If Sales is the machine that drives a business, a well-structured sales
compensation plan is its silent engine.
Not only do sales compensation plans reward hard work, they are pivotal
in motivating and retaining top talent.
This guide offers insights into sales compensation, its importance to high-
growth organizations like startups, and best practices to follow when
building them.
Let’s dive in.
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Sales Compensation
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Sales compensation is the combination of incentives, base salary,
commissions, and bonuses provided to sales reps as a reward for driving
revenue at a company. It reflects a salesperson’s achievements in hitting
targets aligned with company objectives.
What is a Sales Compensation Plan?
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Sales comp plans are a structured strategy that details how reps are
rewarded for meeting their sales goals. It’s tailored based on various
factors, including the rep’s role, seniority, sales cycle length, and the
nature of their sales engagements.
When structured effectively, sales compensation plans ensure salespeople
are continually driven to meet or exceed their sales quotas and contribute
to the bottom line.
Importance of a Well-Structured Sales
Compensation Plan
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Motivating Sales Reps. A clear compensation plan is crucial for
motivating your sales team. With a clear incentive plan tailored for
performance, sales representatives are more driven to meet and
exceed their sales quota.
Alignment with Business Goals. The perfect compensation plan
keeps the sales team on track with the company’s big objectives.
Whether the focus is on bringing in new customers, holding onto
current ones, or rolling out new products, the right rewards make
sure everyone’s aiming for the same targets.
Retention and Attracting Top Talent. Top performers are likely to
stay with a company that rewards their efforts adequately. Moreover,
a competitive compensation package can attract top sales talent to
your organization.
Flexibility and Fairness: A great plan can adjust to different sales
cycles, making sure everyone gets fair pay, no matter the product or
time frame.
Key Components of a Sales Compensation
Plan
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1. Base Salary. The amount of money paid to sales reps regardless of
performance. It provides predictability and stability to team
members.
2. On-target earnings (OTE). OTE is an estimation of total earnings
if salespeople hit their targets. It’s a combination of base salary plus
commission.
3. Sales Incentives. Companies can offer other incentives outside of
regular pay or commissions, including:
o Spiffs (Sales Performance Incentive Funds) or short-term
motivators that encourage specific sales behaviors or
outcomes. For example, you could give a a cash prize for the
first rep to close a specific number of deals.
o Contests or competitions that might reward salespeople for
hitting specific targets, like improving customer retention
rates.
o Rewards can be monetary, like cash bonuses, or non-
monetary, such as dinners, trips, or other experiences.
4. Benefits and Perks. Beyond the monetary components, benefits and
perks play a significant role in attracting and retaining top sales
talent. These can include:
o Health and wellness benefits like health insurance, gym
memberships, or wellness programs.
o Professional development incentives such as courses,
workshops, or subsidies for further education.
o Flexible work arrangements can include remote work,
flexible hours, or compressed work weeks.
o Retirement plans with or without matching 401(k)
contributions.
o Other perks like company phones, car allowances, or regular
team outings and events.
5. Bonuses. Extra payouts that sales reps can earn based on their
performance, achievements, or meeting specific criteria set by the
company.
Sales Compensation Plan Examples
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Trying to create a compensation plan but unsure of where to start?
Let’s walk through a few different types of sales compensation plans. Each
example includes a free template for you to try out on your own!
Base Pay
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Instead of rewarding sales reps for performance, base pay commission
plans provide them with a fixed, regular salary. Base pay commission
plans are generally liked for their predictability because they offer
salespeople a consistent income.
Example: A salesperson earns a base salary of $3,000 per month.
Base Pay + Commission
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In addition to earning a regular salary, base pay + commission plans offer
salespeople extra earnings based on their sales performance.
Example: A salesperson has a $3,000 base salary and a 5% commission
rate. If they achieve $20,000 in sales, they’d earn an additional $1,000
commission, making their monthly earnings $4,000.
Get the template here!
Residual Commission
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Subscription-based businesses typically provide residual commissions on
recurring sales over a period of time. It factors in base salary, rewards, and
deductions to determine the net earnings.
Example: A salesperson sells a software subscription at $100/month,
earning a 10% commission on the initial sale and an ongoing 10% for
every subsequent month the subscription remains active.
Get the template here!
Tiered Commission
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Tiered sales commission plans adjust commission rates based on sales
volume, rewarding sales reps to exceed their sales quotas.
Example: A tiered commission plan is composed of three levels:
Tier 1: 5% commission for sales up to $10,000
Tier 2: 7% commission for sales between $10,001 and $20,000
Tier 3: 10% commission for sales exceeding $20,000
If a salesperson makes $25,000 in sales, they earn 5% on the first $10,000
($500), 7% on the next $10,000 ($700), and 10% on the remaining $5,000
($500), for a total commission of $1,700.
Get the template here (Hubspot | Salesforce)
Revenue Commission
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Revenue commission plans compensate sales reps directly based on the
total revenue they bring into the company. In other words, rep
compensation directly relates to company revenue, creating a direct
alignment between individual effort and earning potential.
