How to create a sales compensation plan with a sales commission structure that drives performance and growth

Designing commission structures shouldn’t feel like solving a Rubik’s Cube. Yet, for many businesses, it does. On paper, it’s just math. However, in reality, every small design decision influences sales behavior, deal quality, and revenue predictability. 

Variable pay tied to revenue looks simple until you factor in renewals, churn, and non-standard discounts. 

However, when designed and implemented strategically, your sales commission structure becomes one of the most powerful levers for driving reps’ behavior, reducing churn, and improving cost of sales. 

This article explores how finance leaders can build sales compensation plans that drive growth without sacrificing financial control. It covers how to structure pay mix across roles in your compensation plan design along with the most common sales compensation and commission models used across companies. We also discuss a few best practices to avoid common mistakes that cause compensation plans to break as you scale.

What are sales compensation plans?

A sales compensation plan outlines how an organization rewards its sales team. These plans include different components like base salary, commissions, bonuses, incentives, and other performance-linked rewards. The purpose of a sales compensation plan is to encourage the right behaviors, support revenue goals, and create predictability in financial planning.

The elements of a sales compensation plan include the following:

• Base salary: The fixed income
• Commission: Percentage-based payout
• Bonus: One-time reward
• Incentives: Short-term motivators

Commission vs. incentive vs. bonus: Key distinctions 

• Commission is the core variable pay. It is ongoing and usually tied to deal size or quota attainment. Commission plans vary by role, deal structure, and stage of the customer lifecycle.
  
• Incentives are short-term levers like SPIFFs, contests, or team awards. These are designed to push specific products, move deals faster, or reduce discounting.
  
• Bonuses are one-time payouts. These are the rewards for achieving specific targets, like retaining top accounts or hitting quarterly revenue milestones. They are generally layered on top of commission structures.  

On-target earnings vs. commissions

On-target earnings (OTE) are the total compensation a sales rep can expect if they meet 100% of their quota and all other requirements laid out for their position.

OTE is a great planning benchmark that informs quota setting. It also enables leaders to determine whether compensation aligns with market norms and financial goals for specific roles. OTE also helps structure variable pay within comp plans and is used by SaaS companies to model compensation costs and expected revenue output.

To figure out OTE, you simply add together the base salary, bonuses, and other incentives. For example, if the base salary is $80,000, the commission potential is $60,000, and expected bonuses and other incentives total $10,000, then the expected OTE per the given formula is $150,000.

This breakdown reflects realistic mid-market SaaS comp structures, where:

• Commission is typically 40–50% of OTE.
• Bonuses for hitting stretch targets or team milestones and incentives (e.g., SPIFFs or non-cash rewards) make up ~5–10%.

It is important to note here that the OTE calculation doesn't take into account any one-time bonuses and other benefits that aren’t directly linked to sales performance, e.g., one-time/special bonus, overtime pay, etc.  

In addition to OTE, sales leaders can also use the Q factor to help ensure they’re setting set optimal quotas and to monitor sales efficiency. Q-factor compares revenue generated (typically ARR) to total sales compensation (OTE). For example, a Q factor of 2 means a sales rep needs to generate $2 in revenue for every $1 paid in compensation. Using this metric, leaders can answer questions such as, Are our quarterly quotas achievable? Are the highest-earning sales people delivering a high ROI? Is the way we’re thinking about redesigning compensation plans going to be cost-efficient?

Importance of sales commissions and incentives

Sales commissions and incentives directly influence pipeline quality, deal structure, and long-term revenue retention in SaaS businesses. Let’s see how. 

Impact of sales commissions and incentives on the business

Sales commissions influence more than just payouts—they can impact a company’s forecasting, financial performance, and hiring strategy: 

• Commissions tied to realistic quotas and metrics like annual recurring revenue (ARR) support sustainable expansion.
• Profitability-based commissions ensure reps prioritize deals that support customer lifetime value.
• ​​Well-designed plans create predictable revenue growth, protect margins, and improve forecasting accuracy.
• Transparent, high-earning potential helps attract and retain experienced sales talent.
• Setting quotas and payout thresholds ensures reps stay focused on deals that justify the customer acquisition costs.

