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In recent years, achieving sales targets has become increasingly challenging for sales teams due to several factors, including:
Growing competition across almost all industries.
Market turbulence and economic uncertainty.
Lengthened customer buying journeys.
Fluctuations in demand.
Greater difficulties in lead generation.
To overcome these obstacles, companies must focus on improving their sales team’s performance. An effective sales compensation plan plays a crucial role in achieving this, as it directly impacts overall sales performance and helps motivate sales reps to excel.
After all, who would want to work for a company with an unclear sales compensation structure, where they don’t understand what they can earn by hitting their sales targets?
Compensation-related issues can significantly affect retention. According to Salesforce's State of Sales Report, the number one reason sales reps leave their roles is unrealistic sales targets, followed closely by uncompetitive pay and benefits. Similarly, the Sales Happiness Index found that 31% of sales professionals cited the lack of bonuses as a key reason for quitting, while 43% pointed to insufficient benefits.
However, sales comp plans cannot exist in isolation. They must align with the company’s overall business objectives and sales strategy. A good sales compensation plan should drive sales performance, inspire team performance, help achieve revenue targets, and support other strategic goals.
For sales managers and revenue leaders, the challenge lies in designing a sales compensation plan structure that delivers measurable, positive outcomes. Unfortunately, many companies continue to make avoidable mistakes when crafting their compensation plans, leading to misalignment and reduced effectiveness.
In this article, we’ll explore the critical aspects of creating effective sales compensation plans, analyze real-world examples, and provide best practices to help you design attractive sales compensation plans that work.
What is Sales Compensation?
Sales compensation refers to the monetary and non-monetary rewards given to sales professionals in exchange for their performance and contributions to achieving an organization’s sales goals. It includes a combination of fixed pay (such as a base salary) and variable pay (such as commissions, bonuses, or incentives) that are typically tied to individual or team performance metrics. Sales compensation is designed to motivate, reward, and retain sales talent while aligning their efforts with the organization’s overall revenue and growth objectives.
What are Sales Compensation Plans?
A sales compensation plan is a structured framework that outlines how a company will compensate its sales team. It defines the components of sales compensation, including base salary, commissions, bonuses, incentives, and benefits, and specifies the rules, conditions, and performance metrics that govern payouts. A well-designed sales compensation plan balances fairness, transparency, and motivation, ensuring that sales professionals are rewarded for achieving specific objectives, such as meeting sales quotas, acquiring new customers, or upselling existing accounts.
An effective sales compensation plan aligns the sales team's efforts with the company’s strategic goals, drives desired behaviors, and provides a clear understanding of how performance impacts earnings.
Why is Effective Sales Compensation Important?
You can’t underestimate the importance of effective sales comp plans, and here we will discuss the top reasons why you should design sales compensation carefully.
Key reasons why effective sales compensation matters:
1. Drives sales performance
An effective sales compensation plan motivates sales reps to achieve their sales targets, directly influencing the sales team’s performance and helping companies hit their revenue targets. A well-designed plan aligns individual efforts with business objectives, ensuring every deal contributes to overall success.
2. Retains top talent
Clear and competitive compensation plans attract and retain skilled sales professionals. Unclear compensation structures or uncompetitive pay lead to high turnover, with many sales reps leaving due to unrealistic sales quotas or insufficient benefits.
3. Aligns sales efforts with business goals
A good sales compensation plan ensures that the sales team’s actions are tied to the company’s business goals. It incentivizes behaviors that close deals, improve team performance, and contribute to long-term growth.
4. Motivates and engages sales teams
The right mix of base salary, commissions, and bonuses motivates sales representatives to exceed expectations. Tools like on-target earnings and profit-sharing help motivate sales reps while fostering a results-driven culture.
5. Adapts to market challenges
A flexible sales compensation plan structure helps sales leaders respond to market changes, fluctuating demand, and shifts in the sales cycle, ensuring the sales organization stays competitive.
6. Improves sales strategy execution
By aligning with the company’s sales compensation strategy, the plan encourages sales teams to focus on high-priority deals and meet strategic objectives like achieving higher total sales or entering new markets.
An attractive sales compensation plan is essential for driving productivity, reducing turnover, and achieving positive business outcomes.
Setting Realistic Sales Targets
Before moving forward, it’s important to highlight that sales compensation plans will not yield results unless you set attainable sales targets.
As mentioned earlier, unrealistic sales goals are among the top reasons why sales representatives leave their roles.
What’s the point of designing the best sales compensation plan in the world if your sales quotas are unattainable, setting sales reps up for failure from the start?
Reasonable sales goals and effective sales comp plans work hand-in-hand to drive maximum results.
What to consider when setting sales targets
When setting realistic and attainable sales targets, sales leaders should take the following factors into account:
Current sales forecasts
Leverage data from the existing pipeline, historical sales performance, and on-target earnings to set achievable goals.
Market trends and sentiments
Stay informed about shifts in your industry, competitor activities, and economic conditions that might impact total sales or customer behavior.
Potential demand volume
Analyze demand forecasts based on market research, seasonal patterns, and customer buying journeys.
Territory potential
Assess the opportunities within each territory, including customer density, purchasing power, and any limitations that may impact results.
Budgets and resources
Ensure the sales team has the necessary resources—marketing support, travel budgets, and training programs—to achieve their targets effectively.
Tools and sales enablement programs
Equip your team with the right tools, such as CRM systems and analytics platforms, to streamline processes and provide actionable insights.
Sales process improvements
Continuously refine your sales processes to remove friction points, enabling sales reps to focus on closing deals and building customer relationships.
Team capacity and workload
Factor in the size of your sales team, their capacity, and individual skill levels to avoid overburdening your sales reps or stretching resources too thin.
Past performance trends
Identify patterns in past performance to ensure goals are challenging yet realistic based on historical data.
Why this matters
Even if you pay high commissions, unrealistic sales targets can lead to decreased team morale, burnout, and ultimately, declined sales performance. Setting attainable goals that align with a strong sales compensation plan ensures your sales reps feel motivated and empowered to succeed.
Key Terms in Sales Compensation Plans
Let’s define the key terms we’ll use in our further discussion.
Sales quota
A sales quota is a specific sales target that a sales rep or sales team is required to achieve within a defined time frame, such as a month, quarter, or year. For example, if a sales representative has a quota of $120,000 in sales for a quarter, they need to generate enough revenue from selling products or services to meet or exceed that goal. Attainable sales quotas are critical for maintaining team morale and ensuring an effective sales compensation plan.
On-target earnings (OTE)
On-target earnings (OTE) represent the total compensation a salesperson can expect to earn if they achieve their sales targets. OTE combines a base salary with potential commissions and bonuses. For instance, if a sales role offers an OTE of $80,000 per year, the salesperson can anticipate earning this amount if they consistently meet their goals. OTE is a critical component of an attractive sales compensation plan for top-performing sales professionals.
Sales accelerators
Sales accelerators are performance-based incentives that increase a salesperson’s commission rate after they exceed their sales quota. For instance, if a sales rep typically earns a 6% commission on all sales, they might see their rate increase to 8% for any sales made after surpassing their quota by 15%. Accelerators are a powerful tool to motivate sales reps and drive high performance within the sales team.
Sales decelerators
Sales decelerators work in the opposite way, reducing commission rates for salespeople who fail to meet their minimum quotas. For example, if a sales representative achieves only 70% of their sales target, their commission rate might decrease from 6% to 4% on those sales. While controversial, decelerators are sometimes used in sales manager compensation plans to emphasize accountability.
Clawbacks
Clawbacks refer to situations where a salesperson must return part of their earned commission due to certain conditions, such as cancellations or product returns. For example, if a sales representative earns a commission for closing a deal but the customer cancels their subscription within 60 days, the company might deduct that commission from the rep’s future earnings. Clawbacks ensure fairness in the sales compensation program by tying earnings to sustainable results.
Sales performance incentive fund (SPIF) or Sales Contests
A SPIF is a short-term incentive designed to boost sales performance and motivate sales reps to focus on specific goals. For example, a company might run a contest offering a $600 bonus to the first three sales reps who sell 50 units of a new product within a month. These programs create excitement and competition, driving immediate results.
Commission vs Bonus
Some people use the terms commissions and bonuses interchangeably, but these represent two distinct methods of rewarding sales reps.
While commissions are almost always an integral part of sales compensation programs, bonuses are not mandatory and are often used as supplementary incentives.
Let’s delve into the differences between these two types of rewards:
1. Commission
A commission is a variable payment based on the amount of sales made, typically calculated as a percentage. For example, a 7% commission on a $2,000 deal would result in $140. Commissions are directly tied to sales performance and encourage sales representatives to achieve higher sales targets.
2. Bonus
A bonus is a fixed reward for achieving specific goals, often unrelated to the total sales value. For instance:
A Sales Representative might receive a $300 bonus for successfully onboarding 15 new customers within a month.
A Senior Account Executive could earn a bonus for coaching and mentoring new sales reps, paid upon the successful completion of the onboarding period by the new hires.
The key difference between commissions and bonuses lies in their structure: while commissions are variable and directly tied to sales results, bonuses are fixed amounts assigned to accomplishing specific, often short-term, objectives.
Both commissions and bonuses play important roles in an effective sales compensation plan structure, contributing to a well-rounded strategy that motivates sales teams and aligns their efforts with company goals.
Sales Compensation Plan Structure
The following example illustrates an advanced sales compensation plan structure.
Mandatory components of the plan are marked in green, while optional elements are highlighted in yellow.
Before designing your specific sales compensation plan, ensure that all components align with the ultimate goal: motivating sales teams to improve performance and achieve their sales targets.
Base salary
Description
The fixed portion of the compensation plan, providing financial stability to sales reps. Usually accounts for 50-70% of on-target earnings.
Example
$50,000 annual base salary for a sales
Commission
Description
A variable payment tied directly to the sales made by the sales rep, often calculated as a percentage of revenue or deal value.
Example
6% commission on all sales revenue; e.g., $144 commission on a $2,400 deal.
Bonuses
Description
Fixed rewards given for achieving specific goals, such as closing a certain number of deals or mentoring new hires.
Example
$300 bonus for onboarding 10 new customers within a month.
Accelerators
Description
Higher commission rates applied when sales reps exceed their sales quotas, motivating overachievement.
Example
Commission rate increases from 6% to 8% for sales exceeding $100,000 in a quarter.
Decelerators
Description
Reduced commission rates for sales reps who fail to meet minimum quotas, emphasizing accountability.
Example
Commission rate decreases from 6% to 4% for sales below 70% of the quota.
SPIF (Sales Performance Incentive Fund)
Description
Short-term incentives designed to boost sales performance.
Example
$500 bonus for the top 3 sales reps selling 20 units of a new product.
Clawbacks
Description
Mechanisms to recover commissions if deals fall through, such as when customers cancel orders.
Example
Rep returns a $200 commission for a deal canceled within 30 days.
Pursue simplicity. The simpler and clearer a sales commission plan is, the more effectively it motivates and engages sales teams.
Examples of Sales Compensation Plans
In this chapter, we will explore examples of all types of sales compensation plans. For certain types, we will include role-specific examples to provide additional clarity.
1 . Base salary + commission compensation plan
Overview
The base salary + commission compensation plan is one of the most commonly used structures in sales compensation programs, particularly in B2B sales. It combines a fixed base salary with a variable commission structure, offering the best of both stability and performance-based incentives.
Advantages
Financial stability: The base salary ensures income during slower periods.
Performance motivation: Commissions drive sales reps to achieve and exceed their sales targets.
Talent retention: Attractive to top sales professionals, rewarding both consistency and excellence.
Flexibility: Easily enhanced with accelerators or SPIFs to encourage specific behaviors.
Disadvantages
Complexity: More challenging to design compared to simpler compensation plans.
Short-term focus: May encourage closing deals over building long-term customer relationships.
Cost Risks: Balancing high commissions with fixed base salary costs can strain budgets
Best applications
B2B sales with high margins: Suitable where commissions align with high-value deals.
Roles with long sales cycles: Offers income security while pursuing lengthy deals.
Revenue-centric roles: Ideal for Account Executives
Why it’s popular
Balanced incentives: Combines stability with performance-driven rewards.
Scalability: Easily adjusted with tiered commissions or additional incentives.
Goal alignment: Drives sales team performance while achieving revenue targets.
Role-based examples
Account Executive (AE) compensation plan example
Base Salary: $60,000 annually
Commission Structure: 7% of closed-won deals
Quota: $1,000,000 in annual revenue
Total Commission: $1,000,000 x 5% = $70,000.00
Total OTE: $60,000 + $70,000 = $130,000.00
Sales Development Representative (SDR) compensation plan example
Base Salary: $45,000 annually
Commission Structure: $100 for each qualified opportunity
Quota: 240 annually
Total Commission: $100 x 240 = $24,000
Total OTE: $45,000 + $24,000 = $69,000
Sales Manager compensation plan example
Base Salary: $90,000 annually
Commission Structure: 5% of total team revenue exceeding $2M annually
Quota: 4,000,000 in annual revenue
Total Commission: (4,000,000 - 2,000,000) x 5% = 100,000
Total OTE: $90,000 + $100,000 = $190,000
VP of Sales compensation plan examples
Base Salary: $120,000 annually
Commission Structure: 2% of total team revenue exceeding $4M annually
Quota: 10,000,000 in annual revenue
Total Commission: ($10,000,000 - $4,000,000) x 2% = $120,000
Total OTE: $120,000 + $120,000 = $240,000
2. Tired Commission Compensation Plan
Overview
A relative commission plan, often called a tiered commission structure, assigns different commission percentages based on whether the sales rep is below, at, or above their sales quota. This model encourages sales representatives to achieve and exceed their targets by offering progressively higher rewards for surpassing specific thresholds.
