Would You Pay the Same Commission on Two Deals with Very Different Margins?
Learn how to use gross profit and margin in sales commission plans, choose the right design and avoid common data, fairness and implementation problems.
By Compswell —
Would you pay the same commission on two €1 million deals if one generated €500,000 in gross profit and the other generated only €250,000? Many revenue based commission plans do exactly that. They reward the value of the sale recorded at the top of the income statement without considering how much value remains after the direct cost of delivering it. This may be acceptable when sellers have little influence over pricing, product mix or delivery commitments. But when they can discount, select lower margin products or add expensive service commitments, paying only for revenue can encourage decisions that increase sales while weakening profitability. The answer is not automatically to replace revenue with margin. It is to determine whether sellers can influence the result, which profitability measure they can understand and whether the company can calculate it accurately before the deal closes. Revenue growth does not always mean profit growth A finance team notices that revenue has increased for two consecutive quarters, but gross margin has declined. Deals are closing at higher discounts, sellers are favouring lower margin products and additional services are being included without enough revenue to cover the cost of delivering them. The immediate reaction is often: put margin into the commission plan. The logic appears straightforward. If sellers are rewarded for profit rather than revenue alone, they should become more disciplined about discounting, product mix and contract terms. That can work. In the right roles, a margin aligned commission plan creates a stronger connection between what sellers earn and what the business keeps. However, a margin measure applied to the wrong role or built on costs sellers cannot see will create a different problem. Sellers may lose commission because of procurement costs, transfer pricing decisions, delivery overruns or accounting allocations that were outside their control. A measure intended to improve commercial decisions can then become a source of unpredictable earnings and repeated disputes. Gross profit and gross margin are not the same measure Before choosing the commission mechanic, the company must be clear about what it wants to reward. Gross profit is the monetary value remaining after direct costs are deducted from revenue: Gross profit = Revenue − Direct cost of goods or services sold If a deal generates €100,000 in revenue and costs €60,000 to deliver, its gross profit is €40,000. Gross margin expresses that gross profit as a percentage of revenue: Gross margin = Gross profit ÷ Revenue × 100 The same deal therefore produces a gross margin of 40%. This distinction matters because the two measures can encourage different decisions. Paying commission directly on gross profit rewards the total profit generated. Using gross margin as a gate or multiplier rewards the quality of each euro of revenue. A large contract can generate substantial gross profit even with a relatively modest margin percentage. A smaller deal may achieve a high margin percentage but contribute less total profit. The company must decide whether it needs sellers to maximise total profit, protect a minimum margin percentage or balance both outcomes. When margin belongs in the commission plan The first question is not which margin formula to use. It is whether the seller has enough influence over profitability for the measure to be fair and motivational. Margin alignment is most appropriate when the seller can materially influence pricing, discounting, product mix, service scope or commercial terms. These decisions create a visible connection between seller behaviour and the profitability of the deal. For example, an enterprise account executive may be authorised to negotiate within a pricing range. A commercial account manager may decide which concessions to offer during a renewal. A solution specialist may influence whether the customer buys a high margin standard product or a heavily customised alternative. In each case, the seller can make decisions that affect both revenue and profit. Margin alignment is less appropriate when prices are fixed centrally, products are predetermined and accounts are assigned. It is also difficult to justify when the main cost changes occur after the sale through procurement movements, implementation delays or delivery decisions controlled by other teams. A seller should not carry a profitability measure merely because their name appears on the transaction. They should carry it because their decisions can change the outcome. Roles where margin alignment can add value Enterprise account executives with discount authority are often suitable because the price they negotiate has a direct effect on gross profit. If the plan pays the same commission regardless of discount level, the seller has a financial reason to use discounting to make the deal easier to close. This is not necessarily poor behaviour. It may be a rational response to the plan. Commercial account managers can also influence margin through renewal pricing, service commitments and concessions. Small compromises made during each renewal may appear harmless but can accumulate across a large portfolio. Product specialists and overlay roles may benefit when they influence the mix of products or solutions sold. If two products generate similar revenue but very different profit, a revenue only plan treats them as equally valuable even when the business does not. Margin measures may also be relevant for sales managers when they control deal approvals, pricing discipline and portfolio mix across a team. In that case, a team level profit or margin measure may be more appropriate than applying deal level adjustments to every individual seller. Four ways to align commission with profitability Margin alignment does not require every company to adopt the same structure. The appropriate design depends on the behaviour the company wants to change, the seller’s level of influence and the quality of the available data. Option 1: A margin gate A margin gate establishes a minimum gross margin requirement before the standard commission rate applies. Deals below the threshold receive a reduced rate or, in carefully defined circumstances, no commission. For example, the plan may pay a standard commission rate of 7% when gross margin is at least 40%. Deals between 30% and 39.9% may pay 4%, while deals below 30% pay 1.5%. This design is relatively easy to explain. Sellers can see the minimum level required to earn the full commission rate, and the company creates a clear boundary around heavily discounted or structurally unprofitable business. The main weakness is the cliff created at the threshold. A deal at 39.9% margin can produce a much lower commission than one at 40%, even though the economic difference between the two deals is minimal. Once the seller crosses the threshold, the gate also provides no additional reward for improving margin further. A margin gate works best when the company wants to protect a clear minimum rather than encourage continuous improvement across the full margin range. Option 2: A margin multiplier A margin multiplier changes the commission rate as the deal’s gross margin rises or falls. Instead of one threshold, the seller moves through a range of rates. Suppose the commission rate increases linearly from 5% at a 30% gross margin to 9% at a 55% gross margin. Under that formula, a deal at 42% margin pays approximately 6.9%, while a deal at 50% margin pays approximately 8.2%. The multiplier gives sellers a reason to improve margin on every deal, not merely to cross a minimum threshold. Negotiating a stronger price, reducing an unnecessary concession or improving product mix can increase both company profit and seller earnings. However, the mechanism is more difficult to calculate. Sellers need to estimate the margin and resulting commission before they finalise the deal. If the calculation is available only after Finance closes the
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