How it works
A flat rate applies one percentage to the whole sale. A tiered rate splits the sale into bands and applies a different rate to each. The higher rate only ever applies to the slice of the sale above that tier's threshold, never to the whole amount, which is the same logic progressive tax brackets use.
flat: commission = sale amount × rate ÷ 100
tiered: commission = Σ (amount within each tier × that tier's rate)
The distinction that matters is between the marginal rate, the rate applied to the next dollar you sell, and the effective rate, which is your total commission divided by the total sale. Under a tiered plan these are never the same number once you are past the first band, and the effective rate is always lower than the top tier you have reached.
This is why a tiered plan cannot punish you for selling more. Crossing a threshold raises the rate only on the dollars above it. Under the demo tiers, a $25,000 sale earns $1,550; a $25,001 sale earns $1,550.10. The extra dollar is taxed at the new 10% rate, so it adds ten cents. There is no cliff, and no sale size at which earning more revenue leaves you with less commission.
Plans that do create cliffs exist, and they work differently: they apply one rate retroactively to the whole sale once a threshold is met. Those are worth reading carefully, because they create a dead zone just below each threshold where an extra dollar of revenue is worth a great deal and the incentive to discount into the next band is enormous. This calculator models the banded kind, not the retroactive kind.
Worked example
A $30,000 sale under the demo tiered structure.
- First $10,000 at 5%: $500.
- Next $15,000 (up to $25,000) at 7%: $1,050.
- Remaining $5,000 (above $25,000) at 10%: $500.
Total commission: $500 + $1,050 + $500 = $2,050, an effective rate of about 6.8%, between the lowest and highest tier rates.
- Apply one rate to the whole amount: $30,000 × 6%.
- That gives $1,800.
$1,800 flat against $2,050 tiered. On this sale the tiered plan pays $250 more, because enough of the sale sits in the higher bands to beat a flat 6%.
Which plan pays better depends entirely on sale size, and these two cross over at exactly $20,000. Below that the flat 6% pays more, above it the tiers do. Comparing two offers means comparing them at the deal sizes you actually close, not in the abstract.
How the effective rate moves with sale size
Under the demo tiers, here is what the same structure actually pays across a range of sales. The effective rate climbs towards the top tier without ever reaching it.
| Sale | Commission | Effective rate | Marginal rate |
|---|---|---|---|
| $5,000 | $250 | 5.00% | 5% |
| $10,000 | $500 | 5.00% | 5% |
| $15,000 | $850 | 5.67% | 7% |
| $25,000 | $1,550 | 6.20% | 7% |
| $30,000 | $2,050 | 6.83% | 10% |
| $50,000 | $4,050 | 8.10% | 10% |
| $100,000 | $9,050 | 9.05% | 10% |
The effective rate approaches 10% as sales grow but never gets there, because the first $25,000 of every sale is always earning less than 10%.
What a real commission plan usually adds
A rate and a threshold are the skeleton of a plan, not the whole of it. These are the terms that most often change what actually lands in your account, and none of them are modelled here, but knowing they exist is the difference between reading an offer and understanding it.
Revenue or margin. Commission on gross revenue and commission on gross profit are very different jobs. Margin-based plans mean a discount you grant comes partly out of your own pay, which is usually the point.
Draws. An advance against future commission. A recoverable draw is a loan that later commission repays; a non-recoverable draw is a floor you keep. The word in the contract is worth finding.
Clawbacks. If a customer refunds or cancels within some window, commission already paid is deducted from a later cheque. Common in subscription sales, and the window length matters more than the rate.
Accelerators and caps. An accelerator raises the rate once quota is met, which is what the tiers above are doing. A cap stops commission accruing past a ceiling, and turns the last part of a strong year into unpaid work.
Splits and timing. A deal shared with another rep may pay each of you a fraction. And commission is typically paid when the customer pays, not when the deal is signed, which can be a quarter apart.
Common questions
Why isn't the whole sale taxed at the top tier's rate?
Because tiered structures are designed to reward larger sales without creating a "cliff" where crossing a threshold by one dollar suddenly changes the rate on everything. Only the portion within each band is charged at that band's rate.
Are these the tiers my employer actually uses?
No. The tiered thresholds and rates shown here are illustrative, to demonstrate how tiered commission works. Real commission structures vary enormously by company and role; check your own compensation plan for the actual figures.
What is the difference between my marginal and effective commission rate?
The marginal rate is what the next dollar of sales earns. The effective rate is your total commission divided by the total sale. Under the demo tiers a $30,000 sale has a marginal rate of 10% but an effective rate of 6.83%, because the earlier bands are still earning 5% and 7%.
Is a flat rate or a tiered rate better?
It depends on your deal sizes. Comparing a flat 6% against the demo tiers, they pay identically at $20,000. Below that the flat rate wins, above it the tiers do. Work it out at the sale sizes you actually close rather than in the abstract.
Does this account for draws, clawbacks or caps?
No. This works out commission on a sale from a rate structure. Draws, clawbacks, quota accelerators, caps, splits and the revenue-versus-margin question all change what you are actually paid, and all live in your compensation plan rather than in the arithmetic.