How to build an effective sales compensation structure for your business

Sales compensation structure design is one of the most crucial (not to mention challenging) parts of being a financial and business leader. 

Get it right, and you have a powerful lever for revenue growth and predictable financial planning. Get it wrong, and you end up with the unintended consequences of undesirable sales behaviors, margin leakage, missed opportunities, and more.

Here, we focus on how to design an effective sales compensation structure for your business that aligns with your company’s overall strategic priorities. 

What is a sales compensation structure?

Your company’s sales compensation structure provides the overarching framework, or blueprint, for how compensation is determined for different sales roles within a company.

A sales compensation structure includes: 

• The mix between base salary and variable pay
• The different types of incentives (e.g., commissions, bonuses, accelerators, SPIFFs) and how they interact  
• The use of tiers, thresholds, or caps
• The general rules or guidelines for how the sales team is paid

Sales compensation structure vs. sales compensation plan

A sales compensation structure defines how pay works. A sales compensation plan defines how it’s implemented.

A sales compensation plan is a detailed, operational document (often tailored for individual sales reps) that lays out exactly what they must do to earn their pay under the broader sales compensation structure.

Key elements of a sales compensation plan include:

• The specific quota or targets for each rep or team
• Commission rates, payout schedules, and detailed formulas
• Incentive types, bonus triggers, and accelerator thresholds
• Any role-specific add-ons or adjustments for territories, account types, etc.
• Written guidelines, examples, and earning scenarios

What does a good sales compensation structure look like?

A well-designed compensation structure ensures that the compensation is:

• Competitive enough to attract and retain talent
• Equitable across roles and territories
• Simple enough for sales reps to easily understand how their actions translate into earnings

Sales compensation plans vary significantly based on many different factors, so there’s no single sales compensation structure that will work for every business. What works for a growth-stage start-up with $10M ARR will not be suitable for an enterprise company with long sales cycles, complex pricing, or usage-based revenue. 

The most effective sales compensation structures are those that align with your business’s overall strategic priorities. 

How to design an effective sales compensation structure with commissions

A sales compensation structure should be designed to balance multiple objectives, including driving growth, protecting margins, managing costs, and motivating teams. The steps below will help you build one. 

1. Determine OTE

The first step is to define the on-target earnings (OTE) for each role. OTE is a strategic tool that helps inform quota setting and structuring the variable component of compensation (e.g., commissions and other incentives). This is critical for forecasting compensation expenses for financial planning and aligning sales performance with business objectives.

It’s also important for attracting and retaining top sales reps. Making sure that the OTE is based on realistic, attainable quotas is critical for keeping sales reps motivated. This is because OTE sets expectations for what your sales reps are likely to actually earn (i.e., realistic attainment rates), not just what they could earn if they hit an aggressive quota. 

To understand this, you need to understand how OTE is calculated: 

OTE is calculated based on 100% quota attainment, so if the quotas are unrealistically high, fewer reps will meet them, with many earning much less than they expected. This not only impacts morale and retention, but it also makes OTE unreliable for planning purposes as well. 

Some companies instead communicate expected earnings based on median attainment to avoid misaligned expectations. So, if your quotas are aggressive, this can help to ensure they reflect what reps can realistically earn. In this case, it’s especially important to be transparent about how OTE is calculated. 

Industry benchmarks from ICONIQ’s 2025 GTM Compensation and Incentives Guide suggest that median attainment rates for fully ramped AEs vary from 53–61% based on the market segments they’re selling to (e.g., SMB, mid-market, enterprise, etc.). If they’re selling to high-growth companies within those markets, median attainment ranges from 49–72%. 

AE responsibilities are just one of the factors you might consider when determining OTE. Others might include the geographic regions your company operates in, the sales territories you’ve defined within those regions, your customer acquisition models (outbound, inbound, or a combination of both), etc. 

The key is to determine your OTE based on the factors unique to your business so it’s realistic, equitable, and competitive. 

2. Determine your commission structure and set commission rates

Choosing the right commission structure starts with understanding your business model, product complexity, and sales team dynamics. Some key factors to consider include:

• 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 rather 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.
• Team capabilities and experience: Experienced reps can handle more upside through accelerators. Less experienced reps may perform better with simpler, more stable plans.

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%. 

3. Decide on the right mix of incentives

This is where your OTE comes in. Now that you’ve determined your OTE benchmark, you need to break it down into its components: base salary and variable compensation (commissions and incentives). The pay mix is the ratio of base salary and variable pay that makes up OTE. 

Broadly, the pay mix includes: base salary + commission + additional incentives beyond commissions (including bonuses, SPIFFs, or accelerators).

The right mix of incentives depends on the current growth of your company, along with your overall strategic business objectives. It’s important to consider your business objectives in this step because different incentives influence different behaviors, which may or may not align with those objectives. 

