How this calculator works
A commission plan sets a base that commission is calculated on and a rate applied to it. On gross sales the base is the whole sale, so a 5% rate on $500,000 pays $25,000. On gross margin the base is sales minus the cost of goods sold, which aligns the salesperson with profitable selling but pays nothing when a sale loses money. Above quota, only sales beyond a threshold earn commission, so the plan rewards exceeding a target rather than reaching it. A tiered plan pays a different rate on each band of sales, like an income tax: the first band is paid at the lowest rate, the next band at a higher rate, and each rate applies only to the dollars inside its band. Total pay is base salary plus commission, and operational profit subtracts it from gross profit.
Formula
Commission on gross sales = gross sales x rate. Commission on gross margin = max(0, gross sales - cost of goods sold) x rate. Commission above quota = max(0, gross sales - quota) x rate. Tiered commission = sum over bands of (sales in band x band rate). Total pay = base salary + commission. Operational profit = gross profit - total pay.
Worked example
With $500,000 of sales, $300,000 of cost of goods sold and a $40,000 base salary, gross profit is $200,000. A 5% rate on gross sales pays $25,000, for total pay of $65,000, operational profit of $135,000 and pay equal to 13% of sales. A 10% rate on gross margin pays $20,000. With a $400,000 quota, 5% above quota pays $5,000. A tiered plan with 2% up to $100,000, 4% to $250,000, 6% to $500,000 and 8% above pays $2,000 + $6,000 + $15,000 = $23,000.
Advertisement
Frequently asked questions
Why is commission zero on a loss-making sale?
The gross-margin plan uses the larger of gross profit and zero as the base. A sale below cost has negative gross profit, and paying a negative commission would mean clawing back past pay. Many plans carry the loss forward against future commission instead, which this calculator does not model.
How are tiered rates different from a single blended rate?
In a tiered plan the higher rate applies only to dollars in that band, so the effective rate on total sales rises gradually. A plan that pays the top rate on all sales once a threshold is crossed is a different design and needs a threshold and single rate, not a band schedule.
Should the base salary include benefits?
The total pay figure here is base salary plus commission. If you want the full cost of the sales role, add employer taxes and benefits separately, for example with a labour cost calculator, because those do not change with commission.