Commission Plan Template: Free Template for Small Business Sales Teams
Quick Answer
A commission plan explains how salespeople earn commission: who is eligible, the commission rate or structure, what sales count, when commission is earned (for example, when the customer pays), when it is paid, how returns and cancellations are handled, any quotas, draws or caps and what happens when someone leaves. Put the plan in writing, have each salesperson sign it, keep calculations transparent and check federal and state wage rules, since commissions can affect overtime and some states require written commission agreements.
A good commission plan motivates salespeople to bring in the right business. A confusing one causes arguments every payday, and a poorly written one can lead to wage claims when someone leaves. Small businesses don't need complicated plans, but they do need clear, written ones.
This guide includes a free commission plan template and explains common structures, how to set rates, when commissions are earned and paid, how to handle returns and what to check on wage rules.
Note: This is general information, not legal or tax advice. Commission pay is affected by federal and state wage laws, and some states require written commission agreements. Have an employment attorney review your plan.
Common Commission Structures
| Structure | How it works | Best for |
|---|---|---|
| Straight commission | Pay is only commission | Experienced, self-directed sales roles; check minimum wage rules |
| Base plus commission | Salary or hourly pay plus commission | Most small business sales roles |
| Tiered commission | Rate increases at higher sales levels | Rewarding top performance |
| Gross margin commission | Commission on profit instead of revenue | Businesses with varying margins |
| Draw against commission | Advance on future commissions | New reps or seasonal sales |
| Team or pooled commission | Shared commission across a team | Collaborative sales |
Free Commission Plan Template
[Company Name] Sales Commission Plan
Plan period: ______ to ______ | Effective date: ______
1. Eligibility: This plan applies to [positions]. Participants must sign this plan to participate.
2. Base pay: $[amount] per [hour/year], paid [frequency].
3. Commission rate: [X]% of [net revenue / gross margin] on eligible sales.
[Tiered: [X]% on sales up to $[amount] per [month/quarter]; [Y]% on sales above $[amount].]
4. Eligible sales: Sales [closed by the participant / to assigned accounts / of these products] that are [invoiced and paid]. Excludes [taxes, shipping, discounts, house accounts, etc.].
5. When commission is earned: Commission is earned when [the customer pays the invoice in full / the order ships / the contract is signed].
6. When commission is paid: Earned commissions are paid [on the next regular payday after the end of the month in which they are earned].
7. Returns, refunds and cancellations: If a sale is refunded, returned or canceled [within X days], the related commission will be [deducted from future commissions], to the extent permitted by law.
8. Draw (if any): [Describe recoverable or non-recoverable draw.]
9. Quotas and goals: [Describe any quotas, accelerators or bonuses.]
10. Disputes: Questions about commission calculations should be raised with [name] within [X] days of payment.
11. Separation: Upon separation, commissions earned through the separation date will be paid [as required by law / per this plan].
12. Changes: [Company] may change this plan with [X] days' written notice. Changes do not affect commissions already earned.
Employee signature: __________ | Date: ______
Company representative: __________ | Date: ______
Have an attorney review the earned, paid, returns and separation sections for your state.
Setting Commission Rates
- Start with margin. Know how much profit each sale generates.
- Decide total target pay for a solid performer, base plus commission.
- Estimate expected sales for that performer.
- Work backward to a rate that delivers target pay at expected sales.
- Test it against high and low sales months.
Example: You want a solid rep to earn $60,000: $40,000 base and $20,000 commission. If a solid rep sells $400,000 per year, the commission rate is $20,000 ÷ $400,000 = 5%.
Use the sales commission calculator to test different rates.
Tiered Commission Example
| Monthly sales | Rate | Commission on that tier |
|---|---|---|
| First $20,000 | 4% | $800 |
| $20,001–$40,000 | 6% | up to $1,200 |
| Over $40,000 | 8% | 8% of the amount over $40,000 |
A rep who sells $45,000 in a month earns $800 + $1,200 + $400 = $2,400. Tiers reward top performers without overpaying for average months.
Revenue vs. Gross Margin Commissions
Paying commission on revenue is simple, but it can encourage heavy discounting. Paying on gross margin ties commission to profit, so reps protect price. Many small businesses start with revenue and switch to margin when discounts become a problem. See markup vs. margin.