Therefore, it is important to work backwards—first identifying the behaviors that best support your objectives, and then choosing the incentives that reinforce and reward those behaviors. 

Once you have the basis for your incentives, the next step is to decide on the incentive structure.

For example, for most early and growth stage SaaS companies, the biggest strategic objective is to acquire new logos/clients and drive ARR growth. Therefore, the basis for the incentive—the quotas you set for your sales reps—would typically be anchored to ARR, such as the number of deals closed and the resulting ARR. 

To measure outcomes, you would include either a tiered or accelerated commission structure in their compensation plans, often with a defined threshold or cliff to minimize payout risk and reinforce target attainment. 

However, if using this mix of incentives, product-led growth (PLG) companies or those with usage-based (UBP) pricing may need to consider including clawbacks to account for variability in revenue realization, churn risk, and post-sale usage behavior.

4. Optimize incentive payout timing

How often you pay matters both for 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.

The key is finding the right balance—one that works for your sales reps and your business. 

5. Plan for scalability

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

• Revisit your quotas as sales cycles and deal sizes evolve and after any major change in your product, pricing, or GTM strategy. The goal is to ensure they remain challenging but still achievable.
• Keep an eye on your cost of sales to make sure that increases in base salaries, commissions, and additional incentives aren’t outpacing revenue growth and eroding your margins. 
• Re-evaluate the complexity of your sales compensation structure, especially after major changes in your sales organization, to identify new sources of friction and to simplify where possible.

6. Monitor and refine

Even well-designed plans create unintended consequences as sales behavior adapts. 

Regular reviews help identify and address early on negative sales behaviors, such as:

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

“Rules of thumb” for developing an effective sales compensation structure

A sales compensation plan is an integral part of the company’s finance planning, impacting the cost of sales, cash flow predictability, and long-term unit economics. While there isn't a universal template for the perfect sales compensation structure, there are acceptable industry standards and benchmarks that enable finance and sales leaders to come to a sound decision and avoid costly errors in judgment. 

Let’s consider the following “rules of thumb”: 

1. OTE has to align with the company’s primary business objective

OTE is for sales reps to achieve the primary company goal. These include closing a particular number of deals, meeting the target revenue, or other specific goals of what the company wants to achieve in that fiscal year. 

Additional incentives beyond commission, including bonuses, SPIFFs, and accelerators, are designed to further maximize income for the rep and are usually tied to a secondary goal, such as upselling or cross-selling other features or products to existing clients, increasing deal size or contract length, etc. 

These are to be used selectively and judiciously, so as not to encourage or influence the unintended consequences of sales behavior.

2. Compensation plans should be budgeted as a percentage of revenue

Quite a few businesses make the mistake of bucketing sales compensation plans as part of HR costs. However, compensation plans should be budgeted as a percentage of the topline revenue.

What does this mean?

• In segments with shorter sales cycles, such as SMB, variable pay often makes up a higher percentage of total compensation, relative to overall revenue.
• In enterprise segments, where deal sizes are larger and sales cycles longer, the percentage of revenue allocated to compensation is generally lower, but the absolute OTE per rep is higher.

As your business grows, it's essential to continuously monitor the cost of sales to ensure compensation doesn’t begin to outpace your revenue growth and erode your margins. 

3. Your sales compensation structure should be simple

Exactly how simple depends on a lot of things, factors unique to your business. But one thing is certain—a complex sales compensation structure with too many elements will not only muddle your sales reps’ KPIs but can also cause friction among your team. 

If you measure reps on multiple targets, such as new revenue, number of deals closed, multi-year contracts, and net-30 vs. net-60 payments, for example, you’ll likely end up with an underperforming team. That lack of performance wouldn’t necessarily be a motivation issue. Rather, it would be more likely that your sales reps aren’t clear on which target to focus on. 

Keep in mind that sales reps are naturally concerned about how to maximize their earnings in the shortest amount of time. If the compensation plan is too complex or confusing, the default mode is to take the path of lowest friction—whatever gives them the fastest payout—which might not always be aligned with the company’s goals.

Sales compensation structures should be clear and easy-to-calculate so sales reps can understand how their pay is calculated and the finance team can model accurately. 

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

Sales compensation structures for different sales roles

Here’s a deeper look at some example compensation structures for different sales roles.

1. Sales representative (aka account executive) 

Sales reps are responsible for moving leads through the entire sales cycle—from finding and qualifying new leads to bookings and closing deals. 

For them, the commission structures are geared towards the deals closed (larger OTEs attached) rather than the opportunities created (though they could be incentivized for it). 

Finance teams, in discussion with HR, sales, and RevOps teams, often work with a standard sales compensation plan, adjusting the commission structures and incentives as required. 

2. Sales manager compensation plan

Sales managers have a complex, hybrid role. They are incentivized for not only ensuring team performance and strategic execution, but also for bringing in revenue (by closing deals). 

