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If your business is sales-based, you may be wondering how to motivate your employees to increase their sales. Perhaps you’ve been considering introducing a sales commission plan to incentivise your staff so your business can continue to thrive in today’s competitive 2025 market, but you’re not quite sure where to begin.
Implementing a sales commission plan that is tailored to your business needs and long-term goals is crucial to sustainable growth. A clear, well-structured plan not only boosts morale but also drives performance across the board.
What Is A Commission Payment?
A commission payment is an amount paid to an employee or contractor as a reward for a sale or successful referral they make. In today’s dynamic business environment, this incentive can be a key driver for increased revenue.
Regardless of whether your business is large or small, commission payments are an effective tool to incentivise your workforce to boost sales and generate steady income. In 2025, when markets are more diverse and digitally driven, motivated employees can be a significant asset in building lasting relationships with returning clients.
Introducing commission payments also allows you to monitor performance easily, highlighting your top salespeople as well as identifying those who may need additional support. For further insights on managing employee performance, you might also find our guide on avoiding misleading conduct useful in ensuring transparent business operations.
What Is A Commission Agreement?
A Commission Agreement should be used whenever you plan to pay commission to a worker. It clearly sets out the terms and conditions of the relationship between you and your employee or contractor, including the duration of the arrangement and the precise method by which commission is earned and calculated.
Having a well-drafted Commission Agreement is vital as it helps to prevent misunderstandings or disputes down the track and ultimately protects your business interests. It is also wise to review your agreement periodically to ensure it adheres to current employment laws and modern award standards, as discussed in our Modern Award Analysis.
A Commission Agreement typically includes clauses that deal with the following:
- Rights and obligations of both parties
- Prices of goods and services
- Calculation of commission
- Payment terms
- Restraint of trade and confidentiality
- Termination
- Dispute resolution
Can I Pay Commission Only?
There are two main methods by which you can implement commission payments in your workplace:
- Commission only
- Commission paid in addition to a base salary
If you wish to pay your employees commission only, you will need to ensure that such an arrangement is permitted under the applicable modern award or registered agreement in 2025. It’s important to check that your arrangement complies with the latest employment standards.
Choosing to pay commission only can be particularly attractive for new businesses, as it encourages your team to drive sales and earn more, all while allowing you to manage payroll expenses effectively.
Read more about the requirements you need to meet before adopting a commission-only structure here.
Conversely, offering commission as a bonus on top of a base salary can provide a good balance, delivering the security of a steady income while still motivating your employees to achieve higher sales targets. The stability of a base salary often translates into better employee retention and consistent performance.
How Do I Calculate Fair Commission Rates?
An important factor when implementing commission payments is determining the appropriate commission rate. Striking the right balance is essential – too low a rate may fail to incentivise, while too high a rate could undermine your profit margins.
Tip: Use your sales commission plan strategically to meet your business objectives.
Begin by setting clear goals and expectations. Keep your commission plan straightforward – if you can’t explain it in a few short sentences, it might be overly complicated, leading to confusion among your team.
Consider your financial targets and ask yourself:
- How many sales or contracts must be achieved to reach your goal?
- How many clients must be acquired to fuel your growth?
- How many leads should your employees pursue each week to hit that target?
Tip: Evaluate the role each employee plays in the sales process.
Consider the value an employee brings to your business and their involvement in the sales cycle. If an employee handles the transaction from start to finish rather than merely generating leads, they may merit a higher commission rate.
Common Ways To Calculate Commission
Revenue Commission
Revenue commission is a popular method for determining commission payments. Under this approach, an employee earns a fixed percentage of the revenue generated from each sale.
For example, if Jake earns a 10% commission on his sales and he makes a $10,000 sale, he would receive $1,000 in commission payments.
This structure is straightforward to calculate; however, its simplicity may sometimes impact your profit margins if not carefully managed.
Margin Commission
The margin commission plan works similarly to revenue commission but takes into account the costs incurred to make the sale. Here, commission is calculated based on the profit margin between the revenue generated and the expenses incurred.
For instance, if Jake’s $10,000 sale incurred $2,500 in expenses, his commission would be calculated as follows:
($10,000 sale – $2,500 expenses) x 10% commission = $750
While margin commission helps protect your overall profitability, it might discourage employees from offering discounts that could otherwise close deals, potentially making your business less competitive.
Tiered Commission
The tiered commission plan offers a more dynamic method whereby the commission rate increases as sales volumes grow. This model not only rewards bigger deals but also motivates your team to seek larger opportunities.
For example, Jake might earn a 5% commission on sales up to $10,000; for sales between $10,001 and $15,000, his commission rate could rise to 7%, and so forth.
While a tiered structure drives employees to achieve higher sales, it requires careful calibration to ensure that higher commissions do not unduly erode your business profits.
The Take Away…
Determining a fair commission rate is a challenging balancing act. It’s important to be flexible and creative when designing your commission structure, as there is no one-size-fits-all solution for every business.
Monitoring how your commission agreements and payments impact both your profits and employee performance is critical. Regular reviews, particularly in 2025, will help you tweak the plan to better align with your business needs. For more tips on creating robust business policies, have a look at our article on Setting Out Good Business Terms & Conditions.
Whatever commission arrangement you choose, ensure that it is set out in writing. Clear documentation of the rights and obligations of both parties minimises the risk of future disputes and confusion about how commission payments are calculated.
In today’s competitive 2025 landscape, it’s also essential to ensure that your commission plans comply with the latest regulatory requirements. Regularly updating your Commission Agreement in consultation with legal experts-like those at Sprintlaw-can safeguard your business, while resources such as Legal Requirements for Starting a Business and How to Choose a Small Business Lawyer offer additional guidance.
Need Help?
If you would like some help with a Commission Agreement or if you have general questions about introducing commission plans to your workplace, our friendly team of lawyers is here to chat. Contact us by emailing team@sprintlaw.com.au or giving us a call on 1800 730 617 for a free, no-obligation consultation.
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