How to Create Sales Compensation Plans That Actually Work

More than half of employees might leave their job if they're not paid well enough. That's why creating sales compensation plans that work has become crucial for businesses with a sales team.

A good sales compensation plan goes beyond showing potential earnings. It helps everyone understand what's expected, gets your team excited, and pushes everyone to reach their personal and company goals.

This piece will show you step by step how to create sales compensation models. These models will help you attract and keep top sales talent while meeting your business goals.

What is salespeople compensation?

Sales compensation is the total financial package companies give their sales professionals based on their performance. It goes beyond just paying for work—companies use it as a tool to encourage specific business behaviors and arrange individual efforts with company goals.

Sales compensation combines different payment elements to reward sales performance. These elements are:

• Base salary: Fixed amount paid regularly whatever the performance

• Commission: Variable pay calculated as a percentage of sales generated

• Bonuses: Additional rewards to achieve specific targets

• Other incentives: May include profit sharing, stock options, or non-monetary benefits

A well-laid-out sales compensation plan does more than just pay employees. The right plan motivates team members, improves quota attainment, reduces turnover, and creates predictable revenue outcomes. But misaligned compensation plans can discourage teams and create commission disputes.

What is selling compensation?

Selling compensation rewards sales professionals for their revenue generation performance. This approach balances financial security with performance incentives to encourage desired selling behaviors.

The right compensation structure can affect an organization's success by a lot. 90% of companies adjust their compensation plans annually to get better results. On top of that, 65% of companies have lost at least one salesperson due to commission disputes. These numbers show why proper compensation plans matter for keeping and motivating employees.

Sales leaders believe compensation plans create "the magic". They're not just numbers on spreadsheets but catalysts that drive revenue growth. The best plans stay simple enough for reps to understand yet complex enough to keep the sales team active and flexible with changing targets.

Sales compensation works as a framework that balances multiple goals: attracting talent, keeping good performers, encouraging extra effort, rewarding business results, and matching management's vision. Done right, it becomes a powerful tool for company success.

What are the four elements of salesperson compensation?

Sales compensation plans need four significant components that motivate sales teams and generate revenue. A clear understanding of these elements creates balanced incentives that improve performance within budget constraints.

Sales quota

A sales quota shows the performance targets salespeople must reach in a specific timeframe to earn their incentive pay. These measures help businesses evaluate their sales strategies' effectiveness and track team results. Quotas motivate representatives to achieve and exceed their targets. They also encourage a competitive yet shared work environment.

Sales quota attainment averages around 58%, which shows why realistic goals matter. Your compensation structure needs proper quotas to measure success and calculate rewards accurately.

On-target earnings (OTE)

OTE gives salespeople a clear picture of their total compensation when they meet their expected goals and quotas. The calculation combines base salary with commission from closed deals when a representative hits 100% of their quota.

The math is simple: Annual base salary + annual commission earned at 100% quota attainment = OTE. Companies often set OTE at one-fifth of their annual sales quota. This means the quota typically runs six to eight times higher than OTE.

Accelerators and decelerators

Sales accelerators kick in when representatives exceed their quota and create bigger payoffs for top performers. These rewards usually start after reaching 100% of quota. They can multiply commission rates by 1.5x to 4x for performance above quota.

Decelerators lower commission rates for underperforming representatives. They usually take effect between 40% and 60% of quota attainment. This helps control costs and encourages representatives to focus on valuable, long-term customer relationships instead of quick, low-quality sales.

Clawbacks and SPIFs

Clawbacks let companies take back commission when customers cancel within a set period. This protection stops commission payments on deals that don't create long-term value. Clawbacks also encourage behaviors that accelerate sustainable growth rather than pushing for wins regardless of cost.

Sales Performance Incentive Funds (SPIFs) offer short-term rewards to shift specific behaviors. These contests run for one to four weeks. Rewards can include cash bonuses or perks like dinners or special experiences.

Types of Sales Compensation Plans with Examples

The right sales compensation model creates a perfect balance between company goals and your team's earning potential. Let's look at the most effective ways to structure compensation and see how each one drives different selling behaviors.

