Sales Compensation Plans Explained: The Ultimate Cheat Sheet (with Videos)

Blog
Oct 21, 2021
7 min read
Understand all you need to know to build sales compensation plans, including benefits, drawbacks, and best practices—all with brief video explanations.

​Commissions are the cost of doing business, but it’s easy to forget that sales compensation plans power your business. It’s the driver behind seller behavior and can be the difference between achieving or missing your revenue targets.

sales_targets_Gartner_statistic

Getting sales compensation plans right is becoming even more important—especially during a time when 94 percent of leaders are not confident they’ll hit their revenue goals.1

That makes designing sales compensation plans a critical business strategy for sales, finance, and revenue leaders. But with so many possibilities—accelerator with multipliers, ranked, amount per deals, and endless combinations—zeroing in on the right sales compensation plans for your team and business needs can often lead to analysis paralysis.

Hence, our ultimate sales compensation plans cheat sheet (videos included!). It offers up a no-nonsense overview of each sales compensation model, including benefits, drawbacks, and brief explainers. Essentially, all the information you need to identify the sales compensation plans that will work best for your sales organization and business goals.

Matrix Rate Commissions

How It Works:

Rates change based on achievement and are segmented by additional filter criteria.

Business Need:

For companies with more than one business goal, e.g. want to grow revenue and profit.

Benefits:

  • Keeps reps focused on more than one measure
  • Supports complex business strategies
  • Links rep behavior with business strategy

Drawbacks:

  • Must account for the intersection of the two chosen measures

Of course, you want to grow revenue, but what if you want to grow revenue and profit? Or you want to grow revenue across a large selection of customers, and not just big accounts. In this case, you’ll want to use different sales commission structures, depending on the intersection of those two measures. 

For example, when you bring in 10 clients and X amount of revenue—you get a higher percentage payout rate on each of your deals.

Matrix commission plans keep your reps focused on more than one measure. It dissuades reps from ignoring certain factors that are important to business success, linking rep behavior with business strategy. And while it sounds complicated, a simple matrix grid can be easily shared and explained to your reps.

Flat Rate Commissions

How It Works:

Pays the same rate for all items that meet the criteria for the specific rule.

Business Need:

For companies that want to keep that percentage fixed on every deal throughout the year—whether it’s the first or last yield of the year.

Benefits:

  • Easy to communicate to reps
  • Compensation costs adjust according to revenue
  • Improved financial sales forecasting
  • Helps reps focus on the transaction rather than squeezing the deal

Drawbacks:

  • Unappealing to high performing reps
  • Could limit performance

Say a company wants to keep its fixed commission rate on every deal throughout the year. This company would want to leverage a flat-rate commission. That ensures that no matter what deal reps bring in, they make the same and the company pays out the same percentage of revenue, profits, or fixed dollar amount per deal.

The added bonus is that this plan can be easily communicated to the reps and combined with other plans as needed. And when sitting with finance you know exactly what every deal is going to cost.

Accelerated Rate Tiers by Attainment

How It Works:

Pay rates that change based on quota attainment or the amount sold.

Business Need:

For companies that are looking to further incentivize high performers once they meet their initial quota.

Benefits:

  • Keeps higher-performing reps motivated
  • Brings in more revenue or profit
  • Protects against “sandbagging”

Drawbacks:

  • Extra expenses

It’s likely you have a variety of different types of sales reps. You have your steady performers and your rockstars. You want the rockstars to continue performing after they hit their quota. Tiered commissions ensure they’re getting motivated beyond quota attainment and getting paid a higher percentage for those deals.

This is an accelerated rate, also known as a tiered commission structure, it pays a higher rate above a certain goal line and you can have as many tiers as you like. So it gives sales reps the incentive to hit their goal and keep going because now they’re making more money for every single deal they bring in.

Accelerators with Multipliers

How It Works:

Rates change based on achievement and are multiplied by additional filter criteria.

Business Need:

For companies ready to maximize rep performance and revenue after effectively establishing straightforward accelerators.

Benefits:

  • Gamifies hitting and exceeding goals for reps
  • Easily explained to sales reps
  • Scales with business success

Drawbacks:

  • Striking a balance on payouts for low and high performers can be tricky

Most companies start off their incentive compensation plans with a single measure: revenue. The next step is to add accelerated rate tiers. If reps exceed revenue goals, they can start looking for the next challenge to make a higher rate. For these companies, an accelerator with multipliers helps maximize rep performance revenue after standard accelerators no longer achieve the desired result.

An accelerator with a multiplier-style compensation plan increases revenue each time a rep hits one goal. At the same time, a rep can hit a profit goal, which earns them a rate multiplier–sweetening the payout as tiered quotas are achieved.