Advantages
Motivates overachievement: By increasing the commission rate once quotas are met, it strongly incentivizes sales reps to exceed their goals.
Performance-driven: Aligns earnings with both individual sales performance and company business objectives.
Fair and scalable: Provides a proportional reward system that scales with effort and results.
Drives Quota Attainment: Ensures sales quotas are a primary focus for sales teams, balancing individual success with company needs.
Disadvantages
Complexity: Can be more difficult to administer and communicate compared to flat commission structures.
Risk of sandbagging: Reps may delay closing deals to benefit from higher commission rates in the next period.
Unpredictable payouts: Earnings can vary significantly based on quota achievement, which might deter some sales representatives.
When to apply
Quota-Driven Roles: Ideal for roles like Account Executives, where sales quotas play a significant part in the compensation strategy.
Longer Sales Cycles: Suitable in B2B sales where deals take time to close, and exceeding targets is critical to success.
High-Margin Sales: Effective in industries with larger profit margins, where higher commissions for overachievement are financially feasible.
Base Salary: $60,000
Quota: $500,000 in annual revenue
Commission Below Quota: 5% of revenue up to $500,000
Commission Above Quota: 8% of revenue above $500,000
Projected Revenue: $600,000 annually
Total Commission: ($500,000 × 5%) + ($100,000 × 8%) = $33,000
Total OTE: $60,000 + $33,000 + $5,000 = $98,000
3. Comprehensive Sales Compensation Plan
Overview
A comprehensive sales compensation plan combines multiple elements—base salary, commission, bonuses, accelerators, decelerators, and SPIFs (Sales Performance Incentive Funds)—to create a versatile and performance-driven structure. This plan aligns sales reps’ performance with company business objectives, motivating both consistent results and exceptional achievement.
Advantages
Balanced incentives: Combines financial stability (via base salary) with motivation to exceed sales targets (via commissions and accelerators).
Customizable: Adapts to different sales roles, industries, and sales cycles, making it suitable for complex sales organizations.
Drives strategic goals: Includes bonuses and SPIFs to align sales efforts with specific business objectives, like promoting new products or boosting team collaboration.
Encourages accountability: Decelerators hold reps accountable for underperformance, fostering a culture of responsibility.
Maximizes performance: The layered structure ensures that high performers are rewarded, encouraging overachievement.
Disadvantages
Complexity: Requires meticulous planning and administration, which can lead to confusion among sales reps if not communicated clearly.
Potential for demotivation: Decelerators may discourage underperforming reps, especially in challenging markets.
Cost management: With multiple components, this plan can be expensive for companies, particularly if poorly designed.
When it’s applicable
High-Value B2B Sales: Best for industries with longer sales cycles and high-margin deals, such as SaaS or enterprise sales.
Diverse Sales Teams: Works well in organizations with varied roles and responsibilities, ensuring all contributions are rewarded.
Growth-Focused Companies: Ideal for businesses aiming to incentivize overachievement, launch new products, or drive team collaboration.
Example for an Account Executive
This comprehensive sales compensation plan ensures that sales reps are rewarded for every aspect of their performance, from achieving quotas to exceeding them and focusing on strategic initiatives. While it requires careful design and communication, it is an excellent choice for sales organizations that value both individual contributions and team alignment with business goals.
Base Salary: $70,000 annually
Commission Structure: 8% of revenue up to $500,000; 12% on revenue above $500,000
Quota: $600,000 in annual revenue
Accelerators: 15% commission for sales exceeding $750,000 annually
Decelerators: 5% commission on revenue if under 70% of quota ($420,000)
SPIFs: $1,000 bonus for every 10 subscriptions of a new product sold
Bonuses: $10,000 for achieving 120% of annual quota
Projected Revenue: $800,000 annually
Total Commission: ($500,000 × 8%) + ($300,000 × 12%) = $74,000
Total SPIFs: $2,000 (for 20 subscriptions sold of a new product)
Total OTE: $70,000 (base) + $74,000 (commission) + $2,000 (SPIFs) + $10,000 (bonuses) = $156,000
Example for Sales Development Representative
This comprehensive plan ensures SDRs are rewarded for achieving and exceeding their sales targets, while also contributing to broader sales team performance and company success
Base Salary: $50,000 annually
Commission Structure: $100 for each qualified opportunity generated
Quota: 20 qualified opportunities per month
Accelerators: $150 per opportunity above 25 in a month
Decelerators: $75 per opportunity if fewer than 10 are generated in a month
SPIFs: $1500 bonus for generating 10 qualified opportunities for a specific new product line within a quarter
Bonuses: $2,000 quarterly for achieving 120% of monthly quota across all three months
Projected Opportunities: 20 qualified opportunities per month (240 annually)
Total Commission: (240 × $100) + (20 × $150 for overachievement) = $27,000
Total SPIFs: $1500 (for special product line opportunities)
Total OTE: $50,000 (base) + $27,000 (commission) + $1500 (SPIFs) + $6,000 (quarterly bonuses) = $84,500
4. Margin-Based Sales Compensation Plan
Overview
A margin-based compensation plan ties an Account Executive’s (AE) commission to the profit margin of the deals they close, rather than just the total revenue. This structure incentivizes sales reps to focus on deals that are both high-value and profitable, aligning their efforts with company business objectives.
Advantages
Encourages profitability: Aligns the sales team’s performance with company goals by prioritizing deals with higher profit margins, not just revenue.
Quality over quantity: Discourages selling at heavy discounts or low margins, ensuring sustainable business growth.
Tailored incentives: Motivates sales representatives to negotiate effectively and sell premium products or services.
Aligns with business goals: Perfect for companies with tight margins or a focus on premium offerings.
Disadvantages
Complex to administer: Requires detailed tracking of deal margins, which can complicate sales comp plans.
Risk of demotivation: If margins are heavily dependent on external factors (e.g., market pricing), sales reps may feel they have limited control over their earnings.
Focus shift: Could lead to sales reps avoiding lower-margin deals that might still be strategically important (e.g., entry into new accounts).
Where it’s applicable
Low-margin businesses: Common in industries like wholesale, distribution, and retail, where margins are slim and profitability is paramount.
Cost-sensitive markets: Effective in industries with fluctuating costs, such as food and beverage, logistics, or manufacturing.
Customized solutions: Works well in businesses with significant cost variability between deals, such as IT services or construction.
Example for an Account Executive
Base Salary: $55,000 annually
Commission Structure: 8% of profit margin per deal (Revenue - COGS)
Quota: $800,000 in annual revenue
Projected Revenue: $800,000 annually
Projected Margin: 30% average margin (COGS is $560,000 for $800,000 revenue)
Total Commission (Example): ($800,000 - $560,000) × 8% = $19,200
Total OTE: $55,000 (base) + $19,200 (commission) = $74,200
This simplified plan provides a base salary for financial stability and a margin-tied commission structure to incentivize profitable deals. It’s straightforward, making it ideal for businesses seeking simplicity while prioritizing profitability.
5. Salary-Only Compensation Plan
When it’s applied
Non-revenue-generating roles: Ideal for positions that provide critical operational support but do not directly impact revenue generation.
Focus on system optimization: Used for roles dedicated to maintaining tools and systems, like CRM platforms, which are vital for the sales team but not directly tied to deal closures.
Example
Role: CRM Administrator.
Ensures the CRM system is properly maintained, manages user access, resolves technical issues, and creates reports to help sales managers and sales reps track their performance and quotas.
Compensation: $60,000 annual salary with no variable pay, as the focus is on ensuring the sales organization operates efficiently rather than generating revenue.
6. Commission-Only Compensation Plan
A commission-only compensation plan works best for roles involving simple, short sales cycles and straightforward products or services. The focus is on high-volume sales rather than complex deal-making.
When it’s applied
Simple and short sales cycles: Ideal for roles involving products or services that are easy to sell and require minimal customer education.
High-volume sales: Works in environments where the focus is on making as many sales as possible, like telesales or retail.
Low Investment required: Suitable for roles where the sales rep doesn’t need to spend significant time or resources nurturing leads or closing deals.
Example
Role: telesales representative.
Responsible for selling low-cost subscriptions for an online magazine. The role involves making outbound calls to prospective customers and closing deals quickly.
Compensation:
10% commission on each subscription sold.
For example, selling 100 subscriptions at $50 each in a month generates $500 in commissions (100 × $50 × 10%).
No base salary is provided, as earnings are entirely performance-based.
Advantages
Highly motivational: Encourages sales reps to maximize effort and sales volume, as income is directly tied to performance.
Low risk for employers: No fixed costs for hiring; businesses only pay when sales are made.
Scalable for high-volume sales: Works well in environments like call centers, where high-volume sales drive results.
Disadvantages
Income uncertainty for Sales Reps: Reps might struggle during slow periods, leading to high turnover.
Limited fit for complex sales: Not suitable for roles requiring customer education, relationship-building, or long sales cycles.
Potential for high pressure: Reps may feel pressured to prioritize quantity over quality, which could harm customer relationships.
7 Steps to Create Compensation Plans
Designing an effective sales compensation plan requires strategic planning and alignment with your company’s business objectives. Follow these seven steps to create a sales comp plan that motivates your sales team, drives performance, and achieves revenue goals.
1. Define your sales strategy
Start by outlining your sales strategy and identifying key priorities, such as revenue growth, market expansion, or customer retention.
Align the sales comp plan with the specific objectives you want to achieve.
Example: If you’re focusing on upselling, emphasize bonuses for recurring revenue.
2. Identify the types of sales compensation
Choose the types of sales compensation that fit your strategy. Common options include:
Base Salary + Commission: A balanced approach for most sales roles.
Commission-Only Plans: Ideal for simple, high-volume sales.
Margin-Based Plans: Great for roles focused on profitable deals.
Team-Based Incentives: Effective for promoting collaboration within the sales team.
3. Set realistic sales goals
Establish attainable quotas that align with individual, team, and company objectives.
Use historical performance data, market trends, and pipeline forecasts to define these goals.
Ensure the goals are challenging yet achievable to prevent demotivation.
4. Design the commission structure
Build a commission structure that rewards performance fairly and motivates sales representatives to exceed expectations:
Include accelerators for overachievement (e.g., higher commission rates for surpassing quota).
Add decelerators to address underperformance (e.g., reduced commission rates below a certain threshold).
Example: A sales manager compensation plan might offer a 5% override on team revenue exceeding $1M quarterly.
5. Incorporate bonuses and incentives
Add targeted bonuses and incentives to your sales comp plan to promote specific behaviors, such as:
SPIFs (Sales Performance Incentive Funds): Short-term rewards for focusing on new product launches.
Team bonuses: Incentives for achieving group milestones, and fostering collaboration.
6. Test and communicate the plan
Before rolling out the plan, test it with historical sales data to ensure payouts align with company profitability.
Clearly communicate the sales compensation plan to the team, explaining each component (e.g., commission structure, quotas, bonuses).
Use simple terms and provide examples to avoid confusion.
7. Monitor and adjust the plan
Continuously monitor the plan’s effectiveness by tracking key metrics like:
Quota attainment rates.
Total compensation costs versus revenue.
Sales team performance.
Gather feedback from sales managers and sales representatives to identify areas for improvement. Adjust the compensation plan annually or as business priorities shift.
Bonus: Actionable tips
To ensure your sales comp plans remain effective and aligned with your business goals, follow these actionable tips:
Focus on simplicity: A straightforward sales compensation plan is easier for sales reps to understand and motivates better performance. Avoid overly complex commission structures that may cause confusion.
Review plans annually: Reassess your sales comp plan at least once a year to ensure it aligns with changing business priorities, market conditions, and the effectiveness of different types of sales compensation.
Incorporate feedback: Engage your sales team and sales managers to gather input on what’s working and what isn’t. Adjust your compensation plan based on real-world insights.
Tie plans to business goals: Ensure your sales manager compensation plan and sales rep compensation plans align with overarching company objectives, such as revenue growth or customer retention.
Provide clear communication: Explain each component of your sales comp plan, including commission structures, quotas, and bonuses, so everyone understands how they can maximize their earnings.
Adapt for roles: Tailor your compensation plans to specific roles. For example, create different types of sales compensation for Account Executives, SDRs, and sales managers, depending on their responsibilities.
Reward overachievement: Use accelerators or tiered commission structures to motivate top performers to exceed their goals.
Monitor key metrics: Regularly track performance metrics, such as quota attainment and total compensation costs, to measure the effectiveness of your sales compensation plans.
By implementing these tips, you can design sales comp plans that drive results, motivate your team, and contribute to long-term success. Let me know if you'd like any additional refinements!
In recent years, achieving sales targets has become increasingly challenging for sales teams due to several factors, including:
Growing competition across almost all industries.
Market turbulence and economic uncertainty.
Lengthened customer buying journeys.
Fluctuations in demand.
Greater difficulties in lead generation.