Impact of sales commissions and incentives on sales performance 

The structure of sales compensation also has a direct effect on how sales reps engage with their pipeline and pursue targets: 

• Clear compensation plans show reps exactly where to focus their efforts.
• A direct link between effort and earnings drives better ownership of the pipeline and outcomes.
• The right balance of fixed and variable pay motivates both steady performers and high achievers.

A word of caution...

‍Commissions strongly influence sales behavior, ideally in a positive way. But they can also be misinterpreted or misused.

Salespeople will always aim to maximize their earnings. The key challenge isn’t stopping them from doing so, but recognizing when their actions start to hurt deal quality, lower margins, or disrupt financial forecasts. 

A strategically-designed sales compensation plan anticipates these behaviors and includes safeguards that aligns personal incentives with company goals.

Common sales compensation and commission plans

There are many different ways to build commissions into your sales compensation model to motivate and reward high performance. While quotas factor into some, there are a number of methods where quotas don't play a role. Here, we explore seven common sales commission models organizations use today.

Salary plus commission

One of the most common commission structures, this plan combines a guaranteed base salary with variable earnings (commission rates) based on sales performance. A key idea to note is that commission rates are always expressed as a percentage. 

1. Fixed percentage-based commission

Also referred to as a flat-rate commission structure, here, sales reps earn a fixed base salary plus a consistent percentage on every dollar of revenue they close. This model best suits SaaS businesses with transactional sales cycles and predictable deal sizes. It is so because the fixed percentage-based commission model simplifies earnings calculations for reps and makes compensation forecasting for finance teams much easier.

‍Example: A sales rep with a $600,000 ARR quota earns a 10% commission rate. If they close a $50,000 deal, they receive a $5,000 commission payout.

2. Accelerated commission

Accelerated commissions apply a higher payout rate to revenue earned beyond quota. This creates a stronger financial upside for top performers and keeps high achievers motivated after achieving quota while sustaining the momentum late in the sales cycle.

Example: A sales rep has a $1M ARR quota. They earn 10% commission up to quota as well as 15% on revenue beyond quota.

If they close $1.2 million in revenue, then the total commission is:  

• First $1,000,000 × 10% = $100,000
• Remaining $200,000 × 15% = $30,000
• Total commission = $130,000

3. Tiered commission

In this structure, payout rates increase as reps advance through defined sales attainment tiers. This model keeps reps motivated across all levels of quota achievement. It rewards both steady progress and exceptional performance.

Example:  A sales rep closes $1.2M in revenue against a $1M quota, with the following tiers:

• Tier 1 — $500,000 (revenue) × 5% (commission rate) = $25,000
• Tier 2 — $500,000 × 8% = $40,000
• Tier 3 — $200,000 × 12% = $24,000
• Total commission earned = $89,000

4. Gross margin commission

Gross margin commissions tie payout to the profit generated from each deal—typically calculated as revenue minus direct delivery costs, such as infrastructure and support. This model motivates reps to focus on high-margin deals and prevents extreme discounting.

Example: A sales rep closes a $100,000 ARR deal with $60,000 in gross margin. At a 10% commission rate, the payout is $6,000.

5. Per seat/license commission

These commissions reward reps based on the number of seats, licenses, or users sold. This commission plan works best for SaaS companies with seat-based pricing models (e.g., $X per user per month). It aligns the sales rep’s incentives directly with customer growth—adding more users or licenses increases deal value.

Example: A sales rep sells 100 licenses at $1,000 per license annually, generating $100,000 in ARR. With a 5% commission rate, the rep earns $5,000.

