To improve the productivity of your sales team, you need to do more than provide them with the latest and greatest sales tools. One of the most effective ways to light a fire under your team’s collective posteriors is to provide a killer compensation plan.
In this article, I’ll discuss how you can make your sales compensation plans even more motivating for sales reps. I’ll explain the different compensation types you can consider, what a compensation plan should contain at a minimum, and how to incentivize performance fairly. I’m even going to give you a head start by creating some example sales compensation plans for each job role in your RevOps team.
What Is a Sales Compensation Plan?
A sales compensation plan is a written document that outlines how and how much you intend to pay each member of your sales team. It includes information about their base salary, as well as quota and performance metrics—and how they'll be rewarded for meeting them. They usually highlight an on-target earnings (OTE) amount, which shows their full salary if they meet all their targets. But they won’t include rewards or benefits available to all employees, like healthcare.
Sales compensation plans are determined by several factors, including the employee’s position, experience, and targets. They'll also change depending on the behavior you want to incentivize and the goals you want your team members to have. In most cases, it will be acquiring new customers. But some members of your RevOps team may be tasked with retaining existing customers or improving customer success.
Since the majority of RevOps teams are responsible for generating revenue, compensation plans are usually tied to sales through a commission structure. This means compensation plans can be variable, with reps given an on-target earnings (OTE) amount, which equates to their full compensation package if they hit 100% of the target.
Sales compensation plans are put in place when an employee first joins the company and are reviewed annually, usually at the start of the company’s financial year.
Why Are Sales Compensation Plans Important?
Motivate Your RevOps Team Effectively
Compensation—and commission, in particular—will always be a key driver of your RevOps team’s behavior. So it almost goes without saying that you need to put together a package to motivate your team.
But in my experience, sales reps aren’t solely motivated by money. They crave security as much as a hefty commission plan. That’s why it’s important to design a sales compensation plan in a way that meets all of their needs.
Retain and Recruit the Best Talent
Enticing sales plans—those that combine security in the form of a generous base salary with incentives in the form of commissions—are the best way to attract top sales talent, in my opinion.
It’s also one of the best ways to keep existing team members in your organization. If they are happy and well-remunerated, why would they bother looking elsewhere?
Improve How You Budget and Forecast Company Costs
The better you define sales compensation plans, the easier it'll be for the company to manage its finances. Clearly defined compensation plans let you budget salaries for your RevOps team for the year ahead. You’ll know how much you’re guaranteed to pay in base salary, as well as what revenue your company will generate when you pay out commissions.
You’ll want to make sure you are paying a commission that aligns (or exceeds) your industry average. Analyze surveys to understand how other companies compensate sales teams so that you can budget accordingly.
Must-Know Sales Compensation Terms
Before I provide examples of sales compensation plans, let’s quickly cover some of the most important terminology to make sure we’re on the same page.
In some sales compensation plans, a commission is dependent on customers staying with the company for a certain period. A clawback is a process that recovers the commission paid to a salesperson when a customer churns quicker than expected.
The purpose of a clawback is to encourage your RevOps team to focus their time and efforts on the best quality prospects, not the ones that are going to be the easiest sale.
On-Target Earnings (OTE)
On-target earnings is the projected value of a salesperson’s total compensation package if they hit their sales targets.
Sales Accelerators / Decelerators
A sales accelerator is a bonus that employees receive when they exceed their sales quota, allowing them to earn a larger commission. A sales decelerator is the opposite. It’s a penalty employees incur when they fail to hit a certain percentage of their target, resulting in a decrease in pay.
This is a sales goal set by management that outlines the amount reps are expected to sell over a given period. Sales quotas can be measured monetarily (the value of deals) or by quantity (the number of units sold).
SPIF stands for sales performance incentive fund. This is a pool of money that can be used to motivate sales reps to meet or exceed their targets.
8 Types of Sales Compensation Plans
A base salary compensation model means paying your RevOps team the same as any other member of your organization. Rather than getting a bonus in the form of a commission when hitting targets, those targets are presented as a set of expectations that reps must meet.
This is a fairly rare form of compensation and not one I'd recommend using. There's simply no reason for sales to go above and beyond to make sales or exceed their targets if they aren’t getting paid a commission. What’s more, I venture it'd make recruitment significantly harder.
The commission-only sales plan can be as brutal as it is motivating. At the end of the day, reps don’t earn anything if they don't sell.
This sales compensation plan may be cutthroat, but it’s a fantastic way to separate great sales reps from everyone else. And it can work particularly well if reps are able to complete sales on a monthly basis—and can thus generate some kind of steady income.
But it usually doesn’t work for organizations with long sales cycles of several months or more. It can also seriously limit your ability to attract the best salespeople. Not everyone is willing to bet it all on commission, even if they can earn significantly more.
Salary Plus Commission
This is probably the most common sales compensation plan, in my experience. It includes a fixed base salary as well as a variable component that can change depending on rep performance—the commission.
This sales compensation plan offers the best of both worlds. Sales employees receive welcome stability in the form of a fixed (and often reasonably generous) base salary. But because the majority of the salary comes from the commission, the employer can rest easy knowing that reps will be motivated to hit their targets.
