Sales teams are driven by compensation: it motivates them to work harder and aligns their efforts with the overall business goals.

Sales compensation plans outline how sales representatives are rewarded for their performance.

The right compensation strategy, can be the difference between a motivated, high-performing sales team and a disengaged, underperforming one.

In fact, 57% of sales employees in go-to-market functions say working for commissions or bonuses motivates them to do a better job at work, and over half (52%) say it motivates them to hit their goals, according to CaptivateIQ’s recent Compensation & Motivation Pulse Survey.

Here are compensation plan examples that you can use to build your own.

What is a Sales Compensation Plan?

A sales compensation plan is a structured framework that outlines how salespeople are rewarded financially for achieving specific goals and targets.

A comp plan motivates sales teams, drives desired behaviors, and aligns individual efforts with the broader objectives of the organization.

Creating a sales compensation plan is a strategic process that takes into account the sales cycle, target market, and desired sales outcomes.

The right balance of base salary and variable pay can motivate sales representatives to exceed targets and maximize their earning potential.

Common Types of Sales Compensation Plans

Sales compensation plans can vary widely depending on the industry, company size, sales cycle, and market conditions.

CaptivateIQ’s recent Compensation & Motivation Pulse Survey shows employees want their earnings tied to the company's goals: 81% of survey respondents said they want a pay structure that includes at least some degree of commissions.

Here are some common types of compensation plans:

• Commission plans: Sales reps earn "straight commissions," or a percentage of the sales revenue they generate. A commission plan motivates reps to maximize sales volume and is common in industries with direct sales models like retail and real estate.
• Salary-based plans: Reps receive a fixed salary regardless of their sales performance. This compensation plan example is stable, but lacks the incentive that often drives high performers to exceed sales quotas.
• Mixed or hybrid plans: These combine elements of both salary and commission plans. For example, sales reps might receive a base salary plus a commission based on achieving certain sales targets or quotas.
• Performance bonus plans: Sales representatives who meet or exceed predefined performance targets receive additional compensation. Bonuses are typically tied to specific sales metrics such as revenue targets, customer acquisition goals, or overall team performance.
• Profit sharing: Sales professionals receive a share of profits generated by the company, based on a predetermined formula. This method aligns individual and team efforts with company profitability.
• Stock options: Stock options grant sales reps the right to purchase company equity at a predetermined price within a specified timeframe. They offer the potential for significant financial rewards if the company's stock value increases over time.

Benefits of a Sales Compensation Plan

A well-structured sales compensation plan can contribute to the overall success and effectiveness of a sales organization.

Let's dive deeper into the many benefits of a well-crafted compensation strategy.

Increased sales motivation and productivity

Sales compensation plans provide direct financial incentives tied to performance and motivate sales representatives to achieve or exceed their targets.

This can boost productivity by motivating sales employees to exceed quota and expectations in order to maximize their earnings.

Enhanced alignment of sales efforts with company goals

Linking compensation to specific sales objectives and company targets makes sure that sales activities are directly tied to business outcomes.

You can adjust your sales metrics to mirror the sale behaviors or results that matter most to your business, such as:

• The number of closed deals;
• Activity quotas, such as calls made or email outreach;
• The total revenue generated from each sale;
• Total deals closed in an assigned territory.

Improved sales team retention and satisfaction

When sales reps feel fairly rewarded for their efforts and achievements, they are more likely to remain with the company.

This encourages longterm investment in team goals and maintains relationships with existing customers.

Not only that—long-term employees set the tone for high performance across the sales org. The right compensation philosophy should reward top performers to reduce turnover and retain top sales talent.

Better talent recruitment

It's a competitive market out there, with a high turnover rate. Manager's face a pretty hefty challenge: they need to both find the right sales employee, and then convince them to join the team.

An organization's sales compensation plan is often the deciding factor. Competitive compensation packages signal to potential hires that the company:

• Meets or exceeds industry standards for compensation;
• Has aligned their sales strategy with business objectives;
• Will incentivize individual performance and reward top performers.
• Values its employees and aligns the sales organization against team goals.

A job description with no commissions or no bonus plan can negatively impact the volume and quality of applications. Sales managers can wind up losing more time and money to a unending recruiting cycle.

Clear performance expectations and accountability

A sales compensation strategy and benchmark-based commission helps us  measure performance and maintain transparency between revenue targets and company goals.

Clear performance metrics and goals improve accountability within the sales team for both individuals and teams.

Top Sales Compensation Terms to Know

Understanding key sales compensation terms can help you create effective compensation plans and align sales incentives with business objectives.