To overcome these obstacles, companies must focus on improving their sales team’s performance. An effective sales compensation plan plays a crucial role in achieving this, as it directly impacts overall sales performance and helps motivate sales reps to excel.
After all, who would want to work for a company with an unclear sales compensation structure, where they don’t understand what they can earn by hitting their sales targets?
Compensation-related issues can significantly affect retention. According to Salesforce's State of Sales Report, the number one reason sales reps leave their roles is unrealistic sales targets, followed closely by uncompetitive pay and benefits. Similarly, the Sales Happiness Index found that 31% of sales professionals cited the lack of bonuses as a key reason for quitting, while 43% pointed to insufficient benefits.
However, sales comp plans cannot exist in isolation. They must align with the company’s overall business objectives and sales strategy. A good sales compensation plan should drive sales performance, inspire team performance, help achieve revenue targets, and support other strategic goals.
For sales managers and revenue leaders, the challenge lies in designing a sales compensation plan structure that delivers measurable, positive outcomes. Unfortunately, many companies continue to make avoidable mistakes when crafting their compensation plans, leading to misalignment and reduced effectiveness.
In this article, we’ll explore the critical aspects of creating effective sales compensation plans, analyze real-world examples, and provide best practices to help you design attractive sales compensation plans that work.
What is Sales Compensation?
Sales compensation refers to the monetary and non-monetary rewards given to sales professionals in exchange for their performance and contributions to achieving an organization’s sales goals. It includes a combination of fixed pay (such as a base salary) and variable pay (such as commissions, bonuses, or incentives) that are typically tied to individual or team performance metrics. Sales compensation is designed to motivate, reward, and retain sales talent while aligning their efforts with the organization’s overall revenue and growth objectives.
What are Sales Compensation Plans?
A sales compensation plan is a structured framework that outlines how a company will compensate its sales team. It defines the components of sales compensation, including base salary, commissions, bonuses, incentives, and benefits, and specifies the rules, conditions, and performance metrics that govern payouts. A well-designed sales compensation plan balances fairness, transparency, and motivation, ensuring that sales professionals are rewarded for achieving specific objectives, such as meeting sales quotas, acquiring new customers, or upselling existing accounts.
An effective sales compensation plan aligns the sales team's efforts with the company’s strategic goals, drives desired behaviors, and provides a clear understanding of how performance impacts earnings.
Why is Effective Sales Compensation Important?
You can’t underestimate the importance of effective sales comp plans, and here we will discuss the top reasons why you should design sales compensation carefully.
Key reasons why effective sales compensation matters:
1. Drives sales performance
An effective sales compensation plan motivates sales reps to achieve their sales targets, directly influencing the sales team’s performance and helping companies hit their revenue targets. A well-designed plan aligns individual efforts with business objectives, ensuring every deal contributes to overall success.
2. Retains top talent
Clear and competitive compensation plans attract and retain skilled sales professionals. Unclear compensation structures or uncompetitive pay lead to high turnover, with many sales reps leaving due to unrealistic sales quotas or insufficient benefits.
3. Aligns sales efforts with business goals
A good sales compensation plan ensures that the sales team’s actions are tied to the company’s business goals. It incentivizes behaviors that close deals, improve team performance, and contribute to long-term growth.
4. Motivates and engages sales teams
The right mix of base salary, commissions, and bonuses motivates sales representatives to exceed expectations. Tools like on-target earnings and profit-sharing help motivate sales reps while fostering a results-driven culture.
5. Adapts to market challenges
A flexible sales compensation plan structure helps sales leaders respond to market changes, fluctuating demand, and shifts in the sales cycle, ensuring the sales organization stays competitive.
6. Improves sales strategy execution
By aligning with the company’s sales compensation strategy, the plan encourages sales teams to focus on high-priority deals and meet strategic objectives like achieving higher total sales or entering new markets.
An attractive sales compensation plan is essential for driving productivity, reducing turnover, and achieving positive business outcomes.
Setting Realistic Sales Targets
Before moving forward, it’s important to highlight that sales compensation plans will not yield results unless you set attainable sales targets.
As mentioned earlier, unrealistic sales goals are among the top reasons why sales representatives leave their roles.
What’s the point of designing the best sales compensation plan in the world if your sales quotas are unattainable, setting sales reps up for failure from the start?
Reasonable sales goals and effective sales comp plans work hand-in-hand to drive maximum results.
What to consider when setting sales targets
When setting realistic and attainable sales targets, sales leaders should take the following factors into account:
Current sales forecasts
Leverage data from the existing pipeline, historical sales performance, and on-target earnings to set achievable goals.
Market trends and sentiments
Stay informed about shifts in your industry, competitor activities, and economic conditions that might impact total sales or customer behavior.
Potential demand volume
Analyze demand forecasts based on market research, seasonal patterns, and customer buying journeys.
Territory potential
Assess the opportunities within each territory, including customer density, purchasing power, and any limitations that may impact results.
Budgets and resources
Ensure the sales team has the necessary resources—marketing support, travel budgets, and training programs—to achieve their targets effectively.
Tools and sales enablement programs
Equip your team with the right tools, such as CRM systems and analytics platforms, to streamline processes and provide actionable insights.
Sales process improvements
Continuously refine your sales processes to remove friction points, enabling sales reps to focus on closing deals and building customer relationships.
Team capacity and workload
Factor in the size of your sales team, their capacity, and individual skill levels to avoid overburdening your sales reps or stretching resources too thin.
Past performance trends
Identify patterns in past performance to ensure goals are challenging yet realistic based on historical data.
Why this matters
Even if you pay high commissions, unrealistic sales targets can lead to decreased team morale, burnout, and ultimately, declined sales performance. Setting attainable goals that align with a strong sales compensation plan ensures your sales reps feel motivated and empowered to succeed.
Key Terms in Sales Compensation Plans
Let’s define the key terms we’ll use in our further discussion.
Sales quota
A sales quota is a specific sales target that a sales rep or sales team is required to achieve within a defined time frame, such as a month, quarter, or year. For example, if a sales representative has a quota of $120,000 in sales for a quarter, they need to generate enough revenue from selling products or services to meet or exceed that goal. Attainable sales quotas are critical for maintaining team morale and ensuring an effective sales compensation plan.
On-target earnings (OTE)
On-target earnings (OTE) represent the total compensation a salesperson can expect to earn if they achieve their sales targets. OTE combines a base salary with potential commissions and bonuses. For instance, if a sales role offers an OTE of $80,000 per year, the salesperson can anticipate earning this amount if they consistently meet their goals. OTE is a critical component of an attractive sales compensation plan for top-performing sales professionals.
Sales accelerators
Sales accelerators are performance-based incentives that increase a salesperson’s commission rate after they exceed their sales quota. For instance, if a sales rep typically earns a 6% commission on all sales, they might see their rate increase to 8% for any sales made after surpassing their quota by 15%. Accelerators are a powerful tool to motivate sales reps and drive high performance within the sales team.
Sales decelerators
Sales decelerators work in the opposite way, reducing commission rates for salespeople who fail to meet their minimum quotas. For example, if a sales representative achieves only 70% of their sales target, their commission rate might decrease from 6% to 4% on those sales. While controversial, decelerators are sometimes used in sales manager compensation plans to emphasize accountability.
Clawbacks
Clawbacks refer to situations where a salesperson must return part of their earned commission due to certain conditions, such as cancellations or product returns. For example, if a sales representative earns a commission for closing a deal but the customer cancels their subscription within 60 days, the company might deduct that commission from the rep’s future earnings. Clawbacks ensure fairness in the sales compensation program by tying earnings to sustainable results.
Sales performance incentive fund (SPIF) or Sales Contests
A SPIF is a short-term incentive designed to boost sales performance and motivate sales reps to focus on specific goals. For example, a company might run a contest offering a $600 bonus to the first three sales reps who sell 50 units of a new product within a month. These programs create excitement and competition, driving immediate results.
Commission vs Bonus
Some people use the terms commissions and bonuses interchangeably, but these represent two distinct methods of rewarding sales reps.
While commissions are almost always an integral part of sales compensation programs, bonuses are not mandatory and are often used as supplementary incentives.
Let’s delve into the differences between these two types of rewards:
1. Commission
A commission is a variable payment based on the amount of sales made, typically calculated as a percentage. For example, a 7% commission on a $2,000 deal would result in $140. Commissions are directly tied to sales performance and encourage sales representatives to achieve higher sales targets.
2. Bonus
A bonus is a fixed reward for achieving specific goals, often unrelated to the total sales value. For instance:
A Sales Representative might receive a $300 bonus for successfully onboarding 15 new customers within a month.
A Senior Account Executive could earn a bonus for coaching and mentoring new sales reps, paid upon the successful completion of the onboarding period by the new hires.
The key difference between commissions and bonuses lies in their structure: while commissions are variable and directly tied to sales results, bonuses are fixed amounts assigned to accomplishing specific, often short-term, objectives.
Both commissions and bonuses play important roles in an effective sales compensation plan structure, contributing to a well-rounded strategy that motivates sales teams and aligns their efforts with company goals.
Sales Compensation Plan Structure
The following example illustrates an advanced sales compensation plan structure.
Mandatory components of the plan are marked in green, while optional elements are highlighted in yellow.
Before designing your specific sales compensation plan, ensure that all components align with the ultimate goal: motivating sales teams to improve performance and achieve their sales targets.
Base salary
Description
The fixed portion of the compensation plan, providing financial stability to sales reps. Usually accounts for 50-70% of on-target earnings.
Example
$50,000 annual base salary for a sales
Commission
Description
A variable payment tied directly to the sales made by the sales rep, often calculated as a percentage of revenue or deal value.
Example
6% commission on all sales revenue; e.g., $144 commission on a $2,400 deal.
Bonuses
Description
Fixed rewards given for achieving specific goals, such as closing a certain number of deals or mentoring new hires.
Example
$300 bonus for onboarding 10 new customers within a month.
Accelerators
Description
Higher commission rates applied when sales reps exceed their sales quotas, motivating overachievement.
Example
Commission rate increases from 6% to 8% for sales exceeding $100,000 in a quarter.
Decelerators
Description
Reduced commission rates for sales reps who fail to meet minimum quotas, emphasizing accountability.
Example
Commission rate decreases from 6% to 4% for sales below 70% of the quota.
SPIF (Sales Performance Incentive Fund)
Description
Short-term incentives designed to boost sales performance.
Example
$500 bonus for the top 3 sales reps selling 20 units of a new product.
Clawbacks
Description
Mechanisms to recover commissions if deals fall through, such as when customers cancel orders.
Example
Rep returns a $200 commission for a deal canceled within 30 days.
Pursue simplicity. The simpler and clearer a sales commission plan is, the more effectively it motivates and engages sales teams.
Examples of Sales Compensation Plans
In this chapter, we will explore examples of all types of sales compensation plans. For certain types, we will include role-specific examples to provide additional clarity.
1 . Base salary + commission compensation plan
Overview
The base salary + commission compensation plan is one of the most commonly used structures in sales compensation programs, particularly in B2B sales. It combines a fixed base salary with a variable commission structure, offering the best of both stability and performance-based incentives.
Advantages
Financial stability: The base salary ensures income during slower periods.
Performance motivation: Commissions drive sales reps to achieve and exceed their sales targets.
Talent retention: Attractive to top sales professionals, rewarding both consistency and excellence.
Flexibility: Easily enhanced with accelerators or SPIFs to encourage specific behaviors.
Disadvantages
Complexity: More challenging to design compared to simpler compensation plans.
Short-term focus: May encourage closing deals over building long-term customer relationships.
Cost Risks: Balancing high commissions with fixed base salary costs can strain budgets
Best applications
B2B sales with high margins: Suitable where commissions align with high-value deals.
Roles with long sales cycles: Offers income security while pursuing lengthy deals.
Revenue-centric roles: Ideal for Account Executives
Why it’s popular
Balanced incentives: Combines stability with performance-driven rewards.
Scalability: Easily adjusted with tiered commissions or additional incentives.
Goal alignment: Drives sales team performance while achieving revenue targets.
Role-based examples
Account Executive (AE) compensation plan example
Base Salary: $60,000 annually
Commission Structure: 7% of closed-won deals
Quota: $1,000,000 in annual revenue
Total Commission: $1,000,000 x 5% = $70,000.00
Total OTE: $60,000 + $70,000 = $130,000.00
Sales Development Representative (SDR) compensation plan example
Base Salary: $45,000 annually
Commission Structure: $100 for each qualified opportunity
Quota: 240 annually
Total Commission: $100 x 240 = $24,000
Total OTE: $45,000 + $24,000 = $69,000
Sales Manager compensation plan example
Base Salary: $90,000 annually
Commission Structure: 5% of total team revenue exceeding $2M annually
Quota: 4,000,000 in annual revenue
Total Commission: (4,000,000 - 2,000,000) x 5% = 100,000
Total OTE: $90,000 + $100,000 = $190,000
VP of Sales compensation plan examples
Base Salary: $120,000 annually
Commission Structure: 2% of total team revenue exceeding $4M annually
Quota: 10,000,000 in annual revenue
Total Commission: ($10,000,000 - $4,000,000) x 2% = $120,000
Total OTE: $120,000 + $120,000 = $240,000
2. Tired Commission Compensation Plan
Overview
A relative commission plan, often called a tiered commission structure, assigns different commission percentages based on whether the sales rep is below, at, or above their sales quota. This model encourages sales representatives to achieve and exceed their targets by offering progressively higher rewards for surpassing specific thresholds.
