How Do Salespeople Get Paid?

salespeople-paid-pay-structureOTE, base, spiff—While these terms seem straightforward to a seasoned salesperson, they can be pretty cryptic (I know) to someone new to the industry. After my years in software sales, I will attempt to answer the question in plain English: How do salespeople get paid?

Often salespeople new to the industry are afraid to admit they don’t understand how sales salaries work. Unfortunately, in my experience, this is most common during an interview process, when understanding the pay structure matters the most. If you are wondering how typical salesperson compensation works, this post should help give you a basic understanding of how paychecks are calculated.

Basic Sales Salary Terms

Before we talk about how you might get paid, let’s cover a few basic terms that you should know before you start interviewing:

  • Base Salary refers to a salary you receive that is not based on your sales performance.  Just showing up will earn you a base salary, but you may not have your job for very long.
  • Quota is really just another word for a goal you must hit. A quota is the total dollar value, or number of items you are supposed to sell. This is typically assigned for a given time period such as 1 year.
  • Commission has more than 10 definitions on Wikipedia, so don’t feel bad if you are wondering what this means. In sales, commission means the amount of money you earn based on making a sale. This is usually a percentage of the sale value or an amount based on how many units you sell.
  • On Target Earnings (OTE) is what you can expect to make if you hit 100% your quota. This is a combination of your base salary (if you have one) plus your commission or bonus.
  • A Spiff is some sort of extra reward you get for selling something very specific. This is often used to push a certain item. If a computer store wants to get rid of last year’s printer models they might offer an extra $25 for every printer you sell of that model. A spiff is above and beyond what you typically would earn for making the same sale.

The Most Common Pay Structures for Salespeople

  • 100% Commission.
    Where you’ll see it: real estate, selling knives door to door (think Cutco)
    100% commission means you do not make a penny unless you sell something. For the most part this model is typically not regarded as advantageous for experienced salespeople. It could take months to make your first sale and you could go through slow periods, which may not always be your fault. 100% commission can be highly financially rewarding in some situations but it comes with a lot of risk.
  • Base Salary + Commission.
    Where you’ll see it: almost everywhere (think inside-sales reps, BDRs)
    This is a very common model where you make a base salary no matter what you sell and then receive commission on top of that base salary. Having a base salary shares some of the risk with the employer but still allows a salesperson to make a good chunk of their salary based on their performance. This is one of my personal favourite models because as an employer, you get quality salespeople and as an employee, you still have a lot of control over your earning potential.
  • Salary + Bonus.
    Where you’ll see it: sales engineers, account management positions
    Organizations can offer a base salary plus a bonus based on a salesperson’s performance. This model works well when a salesperson is responsible for more “account management” vs. constantly winning new business. Typically these bonuses are not paid out based on a specific deal you close, but rather a bonus paid quarterly or annually based on an overall goal you are set to hit.

Hope these explanations help you on your job hunt!

Remember—understanding your compensation will help ensure three things:

  1. Your pay structure fits your lifestyle and risk tolerance
  2. You are earning a competitive wage based on your skills
  3. You look like you know what you’re talking about in an interview

Good luck out there and let me know if there’s another definition you’re looking for!

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Shaun Ricci

COO at Ideal
Shaun Ricci is a Canadian entrepreneur and the Co-Founder of Ideal. Shaun served as Co-Founder and COO of Field ID until it was acquired in December 2012. Shaun’s accomplishments include spots on the Profit Hot 50 and Deloitte Fast 50 Companies-to-Watch lists as well as the 2012 Ontario Ernst & Young Entrepreneur of the Year Award. Shaun is also an active writer, documenting his wins and losses while building his startup sales team.