Here are the most common terms you should know:

• Base salary: The fixed amount of compensation paid to a sales representative, typically on a regular basis, regardless of sales performance.
• Commission: Additional earnings based on the sales rep's performance and achievement of sales targets or quotas. Straight commissions are often calculated as a percentage of sales revenue or profit generated.
• Quota: A specific sales target set for an individual sales rep or a sales team to achieve within a defined period. Clear quotas and expectations drive sales performance and measure success against predetermined objectives.
• On-target earnings (OTE): The total compensation a sales rep can expect to earn if they achieve their sales targets. On-target earnings are usually determined as salary plus commissions (base salary and potential commissions).
• Sales accelerators: Higher commission rates or bonuses awarded to sales reps for exceeding their sales quotas or targets. Sales accelerators incentivize high performance and reward exceptional sales achievements.
• Sales decelerators: Reduced commission rates or penalties imposed on sales reps for failing to meet their sales targets or quotas. Sales decelerators encourage sales teams to strive for consistent performance and discourage underperformance.
• Draw: An advance payment against future commissions given to sales reps to provide regular income stability, especially during early stages or seasonal fluctuations in sales performance.
• Clawback: The process of reclaiming or recovering previously paid commissions or bonuses if sales transactions are later canceled, returned, or found to be invalid. Clawbacks ensure sales accuracy and alignment with company policies.

How to Create a Sales Comp Plan

When designing your compensation plan, you should consider these components and then take a step back and understand the factors that influence your market share and company the most.

Key Components of a Good Sales Compensation Plan

A good sales compensation plan includes several key components designed to motivate and retain sales representatives.

1. The base salary provides stability and a guaranteed income, while the commission structure is the primary incentive to drive higher sales performance.
2. Performance bonuses offer additional rewards for meeting or exceeding sales targets, and non-monetary incentives like recognition programs and awards boost morale.
3. Additionally, benefits and perks such as healthcare, retirement plans, company cars, or travel incentives can make the role more attractive and rewarding for sales representatives.

Factors to Consider When Creating a Comp Plan

Whether you're following a standard commission structure or creating a custom version, here are some sales tips to help you build your sales compensation strategy.

Industry standards and competitive landscape

Understand typical compensation practices in your industry and among competitors so you can stay competitive and attract top sales talent. For example, industries with high-margin products might offer higher base salaries, while those with lower margins may emphasize performance-based commissions to drive sales.

Company’s financial goals and budget

Align compensation plans with financial objectives. If your company is in a growth phase, you might offer higher performance bonuses to incentivize aggressive sales targets. Alternatively, in a cost-cutting period, you may need to focus on more balanced compensation with a steady base salary and modest commissions to maintain financial stability.

Sales roles and responsibilities

Tailor compensation structures to reflect different sales roles. Inside sales roles, which typically involve shorter sales cycles and lower-value transactions, might have a higher base salary and lower commission rates. In contrast, field sales roles, dealing with longer sales cycles and higher-value transactions, may offer lower base salaries but higher commissions and bonuses to reward closing significant deals.

Sales cycles and target markets

Adapt compensation plans for varying sales cycles, market conditions, and customer segments.

In markets with long sales cycles, a combination of base salary and long-term performance bonuses can keep sales reps motivated over extended periods. For rapidly changing markets or those with shorter sales cycles, more immediate and frequent performance incentives might be necessary to maintain high levels of motivation and quick results.

How to Implement a Sales Comp Plan

Thoughtful implementation of a new or revised sales compensation plan helps your team align with the company's goals and compensation philosophy.

Here are a few steps you can take to roll out sales compensation planning:

Communicate the plan to the sales team

Sales compensation planning should include an employee engagement strategy.

Clearly document and distribute the new compensation structure, including base salary, commission pay rates, bonus structure, and any non-monetary incentives.

Address how it aligns with company objectives and benefits sales representatives.

Provide ample opportunity for questions and clarification to ensure understanding and buy-in from the sales team.

Provide training and resources

Anticipate a ramp-up period, and set your sales employees up for a successful transition.

Managers can offer training sessions to get their reps up to speed on sales processes, new product knowledge, CRM systems, and using compensation calculation tools.

Offer ongoing support in your 1:1s and create a folder of useful resources, such as

• A clear overview of the pay structure and incentive plan;
• Data on specific territories to target;
• Access to payroll software and instructions on how to submit into the system.

Set clear and measurable goals

Your employee engagement strategy should include clearly communicating total compensation targets and how you will measure performance.

Define specific sales targets, sales quotas, and performance metrics that will warrant merit pay.

Ensure these goals are SMART (Specific, Measurable, Achievable, Relevant, Time-bound) to provide clear direction and motivation.

Establish an implementation timeline

Establish expectations for managers and sales people early on.

Create a timeline that outlines key milestones and deadlines for implementing the sales compensation package.

For example, by the first month, all sales people should review and align with the incentive plan.

You can create a plan for each sales rep, set sales quotas, and outline sales goals that support your bottom line.

By the next month, your sales people can start trying to hit their target.

Consider factors like fiscal periods, sales cycles, and seasonal variations that may impact rollout.

Tools and Systems to Support Rollout

The best way to quickly incentivize sales teams to adjust their sales behavior is to give them tools that make sure they don't waste time or effort.

Here are some tools we recommend using.