When Commission Is Earned
The plan should clearly say when commission becomes earned. Common choices include when the contract is signed, when the order ships or when the customer pays. Tying commission to payment protects your cash flow and avoids paying on sales you never collect. Whatever you choose, write it down and apply it consistently.
Draws Against Commission
| Type | How it works |
|---|---|
| Recoverable draw | An advance that is repaid from future commissions |
| Non-recoverable draw | A guaranteed minimum that isn't repaid if commissions fall short |
Draws help new reps through the ramp-up period. If you use a recoverable draw, explain how and when it's repaid, and check state rules before recovering draws from wages or final pay.
Commissions, Overtime and Minimum Wage
- Nonexempt employees who earn commissions may still be owed overtime, and commissions may affect how overtime is calculated. Ask your payroll provider.
- Some retail and service employees paid mostly by commission may qualify for an overtime exemption under specific conditions. See overtime for commissioned employees.
- Straight commission plans still need to meet minimum wage requirements for nonexempt employees.
- Outside sales roles have their own rules.
Talk to your payroll provider or an employment attorney before setting up a commission-only or mostly-commission plan.
Returns, Cancellations and Clawbacks
Decide what happens when a sale is refunded or canceled. Many plans deduct the related commission from future commissions within a set period. Be careful about recovering commissions from wages already paid; state laws limit deductions and some restrict clawbacks of earned commissions. See is it legal to dock an employee's pay.
Commission Statement
| Customer | Invoice # | Sale amount | Paid date | Rate | Commission |
|---|---|---|---|---|---|
| Total |
Give reps a commission statement every pay period showing exactly how their commission was calculated. Transparency prevents most disputes. Track payouts with your payroll records. See tips and commission tracking software.
When a Salesperson Leaves
Separation is where commission disputes most often happen. Your plan should say which commissions are owed for sales closed before the last day, including sales not yet paid by customers. State final pay laws apply to earned commissions, so check them before setting your rules. See final paycheck laws by state.
Rolling Out a New Plan
- Model the plan against last year's sales.
- Have an attorney review it.
- Explain it to the sales team with examples.
- Get a signed copy from each participant.
- Provide commission statements every pay period.
- Review the plan at the end of each plan period.
Example: A Small Distributor
A distributor paid reps 5% of revenue with no written plan. Reps discounted heavily to close deals, and margins shrank. When one rep left, he claimed commissions on orders customers hadn't paid yet. The owner wrote a plan paying 15% of gross margin, earned when the customer pays, with clear separation rules and signed copies. Discounts dropped, margins recovered and commission questions became rare.
Common Commission Plan Mistakes
- No written plan.
- Unclear "earned" and "paid" dates.
- Paying on revenue when discounts eat margin.
- Changing plans mid-period without notice.
- No commission statements.
- Ignoring overtime and final pay rules.
Commission Plan Checklist
| Step | Done? |
|---|---|
| Choose a structure | |
| Set rates from margin and target pay | |
| Define eligible sales and earned/paid dates | |
| Write rules for returns, draws and separation | |
| Have an attorney review | |
| Get signed copies | |
| Provide statements every pay period |
Sample Commission Calculations
| Rep | Monthly sales | Rate | Commission | Base | Total month |
|---|---|---|---|---|---|
| Rep A | $18,000 | 5% | $900 | $3,333 | $4,233 |
| Rep B | $32,000 | 5% | $1,600 | $3,333 | $4,933 |
| Rep C | $45,000 | 5% | $2,250 | $3,333 | $5,583 |
These are made-up numbers using a flat 5% rate with a $40,000 base. A table like this, built before rollout, shows the team exactly what they can earn at different sales levels.
Quotas and Accelerators
A quota is a sales target for a period. An accelerator is a higher rate paid once a rep passes the quota. Accelerators reward top performers for pushing past the goal instead of coasting.
| Attainment | Rate |
|---|---|
| 0–100% of quota | 5% |
| 100–125% of quota | 7% |
| Over 125% of quota | 9% |
Set quotas that a solid rep can reach most months. Quotas that are almost never reached discourage the team.