In some organizations, sales managers receive commissions from their own sales, similar to the compensation structure of the sales rep. However, their biggest payouts come from the bonus structure based on their team’s performance and achievements.

Sales managers will be aware of the compensation structures of their team members. So, it’s important to ensure that their compensation plan and payouts are meaningfully higher than their top-performing sales rep. Their compensation plan should reflect their leadership role and responsibilities, and their impact on the company’s broader objectives. 

A typical compensation structure for a sales manager includes:

• Base salary, often similar or a little higher than senior AEs
• Variable compensation with cliffs tied to team quota results, retention metrics, or other leadership KPIs
• Accelerators and other incentives as a reward for sales managers with a higher commission rate for exceeding a defined sales quota.
• A buffer to help ensure that managers are still compensated even if the team as a whole doesn’t fully hit quota

In many mid-market SaaS companies, equity isn’t part of a sales manager’s commission structure. However, it’s common at the director level and above.  

3. VP of sales compensation plans

The sales compensation structure looks very different at the level of the vice president. 

Broadly, VP compensation builds on a base salary and commission combination with equity-based forms of compensation, such as stock options and restricted stock units (RSUs). These are typically used to reward long-term alignment and retention. 

This compensation design is particularly common in startups where the equity potential is significant but cash compensation could be on the lower side. 

While equity is the most attractive component of the compensation package, the targets are more aggressive, as compared to a sales rep or manager, and often evolve with time. 

The OTE for a VP of Sales is usually based on: 

• Meeting revenue milestones, e.g., ARR growth
• Achieving team-wide quota targets 
• Getting new logo wins or expanding enterprise accounts

Common challenges in designing a sales compensation structure and how to avoid them

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 sales performance management (SPM) systems, finance teams struggle with data quality, real-time visibility, and accurate financial forecasting.

Best practices to help you design an effective sales compensation structure

Many of the problems described above can be avoided with the following best practices:

1. 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.

2. Use Q factor: In this context, Q factor refers to ARR divided by total sales payroll (base plus variable), though some organizations use fully loaded sales costs. It compares the revenue generated by a sales team per dollar spent on compensation. The Q factor helps determine what quota should be set and how to balance territories. 

3. Balance the use of accelerators and decelerators: 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 meaningful upside while protecting cash flow through guardrails.

4. Use scenario planning techniques: These help business leaders stress-test quota distribution and territory assignments, adjusting the comp plans accordingly before rollout. Simulate for different quota-attainment rates and quota distribution curves, payout curves (linear/tiered/accelerated/cliff), and total cost under multiple mixes. This ensures the plan aligns with the business’s overall growth objectives and revenue goals.

5. 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. 

6. 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.

7. 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.

Build a sales compensation structure with Drivetrain for more predictable planning and growth

As your business scales, pricing models evolve, and RevOps and sales teams expand across regions and roles, compensation quickly becomes harder to govern and predict. 

A half-baked or unclear compensation structure can turn into a huge financial risk if it isn’t aligned with business priorities. For finance leaders, designing an effective sales compensation structure is about building more predictability into financial planning and visibility into revenue growth.

Finance leaders not only need to design balanced compensation plans, but they also need a clear way to evaluate their effectiveness. A scalable sales compensation structure is not just measured on bookings, but on how it impacts broader financial outcomes (e.g., cost of sales as a percentage of revenue, retention, expansion, and customer lifetime value, etc.). 

Sales compensation structures need to be flexible enough to adapt to changes in capacity and the sales organization. Often, companies try to handle these changes manually—leading to inconsistent assumptions, misaligned quotas, and payout surprises (leading to clawbacks). 

Also, as businesses scale, they become more complex. Manual workflows and spreadsheets inevitably become a liability. Revenue planning software can help centralize performance data, automate commission calculations, monitor the impact of compensation plans on financial performance, and flag where incentive structures may be creating risk. This allows finance leaders and RevOps teams to review and adjust compensation plans, manage operating expenses more effectively, and protect cash flow before issues escalate.

As an AI-native financial planning and analysis (FP&A), Drivetrain can do all of these things and more, enabling finance and revenue leaders to connect compensation planning with the broader process—linking sales performance, headcount planning, and financial forecasts in one connected model—on a single platform.

With over 800 integrations and a comprehensive, AI-powered suite of FP&A features, Drivetrain makes it easy for RevOps and finance teams to collaboratively: 

• Connect the sales compensation structure directly to revenue forecasts and budgets.
• Model the financial impact of plan changes in real time.
• Track quota attainment, payouts, and cost of sales across teams and regions.
• Identify and address unintended incentive-driven behaviors early—by tracking any changes in payouts and/or team performance.

Explore how Drivetrain can support your business growth plans and enable you to design compensation plans for better sales performance.