6. Quota-based commission

In this model, sales reps only earn commissions when they meet or exceed a predefined sales “quota”. The commissions and incentive structure defines the earnings based on performance against this quota. Common implementation methods include:

• Linear: This is a flat rate. Reps earn a proportionate payout based on goal achievement, e.g., 120% of goal equals 1.2x payout.
• Accelerated: Reps earn a higher percentage after quota attainment, e.g., Higher commission rates apply once the quota is surpassed—e.g., 110% attainment means 1.5x payout.
• Tiered: There are different commission rates for different levels, such as, 80%, 100%, and 120% quota attainment.
• Cliffs: In commission plans, cliffs—also known as commission floors—are a tool or clause that requires sales reps to reach a minimum threshold (e.g., 70–80% of quota) before any commission payouts. The full commission payout happens only after the cliff and their quota is surpassed. 

Example: A sales rep has a $300,000 ARR quarterly quota, with a 10% commission rate on the revenue earned above quota. Let’s assume they close $400,000 in revenue:

• First $300,000 earns no commission
• Remaining $100,000 × 10% = $10,000 payout

7. Residual commissions

Residual commissions reward reps for generating recurring revenue beyond the initial sale. Reps earn commissions on renewals or extended subscription revenue. 

Residuals are typically paid only on retained or renewed revenue. They may also be capped in terms of how long after the sale they may be paid or paid at decreasing rates over time. These commissions are best suited for roles that manage the customer relationship over time, such as account managers or hybrid sales/customer success reps.

Example: Example: A sales rep closes a deal worth $100,000 ARR and earns 10% in year one ($10,000). 

The customer renews for two additional years at a 5% residual rate, which generates $10,000 in additional commission.

The total commission over three years then becomes $20,000.

Salary plus bonus 

This model combines a stable base salary with performance-based bonuses. The bonus angle of this model includes sales performance incentive funds (SPIFFs) and other tactical incentives to influence short-term behavior and performance. These are crucial in SaaS sales compensation design as they encourage and drive strategic outcomes, e.g., pushing for upsell, closing deals by the end of two months instead of a quarter, etc.

Unlike commissions that are tied to individual deals, this model aligns the reps’ variable earnings with strategic business goals and rewards larger achievements, such as:

• Landing a strategic or high-value customer logo
• Enabling a multi-product adoption or upsell success
• Achieving team, regional, or company-wide revenue goals

However, SPIFFs should be used carefully—while they reward short-term outcomes, overuse can lead to perverse incentives that ultimately impact your business’ financial health. 

Equity-based

Equity-based compensation, like stock options, restricted stock units (RSUs), and other similar offerings, is used primarily to reward long-term alignment and retention. It ties employee rewards to the company’s future value and growth. This compensation design is particularly common in startups where the equity potential is significant but cash compensation could be on the lower side.

How to design an effective sales compensation plan with commissions

Developing a sales compensation plan requires balancing multiple objectives including driving growth, protecting margins, managing costs, and motivating teams. As the SaaS CFO, Ben Murray, explains, a comprehensive sales compensation plan should address the following foundational questions: 

• How much? What is the OTE for each role? What is the pay mix (base salary vs. variable compensation)?
• For what? What should be the quotas and performance KPIs for the reps? How often should these targets or quotas be reviewed and adjusted?
• How? What commission structures, including bonuses and incentives, will be used to achieve the desired outcomes and reward performance?

Follow these six steps to build a robust SaaS sales compensation and commission plan for your sales team. 

1. Determine OTE

Your first step is to set the OTE for each role. The median OTE for SaaS sales reps, commonly referred to as account executives (AEs), falls between $120,000 and $150,000 in mid-market segments. For enterprise roles, it goes well above that, depending on deal complexity and territory size. Making sure that the OTE is closely tied to realistic attainment rates (typically 60%–70%) of reps achieving quota is important to maintain reps’ morale and financial sustainability.