Advantages
Motivates overachievement: By increasing the commission rate once quotas are met, it strongly incentivizes sales reps to exceed their goals.
Performance-driven: Aligns earnings with both individual sales performance and company business objectives.
Fair and scalable: Provides a proportional reward system that scales with effort and results.
Drives Quota Attainment: Ensures sales quotas are a primary focus for sales teams, balancing individual success with company needs.
Disadvantages
Complexity: Can be more difficult to administer and communicate compared to flat commission structures.
Risk of sandbagging: Reps may delay closing deals to benefit from higher commission rates in the next period.
Unpredictable payouts: Earnings can vary significantly based on quota achievement, which might deter some sales representatives.
When to apply
Quota-Driven Roles: Ideal for roles like Account Executives, where sales quotas play a significant part in the compensation strategy.
Longer Sales Cycles: Suitable in B2B sales where deals take time to close, and exceeding targets is critical to success.
High-Margin Sales: Effective in industries with larger profit margins, where higher commissions for overachievement are financially feasible.
Base Salary: $60,000
Quota: $500,000 in annual revenue
Commission Below Quota: 5% of revenue up to $500,000
Commission Above Quota: 8% of revenue above $500,000
Projected Revenue: $600,000 annually
Total Commission: ($500,000 × 5%) + ($100,000 × 8%) = $33,000
Total OTE: $60,000 + $33,000 + $5,000 = $98,000
3. Comprehensive Sales Compensation Plan
Overview
A comprehensive sales compensation plan combines multiple elements—base salary, commission, bonuses, accelerators, decelerators, and SPIFs (Sales Performance Incentive Funds)—to create a versatile and performance-driven structure. This plan aligns sales reps’ performance with company business objectives, motivating both consistent results and exceptional achievement.
Advantages
Balanced incentives: Combines financial stability (via base salary) with motivation to exceed sales targets (via commissions and accelerators).
Customizable: Adapts to different sales roles, industries, and sales cycles, making it suitable for complex sales organizations.
Drives strategic goals: Includes bonuses and SPIFs to align sales efforts with specific business objectives, like promoting new products or boosting team collaboration.
Encourages accountability: Decelerators hold reps accountable for underperformance, fostering a culture of responsibility.
Maximizes performance: The layered structure ensures that high performers are rewarded, encouraging overachievement.
Disadvantages
Complexity: Requires meticulous planning and administration, which can lead to confusion among sales reps if not communicated clearly.
Potential for demotivation: Decelerators may discourage underperforming reps, especially in challenging markets.
Cost management: With multiple components, this plan can be expensive for companies, particularly if poorly designed.
When it’s applicable
High-Value B2B Sales: Best for industries with longer sales cycles and high-margin deals, such as SaaS or enterprise sales.
Diverse Sales Teams: Works well in organizations with varied roles and responsibilities, ensuring all contributions are rewarded.
Growth-Focused Companies: Ideal for businesses aiming to incentivize overachievement, launch new products, or drive team collaboration.
Example for an Account Executive
This comprehensive sales compensation plan ensures that sales reps are rewarded for every aspect of their performance, from achieving quotas to exceeding them and focusing on strategic initiatives. While it requires careful design and communication, it is an excellent choice for sales organizations that value both individual contributions and team alignment with business goals.
Base Salary: $70,000 annually
Commission Structure: 8% of revenue up to $500,000; 12% on revenue above $500,000
Quota: $600,000 in annual revenue
Accelerators: 15% commission for sales exceeding $750,000 annually
Decelerators: 5% commission on revenue if under 70% of quota ($420,000)
SPIFs: $1,000 bonus for every 10 subscriptions of a new product sold
Bonuses: $10,000 for achieving 120% of annual quota
Projected Revenue: $800,000 annually
Total Commission: ($500,000 × 8%) + ($300,000 × 12%) = $74,000
Total SPIFs: $2,000 (for 20 subscriptions sold of a new product)
Total OTE: $70,000 (base) + $74,000 (commission) + $2,000 (SPIFs) + $10,000 (bonuses) = $156,000
Example for Sales Development Representative
This comprehensive plan ensures SDRs are rewarded for achieving and exceeding their sales targets, while also contributing to broader sales team performance and company success
Base Salary: $50,000 annually
Commission Structure: $100 for each qualified opportunity generated
Quota: 20 qualified opportunities per month
Accelerators: $150 per opportunity above 25 in a month
Decelerators: $75 per opportunity if fewer than 10 are generated in a month
SPIFs: $1500 bonus for generating 10 qualified opportunities for a specific new product line within a quarter
Bonuses: $2,000 quarterly for achieving 120% of monthly quota across all three months
Projected Opportunities: 20 qualified opportunities per month (240 annually)
Total Commission: (240 × $100) + (20 × $150 for overachievement) = $27,000
Total SPIFs: $1500 (for special product line opportunities)
Total OTE: $50,000 (base) + $27,000 (commission) + $1500 (SPIFs) + $6,000 (quarterly bonuses) = $84,500
4. Margin-Based Sales Compensation Plan
Overview
A margin-based compensation plan ties an Account Executive’s (AE) commission to the profit margin of the deals they close, rather than just the total revenue. This structure incentivizes sales reps to focus on deals that are both high-value and profitable, aligning their efforts with company business objectives.
Advantages
Encourages profitability: Aligns the sales team’s performance with company goals by prioritizing deals with higher profit margins, not just revenue.
Quality over quantity: Discourages selling at heavy discounts or low margins, ensuring sustainable business growth.
Tailored incentives: Motivates sales representatives to negotiate effectively and sell premium products or services.
Aligns with business goals: Perfect for companies with tight margins or a focus on premium offerings.
Disadvantages
Complex to administer: Requires detailed tracking of deal margins, which can complicate sales comp plans.
Risk of demotivation: If margins are heavily dependent on external factors (e.g., market pricing), sales reps may feel they have limited control over their earnings.
Focus shift: Could lead to sales reps avoiding lower-margin deals that might still be strategically important (e.g., entry into new accounts).
Where it’s applicable
Low-margin businesses: Common in industries like wholesale, distribution, and retail, where margins are slim and profitability is paramount.
Cost-sensitive markets: Effective in industries with fluctuating costs, such as food and beverage, logistics, or manufacturing.
Customized solutions: Works well in businesses with significant cost variability between deals, such as IT services or construction.
Example for an Account Executive
Base Salary: $55,000 annually
Commission Structure: 8% of profit margin per deal (Revenue - COGS)
Quota: $800,000 in annual revenue
Projected Revenue: $800,000 annually
Projected Margin: 30% average margin (COGS is $560,000 for $800,000 revenue)
Total Commission (Example): ($800,000 - $560,000) × 8% = $19,200
Total OTE: $55,000 (base) + $19,200 (commission) = $74,200
This simplified plan provides a base salary for financial stability and a margin-tied commission structure to incentivize profitable deals. It’s straightforward, making it ideal for businesses seeking simplicity while prioritizing profitability.
5. Salary-Only Compensation Plan
When it’s applied
Non-revenue-generating roles: Ideal for positions that provide critical operational support but do not directly impact revenue generation.
Focus on system optimization: Used for roles dedicated to maintaining tools and systems, like CRM platforms, which are vital for the sales team but not directly tied to deal closures.
Example
Role: CRM Administrator.
Ensures the CRM system is properly maintained, manages user access, resolves technical issues, and creates reports to help sales managers and sales reps track their performance and quotas.
Compensation: $60,000 annual salary with no variable pay, as the focus is on ensuring the sales organization operates efficiently rather than generating revenue.
6. Commission-Only Compensation Plan
A commission-only compensation plan works best for roles involving simple, short sales cycles and straightforward products or services. The focus is on high-volume sales rather than complex deal-making.
When it’s applied
Simple and short sales cycles: Ideal for roles involving products or services that are easy to sell and require minimal customer education.
High-volume sales: Works in environments where the focus is on making as many sales as possible, like telesales or retail.
Low Investment required: Suitable for roles where the sales rep doesn’t need to spend significant time or resources nurturing leads or closing deals.
Example
Role: telesales representative.
Responsible for selling low-cost subscriptions for an online magazine. The role involves making outbound calls to prospective customers and closing deals quickly.
Compensation:
10% commission on each subscription sold.
For example, selling 100 subscriptions at $50 each in a month generates $500 in commissions (100 × $50 × 10%).
No base salary is provided, as earnings are entirely performance-based.
Advantages
Highly motivational: Encourages sales reps to maximize effort and sales volume, as income is directly tied to performance.
Low risk for employers: No fixed costs for hiring; businesses only pay when sales are made.
Scalable for high-volume sales: Works well in environments like call centers, where high-volume sales drive results.
Disadvantages
Income uncertainty for Sales Reps: Reps might struggle during slow periods, leading to high turnover.
Limited fit for complex sales: Not suitable for roles requiring customer education, relationship-building, or long sales cycles.
Potential for high pressure: Reps may feel pressured to prioritize quantity over quality, which could harm customer relationships.
7 Steps to Create Compensation Plans
Designing an effective sales compensation plan requires strategic planning and alignment with your company’s business objectives. Follow these seven steps to create a sales comp plan that motivates your sales team, drives performance, and achieves revenue goals.
1. Define your sales strategy
Start by outlining your sales strategy and identifying key priorities, such as revenue growth, market expansion, or customer retention.
Align the sales comp plan with the specific objectives you want to achieve.
Example: If you’re focusing on upselling, emphasize bonuses for recurring revenue.
2. Identify the types of sales compensation
Choose the types of sales compensation that fit your strategy. Common options include:
Base Salary + Commission: A balanced approach for most sales roles.
Commission-Only Plans: Ideal for simple, high-volume sales.
Margin-Based Plans: Great for roles focused on profitable deals.
Team-Based Incentives: Effective for promoting collaboration within the sales team.
3. Set realistic sales goals
Establish attainable quotas that align with individual, team, and company objectives.
Use historical performance data, market trends, and pipeline forecasts to define these goals.
Ensure the goals are challenging yet achievable to prevent demotivation.
4. Design the commission structure
Build a commission structure that rewards performance fairly and motivates sales representatives to exceed expectations:
Include accelerators for overachievement (e.g., higher commission rates for surpassing quota).
Add decelerators to address underperformance (e.g., reduced commission rates below a certain threshold).
Example: A sales manager compensation plan might offer a 5% override on team revenue exceeding $1M quarterly.
5. Incorporate bonuses and incentives
Add targeted bonuses and incentives to your sales comp plan to promote specific behaviors, such as:
SPIFs (Sales Performance Incentive Funds): Short-term rewards for focusing on new product launches.
Team bonuses: Incentives for achieving group milestones, and fostering collaboration.
6. Test and communicate the plan
Before rolling out the plan, test it with historical sales data to ensure payouts align with company profitability.
Clearly communicate the sales compensation plan to the team, explaining each component (e.g., commission structure, quotas, bonuses).
Use simple terms and provide examples to avoid confusion.
7. Monitor and adjust the plan
Continuously monitor the plan’s effectiveness by tracking key metrics like:
Quota attainment rates.
Total compensation costs versus revenue.
Sales team performance.
Gather feedback from sales managers and sales representatives to identify areas for improvement. Adjust the compensation plan annually or as business priorities shift.
Bonus: Actionable tips
To ensure your sales comp plans remain effective and aligned with your business goals, follow these actionable tips:
Focus on simplicity: A straightforward sales compensation plan is easier for sales reps to understand and motivates better performance. Avoid overly complex commission structures that may cause confusion.
Review plans annually: Reassess your sales comp plan at least once a year to ensure it aligns with changing business priorities, market conditions, and the effectiveness of different types of sales compensation.
Incorporate feedback: Engage your sales team and sales managers to gather input on what’s working and what isn’t. Adjust your compensation plan based on real-world insights.
Tie plans to business goals: Ensure your sales manager compensation plan and sales rep compensation plans align with overarching company objectives, such as revenue growth or customer retention.
Provide clear communication: Explain each component of your sales comp plan, including commission structures, quotas, and bonuses, so everyone understands how they can maximize their earnings.
Adapt for roles: Tailor your compensation plans to specific roles. For example, create different types of sales compensation for Account Executives, SDRs, and sales managers, depending on their responsibilities.
Reward overachievement: Use accelerators or tiered commission structures to motivate top performers to exceed their goals.
Monitor key metrics: Regularly track performance metrics, such as quota attainment and total compensation costs, to measure the effectiveness of your sales compensation plans.
By implementing these tips, you can design sales comp plans that drive results, motivate your team, and contribute to long-term success. Let me know if you'd like any additional refinements!
In recent years, achieving sales targets has become increasingly challenging for sales teams due to several factors, including:
Growing competition across almost all industries.
Market turbulence and economic uncertainty.
Lengthened customer buying journeys.
Fluctuations in demand.
Greater difficulties in lead generation.
To overcome these obstacles, companies must focus on improving their sales team’s performance. An effective sales compensation plan plays a crucial role in achieving this, as it directly impacts overall sales performance and helps motivate sales reps to excel.
After all, who would want to work for a company with an unclear sales compensation structure, where they don’t understand what they can earn by hitting their sales targets?
