When it comes to retaining top sales talent, competitive sales compensation plans (or sales commission models) are key.
Commission models show your team that they’ll be rewarded for hard work and appreciated for the time they put into their roles. That way, they’re more likely to do their best to hit revenue targets and increase your bottom line.
In this article, you’ll learn about the different types of sales commission plans and how to create one that motivates and rewards your team.
Key takeaways for building sales compensation plans
A sales compensation plan defines how reps are paid, including base pay, commission and any rules tied to performance and targets.
A good sales compensation plan improves motivation, productivity and retention, while helping your business control costs and protect revenue.
Sales teams often combine different models, such as straight commission, tiered, residual or territory plans, depending on roles, sales cycles and targets.
Use Pipedrive to track deals and targets, so your compensation plans stay aligned with sales performance. Try it free.
What is a sales compensation plan?
A sales compensation plan outlines your employees’ base salary and the company’s commission and incentive program.
The commission sales structure should incentivize employees to reach their objectives and earn a deserved reward.
There are many types of compensation structures to choose from. As a sales leader, you should implement a plan that aligns best with your team’s specific needs.
Before we explore the best sales compensation models, you need to know why they matter.
Why are sales compensation plans important?
A sales compensation plan is a way to pay your team, but it also guides how they work, how they feel about their jobs and how much your business grows.
A strong plan gives structure to performance and rewards effort in a way that supports your business goals. Here are some benefits of sales commission plans:
Motivate reps to sell. When pay is tied to results, people work harder to hit sales targets. Rewarding performance helps reps focus on closing deals and improving their numbers.
Attract and retain quality talent. Top salespeople care about how they get paid. Offering a competitive compensation plan makes your company more appealing when hiring and improves retention.
Improve productivity. Sales teams with incentive plans often work more efficiently. According to Gallup research, companies with highly engaged employees see a 78% decrease in absenteeism and 18% higher sales productivity levels.
Protect your business financially. Plans that include clawbacks (more on this below) and accelerators make sure you are paying for results over activity. If a deal falls through or a target is missed, your costs stay in line with what the business earns.
An effective sales compensation plan helps your business get more from your sales team, which leads to better results overall.
Key sales compensation terms to know
Before choosing or building a sales compensation plan, it’s important to understand the basic terms that show up in most commission structures.
The concepts below will help you design a plan that’s fair and easy to understand.
Term | Definition |
Clawbacks | Provisions in a sales compensation plan that let a company take back a commission if a new customer churns before a set amount of time or a deal falls through. Clawbacks balance things for a business that depends on customer retention. |
Sales quotas | Targets a sales rep is expected to hit within a specific period, such as a month, quarter or year. Quotas usually focus on revenue, number of deals closed or a mix. Quotas define performance expectations and are often used to calculate commissions, bonuses and on-target earnings. |
On-target earnings (OTE) | Realistic goals for what a rep will earn if they perform well and achieve set sales objectives. A rep’s OTE is the sum of their base salary and commission earned from closed deals. OTEs should be a practical projection, so set realistic numbers when trying to attract or retain sales talent. |
Incentives and contests | Sales incentives and contests reward top performers. Companies often pay out incentives as a dollar amount, or more creative formats like dinners and excursions. |
Sales accelerators and decelerators | Rules that increase or decrease a rep’s commission rate based on their performance.
|
Types of sales compensation plans
Different sales compensation plans reward different behaviors.
The best structure for you depends on how your team sells, how long deals take to close and how predictable your revenue is.
Below are some common sales compensation plans and when each one makes sense. We’ve also included sales compensation plan examples for a more practical view.
Download Your Guide to Sales Performance Measurement
Base salary + commission
Base salary plus commission plans combine a fixed salary with variable pay based on performance.
Reps receive a guaranteed income each month, while still earning commissions for the deals they close. This performance-based structure balances financial stability with performance incentives and is the most common B2B and SaaS sales compensation plan.
It works well for long sales cycles, multi-stakeholder deals and roles that require ongoing pipeline management.
Example: A sales rep earns a base salary of $3,000 per month and a 10% commission on closed revenue. If they close $15,000 in sales in a month, they earn $1,500 in commission, bringing their total monthly earnings to $4,500.
Straight-line commission
Straight-line plans pay out a rep’s commission based on how much of their quota they sell, which means success depends on how hungry your team is to meet its quota milestones.