Example: If a salesperson sells products worth $50,000 in a month at a
commission rate of 4%, they’d earn a commission of $2,000 for that
month.
Get the template here!
Gross Margin Commission
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Gross margin sales commission plans pay commissions based on a sale’s
profit margin instead of its total value. It incentivizes salespeople to sell
more and maximize the profitability of each sale.
Example: A salesperson earns a 15% commission on the gross margin of
their sales. If they sell a product for $1,000 with a COGS of $600, the
gross margin is $400 ($1,000 – $600). The salesperson’s commission
would be 15% of $400, which is $60.
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Get the template here!
Commission Only
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Salespeople receive no fixed salary in commission-only plans, earning
solely from commissions based on the amount the sell.
Example: A salesperson with a 10% commission rate would earn $500
from a $5,000 sale.
Get the template here!
Territory Volume Commission
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Territory volume commission plans calculate commission based on total
sales volume in an assigned geographic or market area. They incentivize
reps to maximize overall sales within their territory instead of high-value
deals.
Example: A salesperson responsible for a specific region earns a 5%
commission on all sales within their territory. If the total sales reach
$100,000/month, they’d make $5,000.
Get the template here!
Draw Against Commission
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In a draw against commission structure, sales reps get an initial “draw” or
advance at the beginning of a pay period, reflecting anticipated
commissions. As they make sales, this draw is balanced out by the actual
commissions they earn.
Reps pocket the excess if their commissions surpass the draw, but if they
earn less than the draw, they might have to repay the shortfall to the
company.
Want to learn more? Dive deeper into each type of commission structure
in our article: Different Types of Sales Commission Structure.
Otherwise, get the free draw against commission template here.
How to Create a Sales Compensation Plan?
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1. Gather relevant data. Before creating your plan, you must have an
idea of past sales performance, a thorough understanding of your
business goals, and the nuances of your sales cycle.
2. Draft your plan. Set your target pay, base salary, commission,
bonuses, and other incentives. From there, decide on the right pay
mix – the base salary to incentives ratio. Adjust upside potential to
reward sales reps who excel in closing deals and exceeding their
sales quota.
3. Get buy-in from stakeholders. Engage with executives and sales
leaders to gather feedback on your plan. Their insights can ensure it
aligns with organizational goals.
4. Communicate your plan. Transparency is mission-critical.
Organize a meeting to introduce the compensation plan to your sales
force. Emphasize how it supports the business strategy and aligns
with the sales cycle.
5. Implement necessary tools. Use a mix of your sales platforms like
CRMs and other tools to track sales performance. Ensure your
finance and payroll systems can handle payouts so your reps are paid
accurately and on time.
6. Hold training sessions. Offer training sessions that get into plan
specifics into how high-performance can maximize earnings.
7. Monitor and report performance. Keep a close eye on sales
performance metrics. Establish regular check-ins and provide sales
reps with intuitive dashboards that display sales milestones, potential
bonuses, and accrued commissions at a glance.
8. Collect Feedback. Open the channels of communication. Regularly
engage your sales force and solicit their feedback. Their hands-on
experience with the plan can offer invaluable insights, spotlighting
areas that might need recalibration.
9. Review and iterate. As business goals evolve, the plan should
too. Periodically review and adjust your plan against real sales
performance data.
10. Document and ensure compliance. Meticulously document
every tweak, change, or overhaul of the plan and ensure that your
sales compensation strategy is in strict compliance with industry
standards and regulations.
Best Practices in Effectively Maintaining a
Sales Compensation Structure
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1. Set realistic sales quotas. Sales quotas should be both achievable
and competitive. Past sales performance metrics will give you an
idea of realistic goals. Roughly 60% of the sales team should be able
to meet the set quotas.
2. Communicate clearly and often. Consistent and transparent
communication is pivotal. Ensure everyone on the sales team
understands the intricacies of the sales compensation plan. Detail
any changes to the plan and emphasize the company’s goals.
3. Track metrics diligently. Use sales dashboards and spreadsheets to
monitor sales performance metrics, sales quota attainment, and
compensation payouts in real time. This gives you the ability to
course correct and adjust your sales strategy when needed.
4. Conduct regular audits. Frequently check your sales targets and
payouts to ensure reps’ payouts are accurate and in line with your
compensation plan.
5. Evaluate and adjust. Always collect feedback and benchmark
against industry standards. This helps make sure your sales
commission plan remains competitive.
6. Collaborate Cross-Functionally. Involve teams like Finance, HR,
and Sales Ops to get a well-rounded view and create a
comprehensive compensation strategy.
Free Sales Compensation Calculator for
Google Sheets
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While creating the perfect sales compensation plan is challenging,
accurately calculating and tracking against it can be even harder.
Make things easier for yourself with Coefficient’s Sales Commission
Calculator for Google Sheets. It uses live data
from Salesforce or Hubspot to automate commission tracking.
Sales Compensation Plans
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A well-structured sales compensation plan can be your business’ growth
engine – if you can leverage it effectively.
Coefficient allows users to streamline commission management by
automatically tracking and calculating commissions in Google Sheets.
