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Understanding Tiered Commission Structures: A Complete Guide

In the sales industry, motivating your team to achieve (and exceed) targets is crucial to success. A well-designed sales commission plan is a powerful tool for driving performance, and a tiered commission structure can be particularly effective. But what exactly is it, and how can you leverage it for your sales team’s success?

What is a tiered commission structure?

A tiered commission structure rewards salespeople with progressively higher commission rates as they achieve greater sales volume or exceed specific performance goals. Unlike a flat commission rate (where everyone earns the same percentage on every sale), tiered structures create a series of thresholds (tiers) with increasing commission rates. This incentivizes salespeople to push beyond minimum quotas and strive for higher sales achievements.

Here’s a breakdown of the critical components:

  • Tiers: These are defined sales performance levels, often based on metrics like revenue generated, number of deals closed, or new customer acquisition.
  • Thresholds: Each tier has a specific threshold that a salesperson must reach to qualify for the higher commission rate associated with that tier.
  • Commission Rates: These are the percentages of the sale amount that sales professionals earn at each tier. The commission rate typically increases as they move up the tiers.
  • Base Pay or Fixed Pay: In addition to the tiered commission structure, salespeople may also receive a base pay or fixed salary to provide a stable income regardless of their sales performance.

For example, a salesperson might earn a 5% commission on sales up to $10,000, 7% on sales between $10,000 and $20,000, and 10% on anything above $20,000.

Learn more about different types of commissions by reading “Decoding Sales OTE: A Guide to On-Target Earnings.”

When to use tiered commissions

Tiered structures are a good fit for companies that:

  • Have ambitious sales goals: The increasing commission rates encourage salespeople to push for higher achievements. Incentive programs are designed to push sales reps to reach certain milestones.
  • Sell high-value products or services: Higher commission rates on more significant deals incentivize salespeople to close them.
  • Want to reward top performers: Tiered structures recognize and reward salespeople who consistently exceed expectations.

However, tiered structures might not be ideal for:

  • Companies with new or inexperienced salespeople: A complex structure can overwhelm new hires in their first job.
  • Low-margin products: High commission rates might affect profits and the company’s bottom line.
  • Inside sales teams: Motivation might come from call volume or lead generation factors that aren’t directly tied to sales numbers.

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The pros and cons of using tiered commissions


  • Increased sales performance: Tiered structures motivate salespeople to exceed quotas and close bigger deals, ultimately increasing sales pipeline velocity and team productivity.
  • Improved sales team morale: The opportunity to earn more through increasing payouts can boost motivation and create a healthy competitive spirit.
  • Focus on high-value sales: The structure can incentivize salespeople to prioritize more significant, profitable deals that align with company goals and market share growth.


  • Internal competition: A poorly designed structure can create unhealthy competition within the sales team, potentially hindering collaboration and increasing the turnover rate.
  • Administrative complexity: Tracking performance across multiple tiers can be time-consuming, especially without sales commission software.

4 best practices for designing a tiered commission structure

To make the most of a customized compensation plan, sales leaders should keep the following tips in mind:

  • Set clear and achievable goals: Tiers and thresholds should be ambitious but attainable to motivate sales representatives.
  • Align with company objectives: The structure should incentivize behaviors that support overall sales goals, not just individual sales volume. This ensures alignment with business goals.
  • Communicate effectively: Ensure salespeople understand each tier’s structure, calculation methods, and what’s expected. Transparency is key.
  • Monitor and review regularly: Track performance data using several KPIs (key performance indicators) and adjust the structure to maintain effectiveness.

3 examples of tiered commission structures

Here’s a table illustrating different commission structures:

Sales PerformanceFlat CommissionTiered Commission
Up to $10,0005%5%
$10,001 – $20,0005%7%
Above $20,0005%10%

Beyond the basics: Additional considerations for your commission plan

  • Revenue commission percentage vs. commission cap: While tiered commission structures offer increasing percentages, some companies may also set a commission cap, which limits the total amount a salesperson can earn in commission regardless of their sales volume. This can help manage risk and ensure profitability.
  • Gross margin commission structures: In some cases, commission rates might be based on the product’s gross margin.

The bottom line

A well-designed tiered commission structure can be a powerful tool for motivating your sales team to achieve peak performance. By understanding the pros and cons, best practices, and examples of different structures, you can create a well-structured commission plan that drives sales growth and rewards top performers.

For more sales guides and tips, check out our blog.