Compensation-related issues can significantly affect retention. According to Salesforce's State of Sales Report, the number one reason sales reps leave their roles is unrealistic sales targets, followed closely by uncompetitive pay and benefits. Similarly, the Sales Happiness Index found that 31% of sales professionals cited the lack of bonuses as a key reason for quitting, while 43% pointed to insufficient benefits.
However, sales comp plans cannot exist in isolation. They must align with the company’s overall business objectives and sales strategy. A good sales compensation plan should drive sales performance, inspire team performance, help achieve revenue targets, and support other strategic goals.
For sales managers and revenue leaders, the challenge lies in designing a sales compensation plan structure that delivers measurable, positive outcomes. Unfortunately, many companies continue to make avoidable mistakes when crafting their compensation plans, leading to misalignment and reduced effectiveness.
In this article, we’ll explore the critical aspects of creating effective sales compensation plans, analyze real-world examples, and provide best practices to help you design attractive sales compensation plans that work.
What is Sales Compensation?
Sales compensation refers to the monetary and non-monetary rewards given to sales professionals in exchange for their performance and contributions to achieving an organization’s sales goals. It includes a combination of fixed pay (such as a base salary) and variable pay (such as commissions, bonuses, or incentives) that are typically tied to individual or team performance metrics. Sales compensation is designed to motivate, reward, and retain sales talent while aligning their efforts with the organization’s overall revenue and growth objectives.
What are Sales Compensation Plans?
A sales compensation plan is a structured framework that outlines how a company will compensate its sales team. It defines the components of sales compensation, including base salary, commissions, bonuses, incentives, and benefits, and specifies the rules, conditions, and performance metrics that govern payouts. A well-designed sales compensation plan balances fairness, transparency, and motivation, ensuring that sales professionals are rewarded for achieving specific objectives, such as meeting sales quotas, acquiring new customers, or upselling existing accounts.
An effective sales compensation plan aligns the sales team's efforts with the company’s strategic goals, drives desired behaviors, and provides a clear understanding of how performance impacts earnings.
Why is Effective Sales Compensation Important?
You can’t underestimate the importance of effective sales comp plans, and here we will discuss the top reasons why you should design sales compensation carefully.
Key reasons why effective sales compensation matters:
1. Drives sales performance
An effective sales compensation plan motivates sales reps to achieve their sales targets, directly influencing the sales team’s performance and helping companies hit their revenue targets. A well-designed plan aligns individual efforts with business objectives, ensuring every deal contributes to overall success.
2. Retains top talent
Clear and competitive compensation plans attract and retain skilled sales professionals. Unclear compensation structures or uncompetitive pay lead to high turnover, with many sales reps leaving due to unrealistic sales quotas or insufficient benefits.
3. Aligns sales efforts with business goals
A good sales compensation plan ensures that the sales team’s actions are tied to the company’s business goals. It incentivizes behaviors that close deals, improve team performance, and contribute to long-term growth.
4. Motivates and engages sales teams
The right mix of base salary, commissions, and bonuses motivates sales representatives to exceed expectations. Tools like on-target earnings and profit-sharing help motivate sales reps while fostering a results-driven culture.
5. Adapts to market challenges
A flexible sales compensation plan structure helps sales leaders respond to market changes, fluctuating demand, and shifts in the sales cycle, ensuring the sales organization stays competitive.
6. Improves sales strategy execution
By aligning with the company’s sales compensation strategy, the plan encourages sales teams to focus on high-priority deals and meet strategic objectives like achieving higher total sales or entering new markets.
An attractive sales compensation plan is essential for driving productivity, reducing turnover, and achieving positive business outcomes.
Setting Realistic Sales Targets
Before moving forward, it’s important to highlight that sales compensation plans will not yield results unless you set attainable sales targets.
As mentioned earlier, unrealistic sales goals are among the top reasons why sales representatives leave their roles.
What’s the point of designing the best sales compensation plan in the world if your sales quotas are unattainable, setting sales reps up for failure from the start?
Reasonable sales goals and effective sales comp plans work hand-in-hand to drive maximum results.
What to consider when setting sales targets
When setting realistic and attainable sales targets, sales leaders should take the following factors into account:
Current sales forecasts
Leverage data from the existing pipeline, historical sales performance, and on-target earnings to set achievable goals.
Market trends and sentiments
Stay informed about shifts in your industry, competitor activities, and economic conditions that might impact total sales or customer behavior.
Potential demand volume
Analyze demand forecasts based on market research, seasonal patterns, and customer buying journeys.
Territory potential
Assess the opportunities within each territory, including customer density, purchasing power, and any limitations that may impact results.
Budgets and resources
Ensure the sales team has the necessary resources—marketing support, travel budgets, and training programs—to achieve their targets effectively.
Tools and sales enablement programs
Equip your team with the right tools, such as CRM systems and analytics platforms, to streamline processes and provide actionable insights.
Sales process improvements
Continuously refine your sales processes to remove friction points, enabling sales reps to focus on closing deals and building customer relationships.
Team capacity and workload
Factor in the size of your sales team, their capacity, and individual skill levels to avoid overburdening your sales reps or stretching resources too thin.
Past performance trends
Identify patterns in past performance to ensure goals are challenging yet realistic based on historical data.
Why this matters
Even if you pay high commissions, unrealistic sales targets can lead to decreased team morale, burnout, and ultimately, declined sales performance. Setting attainable goals that align with a strong sales compensation plan ensures your sales reps feel motivated and empowered to succeed.
Key Terms in Sales Compensation Plans
Let’s define the key terms we’ll use in our further discussion.
Sales quota
A sales quota is a specific sales target that a sales rep or sales team is required to achieve within a defined time frame, such as a month, quarter, or year. For example, if a sales representative has a quota of $120,000 in sales for a quarter, they need to generate enough revenue from selling products or services to meet or exceed that goal. Attainable sales quotas are critical for maintaining team morale and ensuring an effective sales compensation plan.
On-target earnings (OTE)
On-target earnings (OTE) represent the total compensation a salesperson can expect to earn if they achieve their sales targets. OTE combines a base salary with potential commissions and bonuses. For instance, if a sales role offers an OTE of $80,000 per year, the salesperson can anticipate earning this amount if they consistently meet their goals. OTE is a critical component of an attractive sales compensation plan for top-performing sales professionals.
Sales accelerators
Sales accelerators are performance-based incentives that increase a salesperson’s commission rate after they exceed their sales quota. For instance, if a sales rep typically earns a 6% commission on all sales, they might see their rate increase to 8% for any sales made after surpassing their quota by 15%. Accelerators are a powerful tool to motivate sales reps and drive high performance within the sales team.
Sales decelerators
Sales decelerators work in the opposite way, reducing commission rates for salespeople who fail to meet their minimum quotas. For example, if a sales representative achieves only 70% of their sales target, their commission rate might decrease from 6% to 4% on those sales. While controversial, decelerators are sometimes used in sales manager compensation plans to emphasize accountability.
Clawbacks
Clawbacks refer to situations where a salesperson must return part of their earned commission due to certain conditions, such as cancellations or product returns. For example, if a sales representative earns a commission for closing a deal but the customer cancels their subscription within 60 days, the company might deduct that commission from the rep’s future earnings. Clawbacks ensure fairness in the sales compensation program by tying earnings to sustainable results.
Sales performance incentive fund (SPIF) or Sales Contests
A SPIF is a short-term incentive designed to boost sales performance and motivate sales reps to focus on specific goals. For example, a company might run a contest offering a $600 bonus to the first three sales reps who sell 50 units of a new product within a month. These programs create excitement and competition, driving immediate results.
Commission vs Bonus
Some people use the terms commissions and bonuses interchangeably, but these represent two distinct methods of rewarding sales reps.
While commissions are almost always an integral part of sales compensation programs, bonuses are not mandatory and are often used as supplementary incentives.
Let’s delve into the differences between these two types of rewards:
1. Commission
A commission is a variable payment based on the amount of sales made, typically calculated as a percentage. For example, a 7% commission on a $2,000 deal would result in $140. Commissions are directly tied to sales performance and encourage sales representatives to achieve higher sales targets.
2. Bonus
A bonus is a fixed reward for achieving specific goals, often unrelated to the total sales value. For instance:
A Sales Representative might receive a $300 bonus for successfully onboarding 15 new customers within a month.
A Senior Account Executive could earn a bonus for coaching and mentoring new sales reps, paid upon the successful completion of the onboarding period by the new hires.
The key difference between commissions and bonuses lies in their structure: while commissions are variable and directly tied to sales results, bonuses are fixed amounts assigned to accomplishing specific, often short-term, objectives.
Both commissions and bonuses play important roles in an effective sales compensation plan structure, contributing to a well-rounded strategy that motivates sales teams and aligns their efforts with company goals.
Sales Compensation Plan Structure
The following example illustrates an advanced sales compensation plan structure.
Mandatory components of the plan are marked in green, while optional elements are highlighted in yellow.
Before designing your specific sales compensation plan, ensure that all components align with the ultimate goal: motivating sales teams to improve performance and achieve their sales targets.
Base salary
Description
The fixed portion of the compensation plan, providing financial stability to sales reps. Usually accounts for 50-70% of on-target earnings.
Example
$50,000 annual base salary for a sales
Commission
Description
A variable payment tied directly to the sales made by the sales rep, often calculated as a percentage of revenue or deal value.
Example
6% commission on all sales revenue; e.g., $144 commission on a $2,400 deal.
Bonuses
Description
Fixed rewards given for achieving specific goals, such as closing a certain number of deals or mentoring new hires.
Example
$300 bonus for onboarding 10 new customers within a month.
Accelerators
Description
Higher commission rates applied when sales reps exceed their sales quotas, motivating overachievement.
Example
Commission rate increases from 6% to 8% for sales exceeding $100,000 in a quarter.
Decelerators
Description
Reduced commission rates for sales reps who fail to meet minimum quotas, emphasizing accountability.
Example
Commission rate decreases from 6% to 4% for sales below 70% of the quota.
SPIF (Sales Performance Incentive Fund)
Description
Short-term incentives designed to boost sales performance.
Example
$500 bonus for the top 3 sales reps selling 20 units of a new product.
Clawbacks
Description
Mechanisms to recover commissions if deals fall through, such as when customers cancel orders.
Example
Rep returns a $200 commission for a deal canceled within 30 days.
Pursue simplicity. The simpler and clearer a sales commission plan is, the more effectively it motivates and engages sales teams.
Examples of Sales Compensation Plans
In this chapter, we will explore examples of all types of sales compensation plans. For certain types, we will include role-specific examples to provide additional clarity.
1 . Base salary + commission compensation plan
Overview
The base salary + commission compensation plan is one of the most commonly used structures in sales compensation programs, particularly in B2B sales. It combines a fixed base salary with a variable commission structure, offering the best of both stability and performance-based incentives.
Advantages
Financial stability: The base salary ensures income during slower periods.
Performance motivation: Commissions drive sales reps to achieve and exceed their sales targets.
Talent retention: Attractive to top sales professionals, rewarding both consistency and excellence.
Flexibility: Easily enhanced with accelerators or SPIFs to encourage specific behaviors.
Disadvantages
Complexity: More challenging to design compared to simpler compensation plans.
Short-term focus: May encourage closing deals over building long-term customer relationships.
Cost Risks: Balancing high commissions with fixed base salary costs can strain budgets
Best applications
B2B sales with high margins: Suitable where commissions align with high-value deals.
Roles with long sales cycles: Offers income security while pursuing lengthy deals.
Revenue-centric roles: Ideal for Account Executives
Why it’s popular
Balanced incentives: Combines stability with performance-driven rewards.
Scalability: Easily adjusted with tiered commissions or additional incentives.
Goal alignment: Drives sales team performance while achieving revenue targets.
Role-based examples
Account Executive (AE) compensation plan example
Base Salary: $60,000 annually
Commission Structure: 7% of closed-won deals
Quota: $1,000,000 in annual revenue
Total Commission: $1,000,000 x 5% = $70,000.00
Total OTE: $60,000 + $70,000 = $130,000.00
Sales Development Representative (SDR) compensation plan example
Base Salary: $45,000 annually
Commission Structure: $100 for each qualified opportunity
Quota: 240 annually
Total Commission: $100 x 240 = $24,000
Total OTE: $45,000 + $24,000 = $69,000
Sales Manager compensation plan example
Base Salary: $90,000 annually
Commission Structure: 5% of total team revenue exceeding $2M annually
Quota: 4,000,000 in annual revenue
Total Commission: (4,000,000 - 2,000,000) x 5% = 100,000
Total OTE: $90,000 + $100,000 = $190,000
VP of Sales compensation plan examples
Base Salary: $120,000 annually
Commission Structure: 2% of total team revenue exceeding $4M annually
Quota: 10,000,000 in annual revenue
Total Commission: ($10,000,000 - $4,000,000) x 2% = $120,000
Total OTE: $120,000 + $120,000 = $240,000
2. Tired Commission Compensation Plan
Overview
A relative commission plan, often called a tiered commission structure, assigns different commission percentages based on whether the sales rep is below, at, or above their sales quota. This model encourages sales representatives to achieve and exceed their targets by offering progressively higher rewards for surpassing specific thresholds.
Advantages
Motivates overachievement: By increasing the commission rate once quotas are met, it strongly incentivizes sales reps to exceed their goals.