Base salary plus commission

Most companies use a compensation structure that mixes fixed income with performance-based pay. A 60:40 ratio (60% base salary, 40% commission) stands out as the standard approach. This gives salespeople financial security while motivating them to exceed their targets. The model really shines in complex B2B sales environments where sales cycles run longer and reps need to build relationships instead of rushing to close deals. A software company might pay reps $40,000 base salary and add 3% commission on each sale.

Commission-only plans

This straightforward approach pays representatives based on their sales performance without any guaranteed income. Self-motivated, entrepreneurial people who thrive under pressure tend to excel here. Commission rates usually range from 5-45% depending on industry and deal complexity. These plans work best in industries like real estate, insurance, and direct sales where you can easily track individual performance.

Tiered and milestone-based plans

Tiered commission structures reward salespeople with higher rates as they reach specific thresholds. Reps might earn 8% until they hit $100,000 in sales, then jump to 12% up to $150,000, and keep climbing. Milestone-based plans add rewards throughout the sales process—$500 for qualified demos, $1,000 for signed contracts, plus commission on closed revenue. Both approaches push representatives beyond their basic quotas.

Territory volume and relative commission

Territory volume plans split commissions among teams based on their region's total sales. This approach promotes teamwork and fits perfectly with account management roles or outside sales teams where covering territory matters more than individual achievements.

Draw against commission

This model provides advance payments (draws) against future commissions. Recoverable draws work like loans that reps repay from earned commissions. Non-recoverable draws, common for new hires, don't need repayment if commissions fall short. This helps salespeople stay afloat during ramp-up periods or while working on longer sales cycles.

Profit margin-based plans

These plans link compensation to sales profitability instead of revenue. Reps earn commission percentages on gross margins rather than total revenue. This approach discourages heavy discounting and encourages selling higher-margin products or services. Take a $10,000 sale with $7,000 cost (30% margin)—a rep with 10% commission earns $300 instead of $1,000 if based on revenue alone.

How to Create a Sales Compensation Plan Step-by-Step

Creating a sales compensation plan that works demands thoughtful planning and precise execution. Here's a practical approach to develop compensation structures that improve performance while keeping costs in check.

Set clear business and sales goals

Your business goals should shape your compensation strategy. The plan might focus on boosting overall sales, cutting customer churn, growing existing customer revenue, or launching new products. A soaring win combines company objectives with easy-to-understand targets for sales teams.

Build a compensation planning team with members from finance, sales, and operations departments. This shared approach creates balanced and trusted plans that everyone supports. Sales representatives who participate in planning understand and champion the final structure better.

Choose the right compensation model

Once goals are set, pick a compensation structure that encourages desired behaviors. Your organization's growth stage, sales cycle length, market position, and target customers should guide your strategy. To name just one example, profit-sharing plans suit faster growing startups, while draw against commission works better in seasonal industries.

Define quotas and performance metrics

Your quotas should challenge yet remain achievable. Success metrics can link to sales behavior or organizational measures. The best quotas reflect territory potential, market maturity, and role complexity. Research shows solid benchmarks exist when all but one of these salespeople reach their quota.

Arrange plan with roles and responsibilities

Each sales role needs its own compensation plan based on unique responsibilities and objectives. Sales representatives who close deals need commission-heavy plans. Sales managers who oversee strategy should have plans that emphasize organizational goals.

Test and verify with real data

The compensation plan needs thorough testing before full rollout. Last year's numbers applied to your proposed model reveal potential issues. Analysis of individual components like quota-to-OTE ratios, commission rates, and multipliers should precede testing mixed variables.

Persana.ai offers tools that analyze plan effectiveness and predict outcomes before implementation.

Field tests that compare test groups with control groups offer valuable verification. These tests run between one month and a year, depending on your sales cycle.

Conclusion

A thoughtful strategy works better than guesswork when designing sales compensation plans. In this piece, we explored how well-structured compensation can be a powerful tool. It helps arrange individual efforts with organizational goals.

Your company's specific needs should determine the compensation model. Base salary plus commission, commission-only structures, tiered plans, and profit margin-based approaches each drive different behaviors. These models also attract different types of sales professionals.

A practical roadmap emerges from the step-by-step process above. Clear business goals come first. The right compensation structures follow next. Realistic quotas and metrics need definition after that. Real data testing should happen before full implementation.

Note that successful compensation plans stay simple enough for reps to understand. They need just enough complexity to keep them involved. Most companies adjust their compensation yearly to get optimal results.