the rep's incentive with profitability, not just revenue volume. A rep who gives large discounts to close deals pays for those discounts out of their own commission if they're earning on margin rather than revenue.
Base Plus Commission
Base salary plus commission is the most common structure for in-house distribution reps. The base provides income stability; the commission provides performance incentive.
The right balance: In distribution, a typical split is 60-70% base and 30-40% variable (at target performance). A rep with a $70,000 target total compensation might have a $45,000 base and a $25,000 commission target at 100% of quota. This structure retains good reps through slow periods while maintaining meaningful upside for strong performers.
Base calculation consideration: Set the base at a level that covers the rep's living expenses comfortably, but not so high that the commission component is too small to drive behavior. If the commission upside is only $5,000 on a $65,000 base, the rep has little incentive to work for the variable component.
Tiered Commission Rates
A tiered structure pays increasing commission rates as the rep exceeds quota thresholds. This drives outperformance by rewarding it disproportionately:
- 0-80% of quota: 3% commission rate
- 80-100% of quota: 5% commission rate
- 100-120% of quota: 7% commission rate
- Over 120% of quota: 9% commission rate
The accelerating rate structure means a rep who is already at quota has strong financial incentive to keep selling — each incremental dollar earned above quota is compensated at a higher rate than the dollars that got them to quota. This drives the "bluebird" behavior in distribution — reps who consistently exceed quota by 20-30% and earn significantly more than their peers.
Residual Commission on Repeat Orders
Distribution is a repeat business model — accounts that were acquired last year are generating revenue this year. A residual commission structure pays reps an ongoing percentage on accounts in their book of business as long as those accounts remain active and in good standing.
Residual rates are typically lower than acquisition commission rates — perhaps 1-2% on ongoing revenue versus 4-5% on new accounts — but they accumulate over time, creating a guaranteed commission floor that grows as the rep builds their book. For a rep with $1.5M in managed annual account revenue, a 1.5% residual is $22,500/year — before any new account commissions.
Residuals create strong retention incentives for reps: a rep who has built a substantial residual base loses significant income if they leave. This is valuable for the business but should be paired with clawback provisions.
Commission Clawback on Account Churn
A clawback provision recovers commission paid on accounts that churn within a defined period after acquisition. Without clawback, reps are incentivized to sign any account regardless of fit — they get paid when the account is acquired, with no consequence if the account never becomes a profitable long-term relationship.
A typical clawback: if a new account acquired by the rep goes inactive (no orders in 90 days) within 12 months of being acquired, a portion of the acquisition commission is recovered from future commission payments. The recovery percentage typically scales with how quickly the account churned: 100% recovery if the account churns within 90 days, 50% if within 6 months, 25% if within 12 months.
Clawbacks change rep behavior in useful ways: reps spend more time qualifying prospects before signing them up, they invest more in new account onboarding, and they pay attention to early signs of disengagement before an account goes dark.
Avoiding Rep Sandbagging
Sandbagging — reps deliberately holding back deals until the next period to protect their quota or manage their payout timing — is a common problem in any commission structure with strong quota thresholds. If hitting 120% of quota in December triggers a higher quota for January, a rep has financial incentive to close December's last few deals in January instead.
Anti-sandbagging approaches: annual quota setting that doesn't mechanically ratchet based on last-year performance (which rewards mediocre reps and penalizes strong ones), commission rates that don't drop dramatically at period start (a consistent rate all year reduces the incentive to time deals), and manager visibility into pipeline with deal-level stage tracking that makes timing manipulation visible.