Performance-driven: Aligns earnings with both individual sales performance and company business objectives.
Fair and scalable: Provides a proportional reward system that scales with effort and results.
Drives Quota Attainment: Ensures sales quotas are a primary focus for sales teams, balancing individual success with company needs.
Disadvantages
Complexity: Can be more difficult to administer and communicate compared to flat commission structures.
Risk of sandbagging: Reps may delay closing deals to benefit from higher commission rates in the next period.
Unpredictable payouts: Earnings can vary significantly based on quota achievement, which might deter some sales representatives.
When to apply
Quota-Driven Roles: Ideal for roles like Account Executives, where sales quotas play a significant part in the compensation strategy.
Longer Sales Cycles: Suitable in B2B sales where deals take time to close, and exceeding targets is critical to success.
High-Margin Sales: Effective in industries with larger profit margins, where higher commissions for overachievement are financially feasible.
Base Salary: $60,000
Quota: $500,000 in annual revenue
Commission Below Quota: 5% of revenue up to $500,000
Commission Above Quota: 8% of revenue above $500,000
Projected Revenue: $600,000 annually
Total Commission: ($500,000 × 5%) + ($100,000 × 8%) = $33,000
Total OTE: $60,000 + $33,000 + $5,000 = $98,000
3. Comprehensive Sales Compensation Plan
Overview
A comprehensive sales compensation plan combines multiple elements—base salary, commission, bonuses, accelerators, decelerators, and SPIFs (Sales Performance Incentive Funds)—to create a versatile and performance-driven structure. This plan aligns sales reps’ performance with company business objectives, motivating both consistent results and exceptional achievement.
Advantages
Balanced incentives: Combines financial stability (via base salary) with motivation to exceed sales targets (via commissions and accelerators).
Customizable: Adapts to different sales roles, industries, and sales cycles, making it suitable for complex sales organizations.
Drives strategic goals: Includes bonuses and SPIFs to align sales efforts with specific business objectives, like promoting new products or boosting team collaboration.
Encourages accountability: Decelerators hold reps accountable for underperformance, fostering a culture of responsibility.
Maximizes performance: The layered structure ensures that high performers are rewarded, encouraging overachievement.
Disadvantages
Complexity: Requires meticulous planning and administration, which can lead to confusion among sales reps if not communicated clearly.
Potential for demotivation: Decelerators may discourage underperforming reps, especially in challenging markets.
Cost management: With multiple components, this plan can be expensive for companies, particularly if poorly designed.
When it’s applicable
High-Value B2B Sales: Best for industries with longer sales cycles and high-margin deals, such as SaaS or enterprise sales.
Diverse Sales Teams: Works well in organizations with varied roles and responsibilities, ensuring all contributions are rewarded.
Growth-Focused Companies: Ideal for businesses aiming to incentivize overachievement, launch new products, or drive team collaboration.
Example for an Account Executive
This comprehensive sales compensation plan ensures that sales reps are rewarded for every aspect of their performance, from achieving quotas to exceeding them and focusing on strategic initiatives. While it requires careful design and communication, it is an excellent choice for sales organizations that value both individual contributions and team alignment with business goals.
Base Salary: $70,000 annually
Commission Structure: 8% of revenue up to $500,000; 12% on revenue above $500,000
Quota: $600,000 in annual revenue
Accelerators: 15% commission for sales exceeding $750,000 annually
Decelerators: 5% commission on revenue if under 70% of quota ($420,000)
SPIFs: $1,000 bonus for every 10 subscriptions of a new product sold
Bonuses: $10,000 for achieving 120% of annual quota
Projected Revenue: $800,000 annually
Total Commission: ($500,000 × 8%) + ($300,000 × 12%) = $74,000
Total SPIFs: $2,000 (for 20 subscriptions sold of a new product)
Total OTE: $70,000 (base) + $74,000 (commission) + $2,000 (SPIFs) + $10,000 (bonuses) = $156,000
Example for Sales Development Representative
This comprehensive plan ensures SDRs are rewarded for achieving and exceeding their sales targets, while also contributing to broader sales team performance and company success
Base Salary: $50,000 annually
Commission Structure: $100 for each qualified opportunity generated
Quota: 20 qualified opportunities per month
Accelerators: $150 per opportunity above 25 in a month
Decelerators: $75 per opportunity if fewer than 10 are generated in a month
SPIFs: $1500 bonus for generating 10 qualified opportunities for a specific new product line within a quarter
Bonuses: $2,000 quarterly for achieving 120% of monthly quota across all three months
Projected Opportunities: 20 qualified opportunities per month (240 annually)
Total Commission: (240 × $100) + (20 × $150 for overachievement) = $27,000
Total SPIFs: $1500 (for special product line opportunities)
Total OTE: $50,000 (base) + $27,000 (commission) + $1500 (SPIFs) + $6,000 (quarterly bonuses) = $84,500
4. Margin-Based Sales Compensation Plan
Overview
A margin-based compensation plan ties an Account Executive’s (AE) commission to the profit margin of the deals they close, rather than just the total revenue. This structure incentivizes sales reps to focus on deals that are both high-value and profitable, aligning their efforts with company business objectives.
Advantages
Encourages profitability: Aligns the sales team’s performance with company goals by prioritizing deals with higher profit margins, not just revenue.
Quality over quantity: Discourages selling at heavy discounts or low margins, ensuring sustainable business growth.
Tailored incentives: Motivates sales representatives to negotiate effectively and sell premium products or services.
Aligns with business goals: Perfect for companies with tight margins or a focus on premium offerings.
Disadvantages
Complex to administer: Requires detailed tracking of deal margins, which can complicate sales comp plans.
Risk of demotivation: If margins are heavily dependent on external factors (e.g., market pricing), sales reps may feel they have limited control over their earnings.
Focus shift: Could lead to sales reps avoiding lower-margin deals that might still be strategically important (e.g., entry into new accounts).
Where it’s applicable
Low-margin businesses: Common in industries like wholesale, distribution, and retail, where margins are slim and profitability is paramount.
Cost-sensitive markets: Effective in industries with fluctuating costs, such as food and beverage, logistics, or manufacturing.
Customized solutions: Works well in businesses with significant cost variability between deals, such as IT services or construction.
Example for an Account Executive
Base Salary: $55,000 annually
Commission Structure: 8% of profit margin per deal (Revenue - COGS)
Quota: $800,000 in annual revenue
Projected Revenue: $800,000 annually
Projected Margin: 30% average margin (COGS is $560,000 for $800,000 revenue)
Total Commission (Example): ($800,000 - $560,000) × 8% = $19,200
Total OTE: $55,000 (base) + $19,200 (commission) = $74,200
This simplified plan provides a base salary for financial stability and a margin-tied commission structure to incentivize profitable deals. It’s straightforward, making it ideal for businesses seeking simplicity while prioritizing profitability.
5. Salary-Only Compensation Plan
When it’s applied
Non-revenue-generating roles: Ideal for positions that provide critical operational support but do not directly impact revenue generation.
Focus on system optimization: Used for roles dedicated to maintaining tools and systems, like CRM platforms, which are vital for the sales team but not directly tied to deal closures.
Example
Role: CRM Administrator.
Ensures the CRM system is properly maintained, manages user access, resolves technical issues, and creates reports to help sales managers and sales reps track their performance and quotas.
Compensation: $60,000 annual salary with no variable pay, as the focus is on ensuring the sales organization operates efficiently rather than generating revenue.
6. Commission-Only Compensation Plan
A commission-only compensation plan works best for roles involving simple, short sales cycles and straightforward products or services. The focus is on high-volume sales rather than complex deal-making.
When it’s applied
Simple and short sales cycles: Ideal for roles involving products or services that are easy to sell and require minimal customer education.
High-volume sales: Works in environments where the focus is on making as many sales as possible, like telesales or retail.
Low Investment required: Suitable for roles where the sales rep doesn’t need to spend significant time or resources nurturing leads or closing deals.
Example
Role: telesales representative.
Responsible for selling low-cost subscriptions for an online magazine. The role involves making outbound calls to prospective customers and closing deals quickly.
Compensation:
10% commission on each subscription sold.
For example, selling 100 subscriptions at $50 each in a month generates $500 in commissions (100 × $50 × 10%).
No base salary is provided, as earnings are entirely performance-based.
Advantages
Highly motivational: Encourages sales reps to maximize effort and sales volume, as income is directly tied to performance.
Low risk for employers: No fixed costs for hiring; businesses only pay when sales are made.
Scalable for high-volume sales: Works well in environments like call centers, where high-volume sales drive results.
Disadvantages
Income uncertainty for Sales Reps: Reps might struggle during slow periods, leading to high turnover.
Limited fit for complex sales: Not suitable for roles requiring customer education, relationship-building, or long sales cycles.
Potential for high pressure: Reps may feel pressured to prioritize quantity over quality, which could harm customer relationships.
7 Steps to Create Compensation Plans
Designing an effective sales compensation plan requires strategic planning and alignment with your company’s business objectives. Follow these seven steps to create a sales comp plan that motivates your sales team, drives performance, and achieves revenue goals.
1. Define your sales strategy
Start by outlining your sales strategy and identifying key priorities, such as revenue growth, market expansion, or customer retention.
Align the sales comp plan with the specific objectives you want to achieve.
Example: If you’re focusing on upselling, emphasize bonuses for recurring revenue.
2. Identify the types of sales compensation
Choose the types of sales compensation that fit your strategy. Common options include:
Base Salary + Commission: A balanced approach for most sales roles.
Commission-Only Plans: Ideal for simple, high-volume sales.
Margin-Based Plans: Great for roles focused on profitable deals.
Team-Based Incentives: Effective for promoting collaboration within the sales team.
3. Set realistic sales goals
Establish attainable quotas that align with individual, team, and company objectives.
Use historical performance data, market trends, and pipeline forecasts to define these goals.
Ensure the goals are challenging yet achievable to prevent demotivation.
4. Design the commission structure
Build a commission structure that rewards performance fairly and motivates sales representatives to exceed expectations:
Include accelerators for overachievement (e.g., higher commission rates for surpassing quota).
Add decelerators to address underperformance (e.g., reduced commission rates below a certain threshold).
Example: A sales manager compensation plan might offer a 5% override on team revenue exceeding $1M quarterly.
5. Incorporate bonuses and incentives
Add targeted bonuses and incentives to your sales comp plan to promote specific behaviors, such as:
SPIFs (Sales Performance Incentive Funds): Short-term rewards for focusing on new product launches.
Team bonuses: Incentives for achieving group milestones, and fostering collaboration.
6. Test and communicate the plan
Before rolling out the plan, test it with historical sales data to ensure payouts align with company profitability.
Clearly communicate the sales compensation plan to the team, explaining each component (e.g., commission structure, quotas, bonuses).
Use simple terms and provide examples to avoid confusion.
7. Monitor and adjust the plan
Continuously monitor the plan’s effectiveness by tracking key metrics like:
Quota attainment rates.
Total compensation costs versus revenue.
Sales team performance.
Gather feedback from sales managers and sales representatives to identify areas for improvement. Adjust the compensation plan annually or as business priorities shift.
Bonus: Actionable tips
To ensure your sales comp plans remain effective and aligned with your business goals, follow these actionable tips:
Focus on simplicity: A straightforward sales compensation plan is easier for sales reps to understand and motivates better performance. Avoid overly complex commission structures that may cause confusion.
Review plans annually: Reassess your sales comp plan at least once a year to ensure it aligns with changing business priorities, market conditions, and the effectiveness of different types of sales compensation.
Incorporate feedback: Engage your sales team and sales managers to gather input on what’s working and what isn’t. Adjust your compensation plan based on real-world insights.
Tie plans to business goals: Ensure your sales manager compensation plan and sales rep compensation plans align with overarching company objectives, such as revenue growth or customer retention.
Provide clear communication: Explain each component of your sales comp plan, including commission structures, quotas, and bonuses, so everyone understands how they can maximize their earnings.
Adapt for roles: Tailor your compensation plans to specific roles. For example, create different types of sales compensation for Account Executives, SDRs, and sales managers, depending on their responsibilities.
Reward overachievement: Use accelerators or tiered commission structures to motivate top performers to exceed their goals.
Monitor key metrics: Regularly track performance metrics, such as quota attainment and total compensation costs, to measure the effectiveness of your sales compensation plans.
By implementing these tips, you can design sales comp plans that drive results, motivate your team, and contribute to long-term success. Let me know if you'd like any additional refinements!
In recent years, achieving sales targets has become increasingly challenging for sales teams due to several factors, including:
Growing competition across almost all industries.
Market turbulence and economic uncertainty.
Lengthened customer buying journeys.
Fluctuations in demand.
Greater difficulties in lead generation.
To overcome these obstacles, companies must focus on improving their sales team’s performance. An effective sales compensation plan plays a crucial role in achieving this, as it directly impacts overall sales performance and helps motivate sales reps to excel.
After all, who would want to work for a company with an unclear sales compensation structure, where they don’t understand what they can earn by hitting their sales targets?
Compensation-related issues can significantly affect retention. According to Salesforce's State of Sales Report, the number one reason sales reps leave their roles is unrealistic sales targets, followed closely by uncompetitive pay and benefits. Similarly, the Sales Happiness Index found that 31% of sales professionals cited the lack of bonuses as a key reason for quitting, while 43% pointed to insufficient benefits.