Caps on Commission
Some plans cap total commission. Caps protect against windfalls, such as one unusually large deal, but they can also cause top reps to hold deals until the next period. If you're worried about windfalls, a better approach is often a separate rule for unusually large deals, decided in advance.
Split Commissions and House Accounts
- Split commissions: when two reps work a deal, decide the split in advance, such as 50/50 or 70/30.
- House accounts: large or long-standing customers managed by the owner may pay no commission or a reduced rate.
- Territory rules: decide who gets credit when a customer in one rep's territory buys through another.
- Reassigned accounts: explain what happens to commission when accounts move between reps.
Write these rules into the plan. Most commission arguments come from situations the plan didn't address.
Spiffs and Incentives for Non-Sales Staff
A spiff is a small, short-term bonus for selling a specific product or service. Retail staff, technicians and front desk employees can earn spiffs for add-ons, memberships or service plans. Keep spiffs simple, time-limited and tracked in the same way as commissions so they show up on payroll correctly. See bonuses in employee compensation.
The Retail and Service Commission Exemption
Under the federal Fair Labor Standards Act, certain commissioned employees of retail or service establishments are exempt from overtime under Section 7(i). According to the Department of Labor, the employee's regular rate must exceed one and one-half times the applicable minimum wage, and more than half the employee's total earnings in a representative period must consist of commissions. The representative period may be as short as one month but not more than one year. The establishment must also qualify as a retail or service establishment, and state overtime rules may differ.
Paying Commissions on Time
- Set a monthly cutoff for counting sales and payments.
- Calculate commissions within a few days of the cutoff.
- Have a manager review the commission statement.
- Send approved amounts to payroll before the payroll deadline.
- Keep the statement with your payroll records.
Commissions paid to employees go through payroll like other wages. Ask your payroll provider how commissions are taxed and withheld.
Reviewing the Plan Each Year
| Question | Why it matters |
|---|---|
| Did solid performers hit target pay? | Rates may be too high or too low |
| Did commission cost match the budget? | Protects margins |
| Were there many disputes? | Unclear rules |
| Did reps chase the right deals? | Plan rewards the right behavior |
| Did turnover rise? | Plan may feel unfair |
Make changes at the start of a new plan period and give written notice, so reps aren't surprised mid-year.
Commission Plans for Service Businesses
Commission isn't just for dedicated salespeople. Service businesses often pay technicians, stylists, trainers and advisors a percentage of the services or products they sell.
| Business | Common approach |
|---|---|
| Salons and spas | Percentage of service revenue plus retail product commission |
| HVAC and plumbing | Hourly pay plus commission or spiffs on equipment and maintenance agreements |
| Fitness studios | Commission on memberships and personal training packages |
| Auto repair | Commission or flat rate on labor and parts |
| Real estate and insurance | Commission-based with specific licensing rules |
For any role, check how commissions affect minimum wage and overtime for nonexempt employees.
Questions Salespeople Ask About a New Plan
- How much will I earn at my current sales level?
- When does a sale count, and when do I get paid?
- What happens if a customer cancels or doesn't pay?
- Who gets credit when two of us work a deal?
- What happens to my commissions if I leave?
- How will the plan change, and how much notice will I get?
If your written plan answers all six, you've covered the issues behind most commission disputes.
Keeping Commission Records
Keep each signed plan, every commission statement and the sales data behind it. The Department of Labor says payroll records must be kept for at least three years, and good commission records make it easy to answer questions from reps, auditors or wage agencies. Check your state, which may require longer.
Commission and Team Morale
Commission plans affect more than the sales team. Support staff, operations and customer service help close and keep deals, and a plan that rewards only salespeople can create friction. Some businesses add a small team bonus tied to company sales or customer retention so everyone shares in growth. Whatever you choose, explain it openly. A plan people understand and trust motivates far better than a generous one nobody can follow.
Track Sales and Pay With Updoot
Updoot's sales tracking keeps deals and results organized, and the payroll report brings hours, commissions and bonuses together for payroll.
Sources
- U.S. DOL: Fact Sheet #21, Recordkeeping Requirements Under the FLSA
- U.S. DOL: Fact Sheet #20, Employees Paid Commissions by Retail Establishments