Tiered Commission Structure: Don't Tire Out. Tier Out.

Tiered commission structures can unleash a killer loop of untiring rockstar performance in sales teams

Incentive lies at the heart of a bravura sales performance. A well-designed pay-for-performance format - such as commissions – can be a powerful tool in revenue success. It can nudge and prod individuals and channels towards blockbuster outcomes, revolutionizing the organization’s cash flow.

Of the formats popular in the industry, the tiered commission structure - traditionally a Go-To for growth first organizations - occupies place of pride for its ability to trigger beast mode in sales predators and pros.

What is a tiered commission?

Despite the reams of literature written on the topic, profit maximization – the holy grail of business - remains an enigma for most leaders.

A tiered commission structure solves the jigsaw with a crunchy orange-hued trick: The Carrot. The more you munch, the more numbers you crunch. 

Defining a tiered commission structure

Tiered commission is a compensation model where the cut becomes bigger and bigger as the sales volume grows. In a tiered commission structure, channels and sales professionals earn varying commission rates depending on the specific performance level or tier they are in.

A step-by-step incentive path keeps raising the reward stake as salespeople cross one performance threshold after another, ensuring momentum doesn’t slack and that members stay focused on selling more and more. A tier is flanked at either end by two threshold levels – one at the lower end that marks entry into the tier, and the other at the top end marking the members exit into the next higher earning bracket.  

With every new quota milestone passed, members enter a new ‘tier chamber’, enjoying a bigger cut for every sale achieved in, and throughout, that tier chamber. Quotas are defined basis a variety of factors such as number of deals closed, number of units sold, amount of revenue brought in, volume of profits made, number of new customers acquired and so on.

Another way of looking at it could be:

• Sales under $50,000: Commission is 7%.
• Sales from $50,001 to $100K: Commission is 10%.
• Sales over $100,000: Commission is 12%

Anything but flat

A flat rate commission cut per deal, while being straightforward and reasonably attractive, carries no special motivation for sales personnel to complete 100% of their quota if their needs are less, or met early on. There's no difference in reward for hitting 20%, 60% or 100% of one’s quota.

For businesses eyeing a sweet spot between 80% and 120% of quota attainment though (and often more), this can be a dampener. Revenue and sales leaders have a simple solution to the problem: Crank up the sugar. And ensure stopping isn’t an option.

Enter the tier

With higher sales volumes translating into enhanced earnings - thanks to a commission rate design that escalates progressively - the tiered model will now unleash a hamster wheel of performance fury.

As the salesperson hungrily steps into the subsequent ‘commission class’, the same effort will snowball into a larger platter of spoils, bringing on the goosebumps.

The whiff of unlimited money can be too much to resist, even for the most complacent individual. It’s a loop programmed to ensure everyone – employee and employer – has a happy ending. Targets will be blown away, cash registers will jangle, rivals will be squashed.

Types of tiered commission structure

Different tiered commission structures offer various ways to reward sales performance, ensuring reps stay motivated and driven to close more deals. Here are the common types of tiered commission structures, each offering a unique way to reward performance and keep sales teams motivated.

1. Tiers for vendors

Which creates milestone-based tiers mapped to the total number of products sold by a specific vendor. This model allows businesses to place the spotlight squarely on their vendor ecosystem.

They can adjust the dials to compare and replace vendors, bring out the best in them, and turn vendor partners into sturdy pillars of growth. Managing multiple cuts and tiers may, however, make management and administrative chores clunky, and potentially create fairness issues ultimately leading to vendor dissatisfaction and churn.

2. Tiers for products

Which aligns tiers to products. For example, a company with a wide product catalog can have a separate, tiered commission structure for each specific product. This model encourages product diversity and lets the company adjust cuts dynamically based on product potential and performance. On the flip side, vendors may be discouraged by lukewarm market response in product categories that are not doing well.

3. Tiers by pricing

Where a portfolio with varying pricing can have commission tiers customized for each price range. This kind of a model empowers the brand’s pricing strategy, aligning it seamlessly with commissions.