However, sales comp plans cannot exist in isolation. They must align with the company’s overall business objectives and sales strategy. A good sales compensation plan should drive sales performance, inspire team performance, help achieve revenue targets, and support other strategic goals.
For sales managers and revenue leaders, the challenge lies in designing a sales compensation plan structure that delivers measurable, positive outcomes. Unfortunately, many companies continue to make avoidable mistakes when crafting their compensation plans, leading to misalignment and reduced effectiveness.
In this article, we’ll explore the critical aspects of creating effective sales compensation plans, analyze real-world examples, and provide best practices to help you design attractive sales compensation plans that work.
What is Sales Compensation?
Sales compensation refers to the monetary and non-monetary rewards given to sales professionals in exchange for their performance and contributions to achieving an organization’s sales goals. It includes a combination of fixed pay (such as a base salary) and variable pay (such as commissions, bonuses, or incentives) that are typically tied to individual or team performance metrics. Sales compensation is designed to motivate, reward, and retain sales talent while aligning their efforts with the organization’s overall revenue and growth objectives.
What are Sales Compensation Plans?
A sales compensation plan is a structured framework that outlines how a company will compensate its sales team. It defines the components of sales compensation, including base salary, commissions, bonuses, incentives, and benefits, and specifies the rules, conditions, and performance metrics that govern payouts. A well-designed sales compensation plan balances fairness, transparency, and motivation, ensuring that sales professionals are rewarded for achieving specific objectives, such as meeting sales quotas, acquiring new customers, or upselling existing accounts.
An effective sales compensation plan aligns the sales team's efforts with the company’s strategic goals, drives desired behaviors, and provides a clear understanding of how performance impacts earnings.
Why is Effective Sales Compensation Important?
You can’t underestimate the importance of effective sales comp plans, and here we will discuss the top reasons why you should design sales compensation carefully.
Key reasons why effective sales compensation matters:
1. Drives sales performance
An effective sales compensation plan motivates sales reps to achieve their sales targets, directly influencing the sales team’s performance and helping companies hit their revenue targets. A well-designed plan aligns individual efforts with business objectives, ensuring every deal contributes to overall success.
2. Retains top talent
Clear and competitive compensation plans attract and retain skilled sales professionals. Unclear compensation structures or uncompetitive pay lead to high turnover, with many sales reps leaving due to unrealistic sales quotas or insufficient benefits.
3. Aligns sales efforts with business goals
A good sales compensation plan ensures that the sales team’s actions are tied to the company’s business goals. It incentivizes behaviors that close deals, improve team performance, and contribute to long-term growth.
4. Motivates and engages sales teams
The right mix of base salary, commissions, and bonuses motivates sales representatives to exceed expectations. Tools like on-target earnings and profit-sharing help motivate sales reps while fostering a results-driven culture.
5. Adapts to market challenges
A flexible sales compensation plan structure helps sales leaders respond to market changes, fluctuating demand, and shifts in the sales cycle, ensuring the sales organization stays competitive.
6. Improves sales strategy execution
By aligning with the company’s sales compensation strategy, the plan encourages sales teams to focus on high-priority deals and meet strategic objectives like achieving higher total sales or entering new markets.
An attractive sales compensation plan is essential for driving productivity, reducing turnover, and achieving positive business outcomes.
Setting Realistic Sales Targets
Before moving forward, it’s important to highlight that sales compensation plans will not yield results unless you set attainable sales targets.
As mentioned earlier, unrealistic sales goals are among the top reasons why sales representatives leave their roles.
What’s the point of designing the best sales compensation plan in the world if your sales quotas are unattainable, setting sales reps up for failure from the start?
Reasonable sales goals and effective sales comp plans work hand-in-hand to drive maximum results.
What to consider when setting sales targets
When setting realistic and attainable sales targets, sales leaders should take the following factors into account:
Current sales forecasts
Leverage data from the existing pipeline, historical sales performance, and on-target earnings to set achievable goals.
Market trends and sentiments
Stay informed about shifts in your industry, competitor activities, and economic conditions that might impact total sales or customer behavior.
Potential demand volume
Analyze demand forecasts based on market research, seasonal patterns, and customer buying journeys.
Territory potential
Assess the opportunities within each territory, including customer density, purchasing power, and any limitations that may impact results.
Budgets and resources
Ensure the sales team has the necessary resources—marketing support, travel budgets, and training programs—to achieve their targets effectively.
Tools and sales enablement programs
Equip your team with the right tools, such as CRM systems and analytics platforms, to streamline processes and provide actionable insights.
Sales process improvements
Continuously refine your sales processes to remove friction points, enabling sales reps to focus on closing deals and building customer relationships.
Team capacity and workload
Factor in the size of your sales team, their capacity, and individual skill levels to avoid overburdening your sales reps or stretching resources too thin.
Past performance trends
Identify patterns in past performance to ensure goals are challenging yet realistic based on historical data.
Why this matters
Even if you pay high commissions, unrealistic sales targets can lead to decreased team morale, burnout, and ultimately, declined sales performance. Setting attainable goals that align with a strong sales compensation plan ensures your sales reps feel motivated and empowered to succeed.
Key Terms in Sales Compensation Plans
Let’s define the key terms we’ll use in our further discussion.
Sales quota
A sales quota is a specific sales target that a sales rep or sales team is required to achieve within a defined time frame, such as a month, quarter, or year. For example, if a sales representative has a quota of $120,000 in sales for a quarter, they need to generate enough revenue from selling products or services to meet or exceed that goal. Attainable sales quotas are critical for maintaining team morale and ensuring an effective sales compensation plan.
On-target earnings (OTE)
On-target earnings (OTE) represent the total compensation a salesperson can expect to earn if they achieve their sales targets. OTE combines a base salary with potential commissions and bonuses. For instance, if a sales role offers an OTE of $80,000 per year, the salesperson can anticipate earning this amount if they consistently meet their goals. OTE is a critical component of an attractive sales compensation plan for top-performing sales professionals.
Sales accelerators
Sales accelerators are performance-based incentives that increase a salesperson’s commission rate after they exceed their sales quota. For instance, if a sales rep typically earns a 6% commission on all sales, they might see their rate increase to 8% for any sales made after surpassing their quota by 15%. Accelerators are a powerful tool to motivate sales reps and drive high performance within the sales team.
Sales decelerators
Sales decelerators work in the opposite way, reducing commission rates for salespeople who fail to meet their minimum quotas. For example, if a sales representative achieves only 70% of their sales target, their commission rate might decrease from 6% to 4% on those sales. While controversial, decelerators are sometimes used in sales manager compensation plans to emphasize accountability.
Clawbacks
Clawbacks refer to situations where a salesperson must return part of their earned commission due to certain conditions, such as cancellations or product returns. For example, if a sales representative earns a commission for closing a deal but the customer cancels their subscription within 60 days, the company might deduct that commission from the rep’s future earnings. Clawbacks ensure fairness in the sales compensation program by tying earnings to sustainable results.
Sales performance incentive fund (SPIF) or Sales Contests
A SPIF is a short-term incentive designed to boost sales performance and motivate sales reps to focus on specific goals. For example, a company might run a contest offering a $600 bonus to the first three sales reps who sell 50 units of a new product within a month. These programs create excitement and competition, driving immediate results.
Commission vs Bonus
Some people use the terms commissions and bonuses interchangeably, but these represent two distinct methods of rewarding sales reps.
While commissions are almost always an integral part of sales compensation programs, bonuses are not mandatory and are often used as supplementary incentives.
Let’s delve into the differences between these two types of rewards:
1. Commission
A commission is a variable payment based on the amount of sales made, typically calculated as a percentage. For example, a 7% commission on a $2,000 deal would result in $140. Commissions are directly tied to sales performance and encourage sales representatives to achieve higher sales targets.
2. Bonus
A bonus is a fixed reward for achieving specific goals, often unrelated to the total sales value. For instance:
A Sales Representative might receive a $300 bonus for successfully onboarding 15 new customers within a month.
A Senior Account Executive could earn a bonus for coaching and mentoring new sales reps, paid upon the successful completion of the onboarding period by the new hires.
The key difference between commissions and bonuses lies in their structure: while commissions are variable and directly tied to sales results, bonuses are fixed amounts assigned to accomplishing specific, often short-term, objectives.
Both commissions and bonuses play important roles in an effective sales compensation plan structure, contributing to a well-rounded strategy that motivates sales teams and aligns their efforts with company goals.
Sales Compensation Plan Structure
The following example illustrates an advanced sales compensation plan structure.
Mandatory components of the plan are marked in green, while optional elements are highlighted in yellow.
Before designing your specific sales compensation plan, ensure that all components align with the ultimate goal: motivating sales teams to improve performance and achieve their sales targets.
Base salary
Description
The fixed portion of the compensation plan, providing financial stability to sales reps. Usually accounts for 50-70% of on-target earnings.
Example
$50,000 annual base salary for a sales
Commission
Description
A variable payment tied directly to the sales made by the sales rep, often calculated as a percentage of revenue or deal value.
Example
6% commission on all sales revenue; e.g., $144 commission on a $2,400 deal.
Bonuses
Description
Fixed rewards given for achieving specific goals, such as closing a certain number of deals or mentoring new hires.
Example
$300 bonus for onboarding 10 new customers within a month.
Accelerators
Description
Higher commission rates applied when sales reps exceed their sales quotas, motivating overachievement.
Example
Commission rate increases from 6% to 8% for sales exceeding $100,000 in a quarter.
Decelerators
Description
Reduced commission rates for sales reps who fail to meet minimum quotas, emphasizing accountability.
Example
Commission rate decreases from 6% to 4% for sales below 70% of the quota.
SPIF (Sales Performance Incentive Fund)
Description
Short-term incentives designed to boost sales performance.
Example
$500 bonus for the top 3 sales reps selling 20 units of a new product.
Clawbacks
Description
Mechanisms to recover commissions if deals fall through, such as when customers cancel orders.
Example
Rep returns a $200 commission for a deal canceled within 30 days.
Pursue simplicity. The simpler and clearer a sales commission plan is, the more effectively it motivates and engages sales teams.
Examples of Sales Compensation Plans
In this chapter, we will explore examples of all types of sales compensation plans. For certain types, we will include role-specific examples to provide additional clarity.
1 . Base salary + commission compensation plan
Overview
The base salary + commission compensation plan is one of the most commonly used structures in sales compensation programs, particularly in B2B sales. It combines a fixed base salary with a variable commission structure, offering the best of both stability and performance-based incentives.
Advantages
Financial stability: The base salary ensures income during slower periods.
Performance motivation: Commissions drive sales reps to achieve and exceed their sales targets.
Talent retention: Attractive to top sales professionals, rewarding both consistency and excellence.
Flexibility: Easily enhanced with accelerators or SPIFs to encourage specific behaviors.
Disadvantages
Complexity: More challenging to design compared to simpler compensation plans.
Short-term focus: May encourage closing deals over building long-term customer relationships.
Cost Risks: Balancing high commissions with fixed base salary costs can strain budgets
Best applications
B2B sales with high margins: Suitable where commissions align with high-value deals.
Roles with long sales cycles: Offers income security while pursuing lengthy deals.
Revenue-centric roles: Ideal for Account Executives
Why it’s popular
Balanced incentives: Combines stability with performance-driven rewards.
Scalability: Easily adjusted with tiered commissions or additional incentives.
Goal alignment: Drives sales team performance while achieving revenue targets.
Role-based examples
Account Executive (AE) compensation plan example
Base Salary: $60,000 annually
Commission Structure: 7% of closed-won deals
Quota: $1,000,000 in annual revenue
Total Commission: $1,000,000 x 5% = $70,000.00
Total OTE: $60,000 + $70,000 = $130,000.00
Sales Development Representative (SDR) compensation plan example
Base Salary: $45,000 annually
Commission Structure: $100 for each qualified opportunity
Quota: 240 annually
Total Commission: $100 x 240 = $24,000
Total OTE: $45,000 + $24,000 = $69,000
Sales Manager compensation plan example
Base Salary: $90,000 annually
Commission Structure: 5% of total team revenue exceeding $2M annually
Quota: 4,000,000 in annual revenue
Total Commission: (4,000,000 - 2,000,000) x 5% = 100,000
Total OTE: $90,000 + $100,000 = $190,000
VP of Sales compensation plan examples
Base Salary: $120,000 annually
Commission Structure: 2% of total team revenue exceeding $4M annually
Quota: 10,000,000 in annual revenue
Total Commission: ($10,000,000 - $4,000,000) x 2% = $120,000
Total OTE: $120,000 + $120,000 = $240,000
2. Tired Commission Compensation Plan
Overview
A relative commission plan, often called a tiered commission structure, assigns different commission percentages based on whether the sales rep is below, at, or above their sales quota. This model encourages sales representatives to achieve and exceed their targets by offering progressively higher rewards for surpassing specific thresholds.
Advantages
Motivates overachievement: By increasing the commission rate once quotas are met, it strongly incentivizes sales reps to exceed their goals.
Performance-driven: Aligns earnings with both individual sales performance and company business objectives.
Fair and scalable: Provides a proportional reward system that scales with effort and results.
Drives Quota Attainment: Ensures sales quotas are a primary focus for sales teams, balancing individual success with company needs.
Disadvantages
Complexity: Can be more difficult to administer and communicate compared to flat commission structures.