If a sales rep is continuously hitting 65%, they may be content with that amount. They might not feel incentivized to sell more, and it could be hard to push them without introducing an accelerator.
On the other hand, your team may be keen to hit 100% whenever they can.
Straight-line commission plans work best for teams selling straightforward products or services, where each rep has an individual quota and results are easy to track.
Example: If a rep has a quota of $10,000 in monthly sales and only sells $8,000, they would have made 80% quota attainment. Therefore, they’ll get paid 80% of their commissions.
Tiered commission
Once a sales rep hits a certain number of deals or revenue, a tiered commission plan moves them onto a higher commission rate.
The more deals they close, the more money they’ll earn. It’s one of the best plans to encourage top performers to keep selling because it incentivizes reps to sell beyond their quotas.
Tiered plans also encourage reps to push sales through strategies like upsells and cross-sells.
Example: Your sales rep currently earns a 9% commission on every sale they make up to $20,000 a month. Once they cross the $20,000 threshold, they earn an 11% commission on any deal they close.
Residual commission
Instead of one-time payments, reps continue to earn money from past sales with residual commission plans.
They act as a long-term bonus and can encourage salespeople to build stronger client relationships. The more that customer spends, the more money the rep makes.
Residual commission plans can be most effective for software-as-a-service (SaaS) companies where customers pay monthly or annually over a longer term.
Example: A rep sells a product worth $8,000 and gets a residual commission of 0.5% per month. For every month the customer remains subscribed, the rep gets $40.
Gross margin commission
Gross profit margin plans center around the sales performance of a company, where reps earn a commission on profit margins in a sale instead of the overall price of a product.
In other words, a full-priced sale will result in a higher commission over one closed with a heavy discount. Typically, startups and bootstrapped companies with limited liquidity use these plans.
Example: Your sales reps earn a 10% commission on their gross profit margins and two closed 10 deals each this month. One rep didn’t discount any, worth $1,000 each for total sales of $10,000, while the second discounted five by 20% for a total of $9,000. The commission paid to the first rep will be $1,000, while the second rep will earn $900.
Territory volume commission
Territory volume commission plans tie earnings to the sales volume within a specific geographic area.
Reps earn commissions based on how many products they sell within their assigned area or territory as a team.
It’s often used by larger enterprises that trade in multiple regions and can encourage healthy competition between teams.
Example: A manager sets a commission rate of 10% and a target of $100,000 in one location across a quarter. If three members of a team of five collectively hit that target, the commission is still split equally between the five.
5 Steps for setting up a sales commission plan
Sales compensation plans vary depending on your team’s structure, budget and company goals.
For example, one company might offer a low base salary with a hefty commission package. On the other hand, another may provide a mix of a medium-sized salary, competitive targets and sales career growth opportunities.
Here are five steps that will help you build a plan that best fits your organization.
1. Define goals and priorities
Before drawing up your team’s sales compensation plan design, clarify your goals and priorities.
You need to understand what you want to achieve so you know what your plan should include. Start by asking the following questions:
What is your current average sales commission?
What are your company’s sales goals and organizational goals?
How much revenue do your salespeople bring in and how does it impact your bottom line?
How much of your budget can you afford to allocate to compensation packages?
How much are your main competitors paying their reps and can you make a better offer?
What is the cost of living for in-house reps where your company is based?
Understanding these factors and team members’ expectations makes it easier to build attractive compensation packages to appeal to high-performing candidates and employees.
2. Decide on your target pay
Any compensation plan should start by looking at what the market is paying, as this will vary depending on your industry.
For SaaS teams, using SaaS sales compensation benchmarks can help you sanity-check base pay, commission mix and on-target earnings against similar companies and roles.
For example, in the US, the estimated base salary for a rep at a SaaS company is $81,617 per year, whereas an agricultural sales rep’s salary is $99,030.
Job review sites like Glassdoor, LinkedIn and similar platforms can give you an idea of the average sales rep salary based on your geographical area and industry.
Target pay for each role should also account for commissions. Once you’ve decided on a number, this will serve as the foundation of your compensation plan.
3. Decide on a pay mix
Are you going to use a straight salary or a base salary and tiered commission combination?
You should base your pay mix on what you expect your reps to achieve. For example, if you task salespeople with closing deals and building customer relationships, you may want to give them a base rate plus a residual commission to encourage after-sales service.
On the other hand, sales management might get a larger base salary due to their responsibilities and you could structure their commission based on overall company profits.