You may find that underperforming sales reps are motivated to stick around because of the guaranteed salary. But I believe you can reduce the chance by making your base salary as small as possible while still offering some level of comfort to top performers.
Gross Profit Margin
You’ll find that most of the compensation plans on this list center on revenue-based commissions. This plan is a little different in that it considers profit margins instead.
Here’s how it works. Rather than earning a commission based on the total revenue of the item your reps sell, they’ll earn a commission based on the profit margin your company makes. If they sell an item for $2000 that costs you $500, then they will earn a percentage commission from $1500.
If you think your sales staff have a tendency to discount your products too heavily, this sales compensation plan can be an effective solution. Because reps earn commissions on the profit margin, they are highly disincentivized to offer any kind of discount that eats into it. At the same time, however, it may encourage reps to only focus on selling high-margin products at the cost of better or more suitable low-margin alternatives.
Straight-line commission plans are an interesting option whereby commission is directly tied to your salesperson’s quota. For example, if they complete 80% of their quota, they receive 80% of their commission. Or if they exceed their target and hit 150% of their quota, they receive 150% of their commission.
I really like this commission plan because it’s incredibly easy for reps to calculate their earnings, and uncapped commissions are guaranteed to keep them motivated.
But it isn’t perfect. Uncapped commissions may impact your budget, and less motivated sales reps may be satisfied with hitting 70% of their target.
This is similar to a standard commission structure. Reps are still paid a percentage of each deal they close, but the amount of commission changes according to pre-established tiers.
For example, a sales rep may earn 4% commission on the first $25,000 they generate. They may then earn 8% commission on revenue generated between $25,001 and $100,000 and 2% of revenue generated in excess of $100,000.
I think this is a great sales compensation plan that incentivizes all of your sellers to continue performing. They still get rewarded if they exceed their target, but not by such a large amount that it becomes a problem for you to budget.
Draw Against Commission
This is another commission-only sales compensation plan. The difference between draw against commission and commission only is that employees receive an advance at the beginning of each pay period. Employees pay back the advance and then get to keep the remaining commission if they exceed their target.
This compensation plan is a nice way to give some security to employees, but it can mean that employees end up owing companies a fair bit during lean sales periods.
Your RevOps team receives a portion of the company’s annual or quarterly profits in addition to their base salary.
Sales Compensation Plans for Different Sales Roles
Okay, I’ve discussed the most common types of sales compensation and the key terminology you need to know. Now let’s dive deeper and discuss example compensation plans for roles across your RevOps team.
Sales Development Representative (SDR)
A sales development representative (SDR)—also known as a business development representative—is responsible for outbound prospecting. They make cold calls, send cold emails, update your CRM, and qualify MQLs. Once those leads are warm or they have secured an initial meeting, the SDR then passes leads to a sales rep or sales manager.
Because the goal of an SDR is to bring in new opportunities rather than close deals, they should be rewarded accordingly. That means their target (and therefore commission) should be based on something like the number of sales-qualified leads (SQLs) they create or the number of meetings they book.
Because an SDR’s goals are tied to specific deals, it’s common to offer a fixed amount in compensation per meeting booked—say, $500. Of course, you’ll have to use historical data to work out exactly how much each meeting is worth to your company.
Another option is to compensate them with a small percentage of each deal they contribute to.
Base Salary: $25,000
Targets: 15 meetings booked per quarter
Commission Rate: $300 per meeting
A sales rep has a more inclusive role than an SDR. They are usually responsible for moving leads through the entire sales cycle. That includes finding and qualifying new leads and also booking meetings and closing deals.
The sales compensation plans for most sales reps will focus on the latter and reward them for the deals they close rather than the new opportunities they create. Most sales reps will prefer it this way since they’ll have larger OTEs than if they were also rewarded for creating new opportunities.
That being said, don’t be surprised to run into dozens of different commission structures and compensation for sales reps in the wild—they are, after all, the most common RevOps position. It is commonplace to tweak a standard salary plus compensation sales plan with things like sales accelerators and decelerators as required.
Base Salary: $40,000
Targets: $100,000 net new business
Commission Rate: $20,000
Sales managers have a unique and dynamic role in most RevOps teams. Usually one step above standard sales reps, they are responsible for both the success of their sales team and closing deals themselves. This hybrid role usually results in them having somewhat complex sales compensation plans that aim to incentivize both parts of their job.
A simpler solution is to provide sales managers with commissions from their own sales (just as they’d get if they were still a sales rep) and then introduce a bonus structure that rewards them based on their team’s performance. Whichever method you decide on, just make sure you reward them for their team’s performance. Given the extra workload that sales managers have when they are responsible for a team, it's absolutely necessary to reward them accordingly.
You need to be particularly careful when calculating the sales compensation plan for sales managers. These employees will know the plans of the reps they oversee, which means you need to make sure that a high-performing sales rep isn’t making considerably more than them. That being said, it is unusual to give sales managers equity stakes.