Risk of sandbagging: Reps may delay closing deals to benefit from higher commission rates in the next period.
Unpredictable payouts: Earnings can vary significantly based on quota achievement, which might deter some sales representatives.
When to apply
Quota-Driven Roles: Ideal for roles like Account Executives, where sales quotas play a significant part in the compensation strategy.
Longer Sales Cycles: Suitable in B2B sales where deals take time to close, and exceeding targets is critical to success.
High-Margin Sales: Effective in industries with larger profit margins, where higher commissions for overachievement are financially feasible.
Base Salary: $60,000
Quota: $500,000 in annual revenue
Commission Below Quota: 5% of revenue up to $500,000
Commission Above Quota: 8% of revenue above $500,000
Projected Revenue: $600,000 annually
Total Commission: ($500,000 × 5%) + ($100,000 × 8%) = $33,000
Total OTE: $60,000 + $33,000 + $5,000 = $98,000
3. Comprehensive Sales Compensation Plan
Overview
A comprehensive sales compensation plan combines multiple elements—base salary, commission, bonuses, accelerators, decelerators, and SPIFs (Sales Performance Incentive Funds)—to create a versatile and performance-driven structure. This plan aligns sales reps’ performance with company business objectives, motivating both consistent results and exceptional achievement.
Advantages
Balanced incentives: Combines financial stability (via base salary) with motivation to exceed sales targets (via commissions and accelerators).
Customizable: Adapts to different sales roles, industries, and sales cycles, making it suitable for complex sales organizations.
Drives strategic goals: Includes bonuses and SPIFs to align sales efforts with specific business objectives, like promoting new products or boosting team collaboration.
Encourages accountability: Decelerators hold reps accountable for underperformance, fostering a culture of responsibility.
Maximizes performance: The layered structure ensures that high performers are rewarded, encouraging overachievement.
Disadvantages
Complexity: Requires meticulous planning and administration, which can lead to confusion among sales reps if not communicated clearly.
Potential for demotivation: Decelerators may discourage underperforming reps, especially in challenging markets.
Cost management: With multiple components, this plan can be expensive for companies, particularly if poorly designed.
When it’s applicable
High-Value B2B Sales: Best for industries with longer sales cycles and high-margin deals, such as SaaS or enterprise sales.
Diverse Sales Teams: Works well in organizations with varied roles and responsibilities, ensuring all contributions are rewarded.
Growth-Focused Companies: Ideal for businesses aiming to incentivize overachievement, launch new products, or drive team collaboration.
Example for an Account Executive
This comprehensive sales compensation plan ensures that sales reps are rewarded for every aspect of their performance, from achieving quotas to exceeding them and focusing on strategic initiatives. While it requires careful design and communication, it is an excellent choice for sales organizations that value both individual contributions and team alignment with business goals.
Base Salary: $70,000 annually
Commission Structure: 8% of revenue up to $500,000; 12% on revenue above $500,000
Quota: $600,000 in annual revenue
Accelerators: 15% commission for sales exceeding $750,000 annually
Decelerators: 5% commission on revenue if under 70% of quota ($420,000)
SPIFs: $1,000 bonus for every 10 subscriptions of a new product sold
Bonuses: $10,000 for achieving 120% of annual quota
Projected Revenue: $800,000 annually
Total Commission: ($500,000 × 8%) + ($300,000 × 12%) = $74,000
Total SPIFs: $2,000 (for 20 subscriptions sold of a new product)
Total OTE: $70,000 (base) + $74,000 (commission) + $2,000 (SPIFs) + $10,000 (bonuses) = $156,000
Example for Sales Development Representative
This comprehensive plan ensures SDRs are rewarded for achieving and exceeding their sales targets, while also contributing to broader sales team performance and company success
Base Salary: $50,000 annually
Commission Structure: $100 for each qualified opportunity generated
Quota: 20 qualified opportunities per month
Accelerators: $150 per opportunity above 25 in a month
Decelerators: $75 per opportunity if fewer than 10 are generated in a month
SPIFs: $1500 bonus for generating 10 qualified opportunities for a specific new product line within a quarter
Bonuses: $2,000 quarterly for achieving 120% of monthly quota across all three months
Projected Opportunities: 20 qualified opportunities per month (240 annually)
Total Commission: (240 × $100) + (20 × $150 for overachievement) = $27,000
Total SPIFs: $1500 (for special product line opportunities)
Total OTE: $50,000 (base) + $27,000 (commission) + $1500 (SPIFs) + $6,000 (quarterly bonuses) = $84,500
4. Margin-Based Sales Compensation Plan
Overview
A margin-based compensation plan ties an Account Executive’s (AE) commission to the profit margin of the deals they close, rather than just the total revenue. This structure incentivizes sales reps to focus on deals that are both high-value and profitable, aligning their efforts with company business objectives.
Advantages
Encourages profitability: Aligns the sales team’s performance with company goals by prioritizing deals with higher profit margins, not just revenue.
Quality over quantity: Discourages selling at heavy discounts or low margins, ensuring sustainable business growth.
Tailored incentives: Motivates sales representatives to negotiate effectively and sell premium products or services.
Aligns with business goals: Perfect for companies with tight margins or a focus on premium offerings.
Disadvantages
Complex to administer: Requires detailed tracking of deal margins, which can complicate sales comp plans.
Risk of demotivation: If margins are heavily dependent on external factors (e.g., market pricing), sales reps may feel they have limited control over their earnings.
Focus shift: Could lead to sales reps avoiding lower-margin deals that might still be strategically important (e.g., entry into new accounts).
Where it’s applicable
Low-margin businesses: Common in industries like wholesale, distribution, and retail, where margins are slim and profitability is paramount.
Cost-sensitive markets: Effective in industries with fluctuating costs, such as food and beverage, logistics, or manufacturing.
Customized solutions: Works well in businesses with significant cost variability between deals, such as IT services or construction.
Example for an Account Executive
Base Salary: $55,000 annually
Commission Structure: 8% of profit margin per deal (Revenue - COGS)
Quota: $800,000 in annual revenue
Projected Revenue: $800,000 annually
Projected Margin: 30% average margin (COGS is $560,000 for $800,000 revenue)
Total Commission (Example): ($800,000 - $560,000) × 8% = $19,200
Total OTE: $55,000 (base) + $19,200 (commission) = $74,200
This simplified plan provides a base salary for financial stability and a margin-tied commission structure to incentivize profitable deals. It’s straightforward, making it ideal for businesses seeking simplicity while prioritizing profitability.
5. Salary-Only Compensation Plan
When it’s applied
Non-revenue-generating roles: Ideal for positions that provide critical operational support but do not directly impact revenue generation.
Focus on system optimization: Used for roles dedicated to maintaining tools and systems, like CRM platforms, which are vital for the sales team but not directly tied to deal closures.
Example
Role: CRM Administrator.
Ensures the CRM system is properly maintained, manages user access, resolves technical issues, and creates reports to help sales managers and sales reps track their performance and quotas.
Compensation: $60,000 annual salary with no variable pay, as the focus is on ensuring the sales organization operates efficiently rather than generating revenue.
6. Commission-Only Compensation Plan
A commission-only compensation plan works best for roles involving simple, short sales cycles and straightforward products or services. The focus is on high-volume sales rather than complex deal-making.
When it’s applied
Simple and short sales cycles: Ideal for roles involving products or services that are easy to sell and require minimal customer education.
High-volume sales: Works in environments where the focus is on making as many sales as possible, like telesales or retail.
Low Investment required: Suitable for roles where the sales rep doesn’t need to spend significant time or resources nurturing leads or closing deals.
Example
Role: telesales representative.
Responsible for selling low-cost subscriptions for an online magazine. The role involves making outbound calls to prospective customers and closing deals quickly.
Compensation:
10% commission on each subscription sold.
For example, selling 100 subscriptions at $50 each in a month generates $500 in commissions (100 × $50 × 10%).
No base salary is provided, as earnings are entirely performance-based.
Advantages
Highly motivational: Encourages sales reps to maximize effort and sales volume, as income is directly tied to performance.
Low risk for employers: No fixed costs for hiring; businesses only pay when sales are made.
Scalable for high-volume sales: Works well in environments like call centers, where high-volume sales drive results.
Disadvantages
Income uncertainty for Sales Reps: Reps might struggle during slow periods, leading to high turnover.
Limited fit for complex sales: Not suitable for roles requiring customer education, relationship-building, or long sales cycles.
Potential for high pressure: Reps may feel pressured to prioritize quantity over quality, which could harm customer relationships.
7 Steps to Create Compensation Plans
Designing an effective sales compensation plan requires strategic planning and alignment with your company’s business objectives. Follow these seven steps to create a sales comp plan that motivates your sales team, drives performance, and achieves revenue goals.
1. Define your sales strategy
Start by outlining your sales strategy and identifying key priorities, such as revenue growth, market expansion, or customer retention.
Align the sales comp plan with the specific objectives you want to achieve.
Example: If you’re focusing on upselling, emphasize bonuses for recurring revenue.
2. Identify the types of sales compensation
Choose the types of sales compensation that fit your strategy. Common options include:
Base Salary + Commission: A balanced approach for most sales roles.
Commission-Only Plans: Ideal for simple, high-volume sales.
Margin-Based Plans: Great for roles focused on profitable deals.
Team-Based Incentives: Effective for promoting collaboration within the sales team.
3. Set realistic sales goals
Establish attainable quotas that align with individual, team, and company objectives.
Use historical performance data, market trends, and pipeline forecasts to define these goals.
Ensure the goals are challenging yet achievable to prevent demotivation.
4. Design the commission structure
Build a commission structure that rewards performance fairly and motivates sales representatives to exceed expectations:
Include accelerators for overachievement (e.g., higher commission rates for surpassing quota).
Add decelerators to address underperformance (e.g., reduced commission rates below a certain threshold).
Example: A sales manager compensation plan might offer a 5% override on team revenue exceeding $1M quarterly.
5. Incorporate bonuses and incentives
Add targeted bonuses and incentives to your sales comp plan to promote specific behaviors, such as:
SPIFs (Sales Performance Incentive Funds): Short-term rewards for focusing on new product launches.
Team bonuses: Incentives for achieving group milestones, and fostering collaboration.
6. Test and communicate the plan
Before rolling out the plan, test it with historical sales data to ensure payouts align with company profitability.
Clearly communicate the sales compensation plan to the team, explaining each component (e.g., commission structure, quotas, bonuses).
Use simple terms and provide examples to avoid confusion.
7. Monitor and adjust the plan
Continuously monitor the plan’s effectiveness by tracking key metrics like:
Quota attainment rates.
Total compensation costs versus revenue.
Sales team performance.
Gather feedback from sales managers and sales representatives to identify areas for improvement. Adjust the compensation plan annually or as business priorities shift.
Bonus: Actionable tips
To ensure your sales comp plans remain effective and aligned with your business goals, follow these actionable tips:
Focus on simplicity: A straightforward sales compensation plan is easier for sales reps to understand and motivates better performance. Avoid overly complex commission structures that may cause confusion.
Review plans annually: Reassess your sales comp plan at least once a year to ensure it aligns with changing business priorities, market conditions, and the effectiveness of different types of sales compensation.
Incorporate feedback: Engage your sales team and sales managers to gather input on what’s working and what isn’t. Adjust your compensation plan based on real-world insights.
Tie plans to business goals: Ensure your sales manager compensation plan and sales rep compensation plans align with overarching company objectives, such as revenue growth or customer retention.
Provide clear communication: Explain each component of your sales comp plan, including commission structures, quotas, and bonuses, so everyone understands how they can maximize their earnings.
Adapt for roles: Tailor your compensation plans to specific roles. For example, create different types of sales compensation for Account Executives, SDRs, and sales managers, depending on their responsibilities.
Reward overachievement: Use accelerators or tiered commission structures to motivate top performers to exceed their goals.
Monitor key metrics: Regularly track performance metrics, such as quota attainment and total compensation costs, to measure the effectiveness of your sales compensation plans.
By implementing these tips, you can design sales comp plans that drive results, motivate your team, and contribute to long-term success. Let me know if you'd like any additional refinements!
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Alex is the CEO at Forecastio, bringing over 15 years of experience as a seasoned B2B sales expert and leader in the tech industry. His expertise lies in streamlining sales operations, developing robust go-to-market strategies, enhancing sales planning and forecasting, and refining sales processes.
Alex is the CEO at Forecastio, bringing over 15 years of experience as a seasoned B2B sales expert and leader in the tech industry. His expertise lies in streamlining sales operations, developing robust go-to-market strategies, enhancing sales planning and forecasting, and refining sales processes.
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Sales Planning
Sales Forecasting
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Sales Planning
Sales Forecasting
Sales Performance Insights
Sales Planning
Sales Forecasting
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© 2024 Forecastio, All rights reserved.
Sales Planning
Sales Forecasting
Sales Performance Insights
Sales Planning
Sales Forecasting
Sales Performance Insights
Sales Planning
Sales Forecasting
Sales Performance Insights
© 2024 Forecastio, All rights reserved.
Sales Planning
Sales Forecasting
Sales Performance Insights
Sales Planning
Sales Forecasting
Sales Performance Insights
Sales Planning
Sales Forecasting
Sales Performance Insights
© 2024 Forecastio, All rights reserved.