It also allows selective incentivization and promotion of priority products. That said, monitoring and calculation complications may be an issue. Also, vendors may prioritize products with higher cuts, and lower-priced products may languish from neglect.

4. Tiers by customer

Which incentivizes reps for targeting specific audience segments or for acquiring new customers. On the plus side, this model can help build rich customer relationships, address client concerns and prioritize user groups that are lucrative for the business.

However, challenges in predicting customer habits, segment size and sales length cycles may hurt strategy and tier design - make managing unwieldy and seeding conflict amongst sales teams. Weaker customer segments may be negatively affected.  

5. Tiers by performance

Which is a straight-forward approach to incentivization based on individual or team sales performance. Reps and channels are motivated to iteratively hit and exceed targets like sales quota, customer satisfaction score, gross revenue or other pre-decided parameters.

Great for rewarding performers and boosting company growth but, as with most variable incentive models, carries the probability of creating rift between top performers and the rest of the gang.

Benefits of a tiered commission structure

Here are the key advantages of a tiered commission structure that can boost motivation, reward high performers, and drive consistent revenue growth.

1. Good for business

Any sales incentive structure that fuels success behavior will end up driving conversion numbers and make the accounts books look good. Tiered incentive structures are no different. They can extract chartbusting performances from workers, elevating revenue generation to a whole new level.   

2. Charges up teams

A tiered commission model is much more motivational than, say, a flat commission model. It guides and maintains engagement. Tiers not only ensure sales members don’t give up before quotes are attained. Uniquely, they also ensure that performance is sustained - and even amplified - even after quotas have been achieved. Folks will often bring that extra ounce of effort to the table, normalizing overperformance.

Gamifying challenges by setting personal targets that spike the sense of achievement playfully is a common tactic amongst SDRs. The magic of the tiered commission format becomes particularly evident as one approaches month or quarter end, a time when motivation typically begins to dwindle.

3. Fosters learning culture

The lure of incremental rewards can stimulate SDRs and channels to improve continuously by prioritizing proactive self-development. They become alert to signals and receptive to feedback, sounding out peers for insights and seeking out coaching from seniors.

Cross currents of free knowledge exchange set the foundations of a culture driven by positive competition, high morale and superlative performance. A strong recruiter brand ensures low churn and attracts top talent.

4. Generates satisfied customers

To escalate chances of closure and conversion, sales reps and channels will work harder to nurture positive vibes with customers. As they engage deeper with prospects, hidden pain points will be revealed, providing new opportunities for teams to serve and make their markets happy.

5. Better cost management

Tiered commission models represent a cost-intelligent manner of incentivization and rewarding salespeople. The ‘post-paid’ model ensures payout happens only after results have been officially documented, thereby reducing costs associated with underperformers. Not just that.

Via ongoing testing, compensation can be minutely aligned with high-yielding team members, products and markets – thereby optimizing costs powerfully.

6. Sharper business strategy

A tiered incentive structure brings the organization’s strengths to the fore. Companies can identify their top warriors and understand which approaches are delivering results.

This helps in better forecasting, strategy and planning. Time, resources and efforts can now be efficiently mapped to the larger organizational journey. Deployment is smarter too, as companies can refine their tactics by tweaking tiers and rates on-the-go. Course correction happens continually, pointing teams towards meaningful milestones and profitable paths, and automating a loop of incremental excellence and ROI.

Drawbacks of a tiered commission structure

A tiered commission structure has its challenges, from creating pressure on sales reps to potential payout imbalances. Understanding these drawbacks helps in designing a plan that balances motivation and fairness.

Here are the potential downsides of a tiered commission structure that could impact sales team dynamics, compensation fairness, and overall business profitability.

1. Requires deep pockets

Not all kinds of organizations shine with a tiered approach to incentivization. It works well for companies with adequate budgets. Startups and entrepreneurs on a shoestring may not find tiers appropriate. This format also works for complex, matrixed environments that require close cooperation between multiple departments and reps.