Base Salary: $80,000
Targets: $500,000 net revenue in individual and team sales
Commission Rate: $50,000
Sales director compensation plans are similar to those of a sales manager, just one step further removed from the day-to-day business of closing deals. Sales directors aren’t usually closing deals, in my experience, and thus won’t have an individual commission structure in place, but they may have one that relates to the performance of their department or area. For example, an EMEA sales director may receive a commission based on the performance of every sales manager and rep operating in that market.
Sales directors may also receive additional performance-related bonuses and, in some cases, be rewarded with equity.
Base Salary: $100,000
Targets: $1 million net new business
Commission Rate: $50,000
VP of Sales
When you get to the vice president level, sales compensation plans look markedly different. There will still be some kind of base salary and commission component—particularly if you work for a smaller company and are still expected to generate revenue. But a significant chunk of a VP of Sales’ total compensation will be made up of equity or performance-related bonuses.
These bonuses aren’t tied to individual sales goals in the same way they are for sales reps. They are much broader and based on the performance of the company as a whole. For example, a VP of Sales may get rewarded with a stock bonus if a company meets its user acquisition goals ahead of an IPO.
A VP of Sales also has a lot more power to meet their targets. They are in charge of hiring, after all, and can therefore ramp up hiring in order to hit growth goals. While that’s undoubtedly a positive, those targets will usually be much more aggressive and change significantly over time. Make no mistake, the total compensation package of a VP of Sales is significant, but so is the work needed to hit those OTEs.
Base Salary: $150,000
Targets: $5 million net-new business
Commission Rate: $100,000
OTE: $250,000 + equity
Chief Revenue Officer
The chief revenue officer is probably the best-paid member of your RevOps team—and for a good reason. This person is responsible for all revenue-generating activities, and the buck stops with them.
The total compensation package of a CRO will vary drastically between industries and locations. You can expect a Silicon Valley tech CRO to make considerably more than the CRO of a small software company in Missouri.
Regardless of the industry, location, or experience of the CRO, their compensation package will usually have the following components: a generous base salary, performance-related bonuses, commission, and equity.
Base Salary: $200,000
Targets: 50% revenue growth
Commission Rate: $250,000
OTE: $450,000 + equity
Sales Compensation Plan Best Practices
Make Quotas Challenging but Achievable
The best advice I can give when setting sales quotas is to make them very challenging but just achievable enough to be realistic targets. Ideally, only a small fraction of reps should achieve 100% or more of their target.
By setting these kinds of challenging targets, you can be confident in offering uncapped commissions, knowing that only a small percentage of employees will exceed your budget. If in doubt, look at historical data and your sales forecasts to estimate expected win rates.
One way to work out if your sales target is realistic or not is to use historical data to calculate at what level a rep would need to perform to meet it. If reps need to close $50,000 each month and your average sale size is $5,000, then they need to close 10 deals. If deals close 25% of the time, then they would need to perform 40 demos every month—that’s basically two every working day. Add in all of the prospecting and non-sale activities, and it doesn’t look remotely achievable.
Don’t Cap Commission
When you cap commissions, you limit the amount of compensation employees can earn and disincentivize them from continuing to work hard once they’ve reached their sales targets. Money might not be the sole motivation of your sales team, but it’s a big one. So could you really blame them for not continuing to put in the hard yards when they aren’t being rewarded? Me neither.
That’s why I recommend organizations don’t offer capped commissions and focus instead on creating targets that are fair but very challenging.
An alternative strategy is to create a sales performance incentive fund. This can be used to budget for sales staff who exceed their targets, and it can also be used to reward employees on an ad-hoc basis. For example, you could run quarterly promotions aimed at incentivizing reps to achieve a particular goal. It could even be used to reward reps on top of their standard commission if they achieve objectives like encouraging customers to pay their full subscription upfront.
Keep It Simple
Complex sales plans are almost always the least effective, from what I’ve seen. When you try to combine two or more different compensation strategies, it quickly becomes hard for salespeople to understand how much they'll be paid. When that’s the case, your compensation plan isn’t going to motivate them. If anything, it could send reps heading for the exit.
Be Clear About When Commission Will Be Paid
You should clearly document every part of a sales compensation plan—and particularly how and when commission will be paid. Whether it is monthly, quarterly, or in one go at the end of the year, make sure it is outlined in your sales compensation plan, so your RevOps team can plan accordingly.
In the same vein, you should also present each rep with their sales compensation plan in a timely manner—ideally well ahead of the new fiscal year. The commission outlined in the sales compensation plan will form the vast majority of your team’s salary, so it’s vital for their mental and financial well-being to make it clear in advance how much they can earn and when they will be paid.
Start Experimenting With Your Sales Compensation Plan
Sales compensation plans take many forms. Remember, there isn’t such a thing as a perfect plan. Take my advice on board, and don’t be afraid to experiment and tailor the examples to your team—you know what motivates them better than I do.
If you need a tool to help you calculate, track, and pay commissions, check out our list of the best sales commission software. We’ve carried out extensive research to find you the best tools on the market.
If you want to stay up to date on the latest news and insights in the world of RevOps, then subscribe to our newsletter.