Ultimately, an accelerator with multipliers gamifies quota attainment for reps. You can use this extra one percent to reinforce specific business needs: enough margin, new customers, or upsells.

Fixed Amount per Deal Commissions Plan

How It Works:

Pays a specific amount for every deal sold.

Business Need:

For companies launching a new product, add-on, vertical market, or service without knowing how much can be charged for it. The company’s goal is to get as many deals as possible.

Benefits:

  • Incredibly effective for new product launches
  • Reps are incentivized to bring in every deal
  • Great for acquiring new customers

Drawbacks:

  • Limited to specific types of strategies

Amount per commission pays a fixed amount on every single deal. It doesn’t matter how large the client is, how big the deal is, the rep is going to get paid the same amount. This plan is incredibly effective for new product launches.

When you tell your sales team, “I’m going to pay you a thousand bucks for every deal you bring in,” ...all of a sudden clients are pouring in. Reps are no longer cherry-picking deals, but closing every deal they get.

This model also works great for product lines with fixed prices and any type of deal where the value to the company is consistent regardless of size (e.g.,  jumpstarting new product lines, focusing on a new type of customer, or entering a new market).

Year-to-Date Bonus Plan

How It Works:

Pays amount based on quota achievement.

Business Need:

For companies trying to combat end-of-year revenue stress and chaos from reps bringing in the majority of the revenue in the last few months of the year.

Benefits:

  • Pull in revenue earlier for a more even spread
  • Lessens load from end-of-year revenue stress
  • Keeps reps motivated

Drawbacks:

  • Performance-based bonus can discourage collaboration among reps

A lot of companies set annual quotas, but there are still several companies that forego commissions and opt for bonuses (read more on bonus vs. commission). A 12-month quota is standard practice. This type of plan, however, comes with its challenges: revenue is backloaded at the end of the year, leading to stress and confusion for the CFO and CEO.

To counteract this, you can move your year-to-date quota for each quarter, month, or halfway through the year, and any rep that passes that year-to-date quota measurement gets an extra bonus.

This means sales reps go about chasing standard deals and closing them, but also bringing in one more deal to get their year-to-date bonus as well. Instead of saving that deal until next quarter, or not hustling or negotiating well with a customer, they’ll bring in the revenue earlier for a more even spread throughout the year.

Ranking Bonus

How It Works:

A bonus paid out based on final ranking position for a predefined group of users.

Business Need:

For companies looking to motivate with competitive pressure and drive reps to constantly bring in the next deal.

Benefits:

  • Taps into the competitive nature of sales
  • Energizes throughout the year
  • Implements empirical measurement of performance

Drawbacks:

  • May take extra attention to encourage collaboration between reps
  • May discourage knowledge sharing

Sales reps are competitive people. They compete for commissions, bonuses, and against your competitors and peers. There’s a reason why leaderboards are still a staple of the sales culture. Paying a bonus based on sales rep ranking is a great way to drive the competitive pressure, and keep the reps constantly bringing in the next deal.

In addition, ranking bonuses that payout based on the final ranking of any given measurement period helps energize sales activity throughout the year. It could be for the quarter, month, or even week. This harnesses the competitive spirit of a sales team as reps continually try to be number one.

Bonus on Multiple Quotas

How It Works:

A bonus paid based on a combination of quotas being achieved.

Business Need:

For companies that are focused on multiple measures, goals, or quotas.

Benefits:

  • Helps achieve multiple business goals
  • Encourages reps to be more holistic in focus
  • Sets performance bar higher, incentivizing reps to work hard to earn their bonus

Drawbacks:

  • Not optimal for singularly-focused business needs, e.g. product launches or new business pushes
  • If too many measures (over 3) are included, plan could be made ineffective

A bonus on multiple quotas plan pays reps who bring in a combination of goals that align with strategic business needs. Companies that want revenue brought in and also want a certain amount of deals brought in but might be tracking total product sold or even a profitability margin measure should use this plan. A bonus on multiple quotas helps drive rep performance across all areas of the firm—instead of just the deals reps think are best.

To learn more about how you can use incentives to improve seller performance and drive revenue growth, read the article “5 Steps to Drive Profitable Revenue.”

Sources

1. Gartner

  • Incentive Compensation
Authors
Karrie Lucero
Karrie Lucero
,
Creative Strategist

Karrie Lucero is a Creative Strategist at Xactly Corp. She earned Journalism and Marketing degrees from New Mexico State University and has experience in the tech and SaaS industries, content strategy and creation, video production, and brand storytelling.

Erik Charles
Erik W. Charles
,
VP, Solutions Evangelist

Erik W. Charles is an accomplished professional with more than two decades of experience in Marketing, Consulting, and Product Evangelization.