‍Scenario planning techniques help business leaders stress-test quota distribution and territory assignments, adjusting the comp plans accordingly before rollout. This ensures the plan aligns with the business’ overall growth objectives and revenue goals.

2. Decide on the pay mix by role

Pay mix is how total compensation is split between base salary and variable earnings. It differs based on the role. For AEs, a more variable-heavy mix aligns well with higher control over outcomes. However, for CS reps, the compensation tends to be more base-heavy due to the nature of their role.

For SaaS account executives, the most common pay mix is 50:50. The most common pay mix ratios for other roles are:

• Sales development representatives (SDRs): 70:30 or 60:40.
• Sales managers: 60:40 or 70:30 (depends on management vs. selling expectations).
• Customer success (CS) representatives: 80:20 or even 90:10.

3. Set commission rates

The commission rates you set should fit in with your pricing model, deal size, and margins.

For example, the median commission rate at 100% quota attainment is 11.5% of the ACV, with typical rates ranging between 11% and 14%. 

4. Optimize incentive payout timing

How often you pay matters for both motivation and managing cash flow.

Monthly payouts give reps a quick reward for their performance, which helps keep them motivated and focused.

Quarterly payouts, on the other hand, give finance teams more room to manage cash flow, especially when dealing with things like churn, clawbacks, or longer-term contract adjustments..

5. Plan for scalability

Compensation plans that work at $10M ARR may not scale at $100M. As your business grows, revisit:

• Quota setting as deal sizes evolve
• Cost of sales as compensation expenses rise
• The complexity of your incentive structures

6. Monitor and refine

Even well-designed plans create unintended consequences as sales behavior adapts. Regular reviews help spot (and address):

• Over-discounting to hit accelerators
• Deal shifting across quarters
• Reps gaming multi-year SPIFFs
• Pipeline distortion to optimize commission triggers

Factors to consider when selecting a commission structure

Choosing the right commission structure starts with understanding your business model, product complexity, and sales team dynamics in terms of:

• Sales cycle complexity: Longer sales cycles often require higher base pay to keep reps engaged during extended deal timelines.
• Product or service variability: When pricing or margins vary, gross margin-based commissions protect profitability by tying payouts to deal profitability than revenue.
• Sales volume predictability: Predictable, high-volume sales lend themselves to flat-rate or tiered commissions. Unpredictable enterprise sales often benefit from accelerators or quota-based triggers.
• Customer retention importance: If long-term renewals drive growth, consider residual commissions or bonuses tied to retention to align incentives with customer lifetime value.
• Team capabilities and experience: Experienced reps can handle more upside through accelerators. Less experienced reps may perform better with simpler, more stable plans.

6 best practices for designing effective sales compensation plans

Here’s how SaaS teams can keep sales compensation plans smart and simple.

1. Keep the plan simple and easy to understand

Complex plans confuse sales reps and create administration challenges. Use clear, easy-to-calculate commission structures (discussed earlier) that your sales reps trust and the finance team can model accurately. 

Most top-performing SaaS companies ensure that the core plan components are limited to 2–3 levers, such as base pay, commission, and accelerators.

2. Balance risk and reward

An organization’s pay mix should reflect how much control a rep has over outcomes. Roles with more direct revenue responsibility should have higher variable pay.

Too much upside can drive unhealthy risk-taking, while too little reduces motivation.

3. Incorporate accelerators and decelerators

Accelerators (rewards) incentivize overperformance by increasing a rep’s commission rate as they exceed their sales targets, while decelerators (penalties) decrease commission rates when sales reps underperform or do not meet their targets. 

It is important to maintain a balance between accelerators and decelerators. Using accelerators without limits can strain your comp budget, while stringent decelerators alone can demotivate your sales team.

The right balance helps create a dynamic compensation plan that provides infinite upsides without compromising your business’ cash flow and financial health.