4. Choose your measurement methods
Measuring each rep’s success by tracking sales metrics will give you a more in-depth look at what’s working and what isn’t.
Start by choosing what key performance indicators (KPIs) you’ll measure and how they’ll affect your sales reps’ pay packages and sales commission.
Typical sales performance measures organizations use are:
Revenue from new business vs. revenue from existing customers
Average lifetime value (LTV) of a customer
Net Promoter Score (NPS)
Deals won vs. deals lost
Average deal size
Cost of selling vs. revenue earned
Market penetration
Revenue growth over time
You should also consider that different KPIs should be tracked and awarded to the correct employees. For example, a KPI like growth over time is better suited to a sales manager with more control over their own deals every quarter.
A CRM like Pipedrive can help you set benchmarks and automatically track performance metrics like the number of deals closed, company growth and LTV.
Use it to help you map out your sales cycle and customer journey to consistently hit revenue targets with less effort.
Pipedrive in action: UK marketing agency CreativeRace used Pipedrive to manage its sales team and track targets more clearly by separating lead generation and sales pipelines and using Insights to monitor performance.
With better visibility into deals and activities, managers could spot issues early, coach reps more effectively and keep everyone focused on hitting goals, helping the agency achieve 600% year-over-year growth in client acquisition.
5. Set targets for every sales position (not just the reps)
Positions like sales support, account managers, vice presidents (VPs) and field reps should all have individual compensation plans drawn up that fit their sales roles.
When creating the outline for each plan, try to include performance review periods, commission payout schedules and OTEs that distinguish each person’s role and responsibilities.
Try to set achievable targets and choose a goal around 70% of your sales professionals can either meet or exceed.
Doing so can help to ensure:
Reps are more likely to surpass targets and overachieve
Each team member maintains a good level of motivation by continuously hitting their goals
Pro tip: Balance fair, achievable targets with numbers that still healthily challenge and motivate your reps to hit personal development and revenue goals.
If it better fits your business model, you might use an activity-based selling structure instead and tie commission to the number of activities completed rather than the number of sales made.
Communicating your sales compensation plan with sales reps
Avoid new compensation plans meeting resistance by spending time explaining to your team how they’ll work.
Steve Marley from ZS Associates says sales organizations spend an uneven amount of time developing commission plans instead of focusing on how they’ll be rolled out. Marley explains:
To ensure your whole team is on the same page, you should start introducing your compensation plans during the evaluation process.
A top sales compensation best practice is to communicate your new plan with transparency through three key stages.
Stage 1: Kick off communication as a group
Start by gathering your sales team and letting them know you’re reviewing commission and compensation plans.
If your team is remote and spread out geographically, you can hold a video call.
Try to make sure everyone, including your VP of Sales and new hires, is present and involved in the discussions.
When the meeting wraps, send everyone on the team a copy of the outcomes so they can refer back when they need a reminder of how their new sales commission and compensation package will work.
Stage 2: Distribute your new revenue commission documents and speak with each team member
After the meeting, check in with your sales representatives about any more questions about their compensation plans.
If you manage a sales team, approach each rep individually to ensure they feel heard. Allow them to talk about any quotas or targets in place and ask for their thoughts on the new compensation plan.
These individual meetings will help your senior sales team determine which commission your reps will be happy with and which could rock the boat.
Try to give each person the new compensation plan as a complete document to review. It’s a significant change, so make sure your reps have sufficient time (two weeks or so) to sign off on it.
By the end of two weeks, your employees should clearly understand what they have to do and what they’ll receive.
Stage 3: Monitor your sales commission agreement
Your senior management team should manage and measure the new commission plan’s introduction to make sure it’s effective.
Each plan will have incentive payments built into it, as well as expectations of how much a rep needs to sell and who they will be reporting to – this can be a lot of information for people to get their heads around initially.
Your management team can use these expectations to coach reps to perform better. If people are consistently missing their quota, take the opportunity to check in and see how you can help support them and fix it.
Sales compensation management can eventually optimize performance, especially when earning potential is laid out clearly and effectively from the beginning.
Final thoughts
The backbone of every successful sales team is happy, motivated salespeople.
Developing sales compensation strategies takes hard work, careful planning and constant monitoring and tweaking, but it can pay off greatly.
However, no sales commission plan is perfect and your company will likely change its business objectives over time.
Ready to put your sales compensation plan into action? Try Pipedrive free to track deals and measure performance to keep your comp plans aligned with goals.
