Here's a dirty secret in sales: most reps don't actually understand how their commission works. They know the rough percentages, sure. But ask them to calculate their exact payout on a deal that pushes them from Tier 2 to Tier 3? Blank stares.
I've been in sales for 15+ years. I've seen commission structures that would make accountants cry. And I've watched countless reps leave money on the table because they didn't understand the math.
Let's fix that.
What is a Tiered Commission Structure?
A tiered commission structure pays you different rates based on how much you've sold relative to your quota. The more you sell, the higher your rate. It's designed to reward overperformance.
Here's a typical example:
| Tier | Attainment | Commission Rate |
|---|---|---|
| Tier 1 | 0% - 100% | 6% |
| Tier 2 | 100% - 125% | 8% |
| Tier 3 | 125% - 150% | 10% |
| Tier 4 | 150%+ | 12% |
With a $375,000 quarterly quota, these tiers translate to real dollar thresholds:
| Tier | Revenue Range | Rate |
|---|---|---|
| Tier 1 | $0 - $375K | 6% |
| Tier 2 | $375K - $468.75K | 8% |
| Tier 3 | $468.75K - $562.5K | 10% |
| Tier 4 | $562.5K+ | 12% |
The Key Insight: Blended Rates
Here's what most reps get wrong: you don't earn the top tier rate on all your revenue.
If you close $500K in a quarter, you don't earn 10% on all $500K. You earn:
- 6% on the first $375K (Tier 1)
- 8% on the next $93.75K (Tier 2)
- 10% on the remaining $31.25K (Tier 3)
💡 This is called "blended" or "marginal" commission
Just like tax brackets, each tier only applies to the revenue within that tier's range. This is critical for accurate forecasting.
Step-by-Step Calculation
Let's calculate the commission on $500,000 in quarterly revenue:
Your effective (blended) rate? 6.625% — not the 10% you might have expected.
Accelerators vs. Decelerators
Accelerators are tiers where your rate increases as you exceed quota. This is the standard structure shown above — the more you sell, the more you make per dollar.
Decelerators are the opposite. Some companies reduce your rate after you hit certain thresholds. This is usually framed as "capping" commission to prevent windfall payouts on unusually large deals.
🚩 Red flag
If your comp plan has decelerators, make sure you understand exactly when they kick in. Some companies bury this in the fine print.
Multi-Year Deal Rates
Many companies pay higher rates for multi-year contracts. A typical structure might be:
| Contract Length | Tier 1 | Tier 2 | Tier 3 | Tier 4 |
|---|---|---|---|---|
| 1-Year Deal | 6% | 8% | 10% | 12% |
| 2-Year Deal | 8% | 10% | 12% | 14% |
This incentivizes you to push for longer contracts, which means more predictable revenue for the company and higher commissions for you.
Common Mistakes Reps Make
1. Assuming top-tier rate on all revenue
As we covered, you only earn the accelerated rate on revenue within that tier. Don't budget based on inflated expectations.
2. Forgetting about timing
Most comp plans are quarterly. A deal that closes on January 2nd counts toward Q1, not Q4. This matters when you're straddling tiers.
3. Not tracking deal aging
If you have deals in your pipeline that could close this quarter or next, you need to model both scenarios. Pushing a deal to next quarter might actually benefit you if it gets you into a higher tier.
4. Trusting payroll blindly
Commission errors happen. I've caught mistakes that cost me thousands. Always verify your calculations against your actual paycheck.
Track your commission in real time
Comish automatically calculates your blended commission across tiers, so you always know exactly what you're earning.
Try Comish Free →How to Optimize Your Earnings
Know your threshold numbers
Memorize the exact dollar amounts for each tier. When you're at $360K and quota is $375K, you need to know you're $15K away from unlocking 8%.
Time your closes strategically
If you're already in Tier 3 this quarter but have a big deal that would barely push you into Tier 4, consider whether it makes more sense to save it for next quarter when it could help you reach higher tiers faster.
Push for multi-year when possible
The 2% bump on multi-year deals adds up. On a $100K deal, that's an extra $2,000 in your pocket.
Track everything yourself
Don't wait for your comp plan administrator to tell you where you stand. Build a system (or use Comish) to track every deal and know your exact position at all times.
Wrapping Up
Tiered commission structures aren't complicated once you understand the math. The key insights:
- Each tier only applies to revenue within that range (blended rates)
- Your effective rate is always lower than your top tier
- Multi-year deals usually pay better rates
- Strategic timing can maximize your earnings
- Always verify your own calculations
The reps who understand this stuff — really understand it — consistently out-earn those who don't. Not because they're better at selling, but because they're smarter about structuring their quarters.
Now go calculate your commission. You might be surprised what you find.