4. Define clear evaluation metrics beyond bookings

To evaluate the effectiveness of your commission and incentive plan, track metrics such as cost per outcome, LTV:CAC ratio, discount levels, or margin to assess whether reps are optimizing for long-term value. 

5. Use data-driven insights

Compensation plans should evolve based on real performance data, not assumptions. With the right data, leaders can assess whether incentives are driving sustainable outcomes, aligned with business goals.

However, data quality is critical. Inaccurate or fragmented data can lead to misguided decisions and unintended outcomes.

6. Review and update plans regularly

It is important to set a cadence for quarterly or annual reviews to refine targets, structures, and risk exposure—based on financial data and sales team feedback.

Understanding how reps perceive and respond to the plan can help identify misaligned incentives, address morale issues, or mitigate any confusion around payout rationale and timelines.

A revenue planning software can help centralize performance data, automate commission calculations, and flag where incentive structures may be creating risk. This allows finance leaders to review and adjust compensation plans, manage operating expenses more effectively, and protect cash flow before issues escalate.

Common pitfalls in SaaS sales compensation design

Even well-designed sales compensation plans can fail if leaders overlook certain structural risks. These are some of the most frequent pitfalls SaaS companies encounter:

1. Balancing incentives and clawbacks: While incentives drive bookings, clearly defined clawback provisions protect against churn, non-payment, and unprofitable deals.
2. Handling recurring revenue complexity: Usage-based pricing and multi-year contracts complicate recurring revenue recognition, making commission calculations harder to align with realized revenue.‍
3. Tracking quota attainment distribution: A bimodal pattern across multiple levels—many reps either far below or above the set quota—is not ideal. It usually signals systemic issues, such as poor quota-setting, challenges in enablement, and unclear segmentation strategy.
4. Mitigating retention risk: Without retention-based incentives, reps may overemphasize initial bookings, leading to higher churn and weaker customer lifetime value.
5. Navigating global compliance complexity: Cross-border operations introduce legal, tax, and currency risks that can affect compensation compliance and audit readiness.
6. Addressing operational limitations: Spreadsheet-based commission calculations are prone to manual errors, unwieldy and slow to update, and difficult to scale. Without integrated systems, finance teams often struggle with data quality, real-time visibility, and accurate financial forecasting.

Build sales compensation plans that scale with your SaaS business

A well-designed sales compensation plan balances performance, profitability, and predictability. But as business models evolve, so do the variables: new pricing models, shifting quotas, expanding teams, and rising financial complexity.

Maintaining alignment at scale requires more than static spreadsheets or ad hoc models. It requires real-time data, flexible modeling, and full visibility across finance and revenue operations.

Sales forecasting software and cash flow forecasting tools like those built into Drivetrain gives business leaders full visibility into how compensation and commission structures impact financial health.

With over 800 integrations and a comprehensive suite of financial planning and analysis features, Drivetrain empowers sales leaders and finance teams to align compensation with growth, profitability, and planning cycles.

• Scenario planning and forecasting: Enables business leaders to see how changes in commission plans affect revenue, margins, and compensation costs. 
• Compensation automation: Eliminates manual errors, handles complex commission calculations, and integrates data from CRM, HRIS, and finance systems for accurate, real-time payouts.
• Workforce planning: Finance leaders can link sales capacity directly to hiring plans and revenue forecasts. Drivetrain’s user-friendly platform helps align headcount-related expenses and growth with financial goals through integrated workforce planning.
• Real-time transparency: Drivetrain gives reps visibility into their own performance against quotas, which reinforces their trust and motivation. For finance teams, real-time insights help spot unintended outcomes and improve forecasting accuracy.
• Compensation alignment with budgeting cycles: On Drivetrain’s platform, sales leaders can keep compensation plans aligned with financial forecasts, growth targets, and budgeting cycles. 

Learn more about how Drivetrain can ease the complexities of your sales compensation and commission plans for better sales performance and financial growth.