Gross margin commission is a compensation model where salesperson pay is calculated based on the gross profit (margin) of a sale rather than total revenue. This creates a direct link between the salesperson's earnings and the company's actual profit.
Instead of rewarding salespeople for volume alone, this model incentivizes selling products and solutions with higher margins while avoiding large discounts that erode the company's bottom line.
Traditional revenue-based commissions can create misaligned incentives:
The problem with revenue-based commission: When salespeople are only measured on revenue, they may be tempted to offer large discounts to close deals quickly. A salesperson who gives a 30% discount still earns commission on the sale price, but the company loses significant profit.
The solution with gross margin commission: By basing commission on gross margin, salespeople are motivated to defend prices, sell high-margin products, and negotiate better terms—because it directly affects their own earnings.
Gross margin is calculated as:
Gross Margin = Sale Price - Cost of Goods Sold (COGS)
Or expressed as a percentage:
Gross Margin % = (Sale Price - COGS) / Sale Price × 100
A salesperson closes a deal:
| Element | Amount |
|---|---|
| Sale Price | $75,000 |
| COGS | $45,000 |
| Gross Margin | $30,000 |
| Gross Margin % | 40% |
| Commission Rate | 15% |
| Commission | $4,500 |
Same sale price, but with discount:
| Scenario | Full Price | 20% Discount |
|---|---|---|
| Sale Price | $75,000 | $60,000 |
| COGS | $45,000 | $45,000 |
| Gross Margin | $30,000 | $15,000 |
| Commission (15% of GM) | $4,500 | $2,250 |
| Commission (10% of revenue) | $7,500 | $6,000 |
With gross margin commission, the salesperson loses 50% of their commission from the discount ($4,500 → $2,250). With revenue-based, they only lose 20% ($7,500 → $6,000). This creates a strong incentive to defend price.
A salesperson can choose between two products:
| Product | Price | COGS | Gross Margin | GM% | Commission (15%) |
|---|---|---|---|---|---|
| Product A | $15,000 | $10,500 | $4,500 | 30% | $675 |
| Product B | $12,000 | $6,000 | $6,000 | 50% | $900 |
Although Product A has a higher price, Product B provides higher commission. This incentivizes the salesperson to focus on high-margin products.
Commission is calculated exclusively on gross margin:
Combination of revenue-based and gross margin commission:
Commission rate varies with gross margin percentage:
| Gross Margin % | Commission Rate |
|---|---|
| Under 30% | 8% |
| 30-40% | 12% |
| 40-50% | 15% |
| Over 50% | 18% |
Only sales above a minimum margin trigger commission:
Decide which costs are included in COGS:
Integrate cost data with CRM and commission calculation:
Define target gross margin based on history:
Train salespeople on how the model works:
Ideal for:
Less suitable for:
Failing to include all relevant costs in COGS calculation leads to inflated margins and overpayment.
When salespeople can't see or verify margin data, trust in the compensation system erodes.
Some deals require discounts to compete. Build flexibility into your plan for strategic opportunities.
Moving from revenue-based to margin-based compensation overnight can cause significant pay disruption. Phase in gradually.
Gross margin commission is a powerful model for companies that want to align salesperson incentives with true profitability. By basing compensation on profit rather than revenue, you create a sales culture focused on value creation.
However, the model requires accurate data and transparent communication to function optimally. With the right systems in place, gross margin commission can transform your sales organization's focus from volume to profit.
Want to implement gross margin commission? Prowi makes it easy to calculate commission based on margin with automatic integration to your cost data. Book a demo to see how we can optimize your commission structure.