2. Pushes categories selectively

A common gripe with the tiered incentive model is that it tilts the system in Favour of high yield categories. Other products in the company’s catalog may get the short shrift.

3. Biased towards rockstars

In a similar vein, tiered incentive structures can create uneven earnings. It can favor strong performers, generating grievance and harming team morale. Both the above points discussed can, additionally, translate into an opportunity cost for the business.

4. Could get complicated

A tiered commission structure – with multiple variables and complicated moving parts - may not be the clearest format to comprehend by all employees, the easiest to design or the simplest to monitor and manage.

5. Can cause breakdown

The lure of the lucre can push reps into over-exerting themselves, resulting in stress, health issues and burnout.

Factors to keep in mind when designing and deploying a tiered commission structure

• Have clarity on who you are designing the incentive structure for – both on the sales side and the customer side – so that tiers can accordingly be linked with personality silhouettes and motivational triggers.
• There should be no ambiguity around The Big Why. Clarity on the overarching purpose behind invoking a tiered commissions structure in the organization will help design the right incentive framework. 
• Tier thresholds and performance parameters should be reasonable and attainable to drive spontaneous adoption amongst SDRs and channels.
• The value of the incentive should be carefully calculated, ensuring it stays high enough to be attractive while not eating into the company’s profits.
• A tiered commission model should be sensitive to the individual’s wish-lists while being true to organizational objectives.    
• It should be delicately designed to salute rockstars while at the same time be empathetic to weak performers.  
• Compensation formulae should have both rationality and transparency: KPI’s and expectations must be communicated effectively with all stakeholders.
• There must be a mechanism in place to monitor, measure and improve by ploughing-back learnings routinely.
• Frontline armies, customer-facing teams and SDR’s must be drawn into the decision-making process to inform the roadmap with hands-on, fresh-from-the-battleground insights.    
• Figure out whether your current incentive management infrastructure can support the additional complexity of a tiered model, and whether you have the tools, manpower and resources to run it seamlessly.
• Use a robust technology - or a tech enabled platform – to eliminate human error and delays, strengthen subjective decisions with data, manage operations efficiently and dispense rewards quickly.

When to use a tiered commission structure

Here are the key scenarios where a tiered commission structure works best, ensuring sales teams stay motivated, hit targets, and push beyond their limits.

Tiered incentives work well:

• For companies with ambitious revenue plans, which require high sales momentum.
• For brands with big ticket services and products, which magnify cuts that salespeople earn.
• For products and sectors with shorter sales cycles like e-commerce or retail, which allows for instant gratification amongst salespersons.  
• For organizations with a policy of prioritizing, recognizing and incentivizing top performers.

Tiered incentives may not be the right fit:

• For companies who do not have confident and experienced sales personnel in their ranks: A tiered approach here could lead to overwhelmed teams and failure in ticking big boxes.    
• For companies with low margin products. The high cut percentage of a typical tiered commission structure may be detrimental to fiscal health in this case.
• For companies with poorly designed tier plans. For instance, if incentives are linked to lead generation or call numbers - KPIs’ that do not necessarily translate into a sale - a tiered incentive format may end up being unprofitable.

How to design a tiered commission structure that delivers for your sales machinery

• Set the quotas.
• Define the targets for each threshold.
• Create the tiers. Design them in a way that progression from one tier to the next is quick. Staying too long in the same tier can sap enthusiasm.  
• Determine the commission rates for each tier.
• Ensure high performers are thumpingly rewarded.

Tired of growing slow?

Let's tiers unleash loop of profits

Nothing unlocks Beast Mode in your salespeople quite like incentives. And nothing unlocks the true power of incentives quite like a tiered commission structure.

You can’t really judge the power a tiered incentive structure holds or figure out if it is a good fit for your business, unless you give it a shot. Tired of a sluggish growth curve? A pilot tiered project could just land the breakthrough you are looking for.