• Incentive compensation management (ICM) software: Calculate commissions, bonuses, and other incentive payments. This payroll software helps with accuracy and compliance, while reducing admin workload, reporting on program success, and more.
• Data analytics platform: Analyze data on sales performance, employee satisfaction, and other relevant metrics to help you adjust and improve the compensation plan.
• Customer Relationship Management (CRM) systems: Capture and analyze customer data, track sales activities, and ensure accurate incentive payments are based on reliable, updated sales data.
• Sales performance management software: Track and manage sales performance metrics and provide real-time visibility into sales performance. Sales performance management software helps optimize custom versions of incentive structures.
• “What If” Sales compensation calculator: Provide visibility into potential earnings based on specific selling scenarios, to further incentivize the team.

3 Sales Compensation Plan Examples

Here are a few examples of different types of sales compensation plans—plus additional benefits.

1. Commission-based plan with sales accelerators

Industry: Software as a service (SaaS)

Details:

• Base salary: $50,000 annually
• Straight commission: 5% on all sales up to $500,000
• Sales accelerators: 7% on sales between $500,001 and $1,000,000; 10% on sales over $1,000,000
• Additional sale bonuses: $10,000 bonus for hitting $1,000,000 in annual sales

Benefits:

• Motivates reps: The tiered commission rates incentivize sales reps to exceed their targets.
• Aligns with sales goals: Encourages higher sales volume and drives company revenue.
• Retains talent: Competitive earnings potential helps retain top performers.

2. Profit sharing with performance bonuses

Industry: Manufacturing

Details:

• Base salary: $60,000 annually
• Profit sharing: 5% of company profits distributed quarterly, based on individual contribution
• Performance bonuses: Up to $20,000 annual sale bonuses for meeting specific production and sales targets, such as closed deals
• Non-monetary incentives: Recognition programs, annual awards, and exclusive training opportunities

Benefits:

• Encourages teamwork: Profit sharing fosters a collaborative environment, aligning individual efforts with overall company success.
• Enhances engagement: Performance bonus structure linked to clear targets motivate salespeople and increase productivity.
• Improves retention: Additional non-monetary incentives help improve job satisfaction and loyalty.

3. Mixed plan with stock options

Industry: Technology startups

Details:

• Base salary: $70,000 annually
• Commission: 3% on all sales
• Stock options: 500 shares vesting over four years
• Additional perks: Health benefits, flexible working hours, and professional development allowances

Benefits:

• Attracts top talent: Competitive base salary and commission structure appeal to high-performing sales reps.
• Long-term incentives: Stock options align employees’ interests with the company’s sales goals, encouraging loyalty and a sense of ownership.
• Professional growth: Additional benefits such as development allowances enhance employee skills and career progression.

How to Evaluate Whether You Have the Right Compensation Plan

Knowing whether your compensation plan works requires a combination of quantitative and qualitative feedback.

To know you have the right plan, you should first identify the KPIs you'll track and which matter most to your business, then implement methods for collecting feedback.

Lastly, make adjustments to the plan based on the data you gather.

Methods for Gathering Data and Insights

Here are several ways to source and leverage data against specific goals.  

• Sales performance analytics: Use sales performance management software and CRM systems to collect and analyze real-time data on sales activities, quota attainment, and commission payouts. Identify trends and patterns that indicate the plan's effectiveness.
• Surveys and feedback from sales reps: Send surveys or hold feedback sessions with a small group of sales representatives to gather qualitative insights. Ask about their perceptions of the plan’s fairness, effectiveness in driving performance, and suggestions for improvement. Surveys are easy to administer and review.
• Performance reviews and evaluations: Sales managers can conduct regular performance reviews to assess individual and team performance against set goals and KPIs. Use performance evaluations to identify top performers, areas for improvement, and training needs.
• Reporting insights: Leverage reporting tools from your ICM to regularly monitor and share performance insights with stakeholders. According to the State of Incentive Compensation Management Report, only 46% of sales leaders optimize compensation programs based on insights. That leaves a lot of room for improvement.

Key Performance Indicators (KPIs) to Track

Make sure that your merit pay is aligned with your company's bottom line.

Here are some common metrics to consider for your incentive plan.

1. Sales revenue and growth: Monitor overall sales revenue and growth trends over time. Compare current performance with historical data to gauge the impact of the compensation plan on sales outcomes.
2. Sales team productivity: Measure individual and team productivity metrics such as sales volume, conversion rates, and average deal size. Evaluate how the compensation plan influences sales activities and outcomes.
3. Employee satisfaction and retention: Conduct regular surveys or gather feedback from sales representatives to assess their satisfaction with the compensation structure and its impact on morale and motivation. Track employee turnover rates to understand retention trends and whether the plan contributes to retaining top talent.
4. Customer acquisition and retention rates: Analyze customer acquisition metrics like new customer growth and acquisition costs. Evaluate customer retention rates to see if sales efforts under the compensation plan contribute to long-term customer relationships.
5. Incentive program ROI: Measure the cost of incentives in relation to revenue results to understand the return on investment (ROI) of the sales compensation program. A high ROI indicates that the compensation plan is cost-effective and successfully drives revenue.

Whether you use one of the metrics above or your own custom version, make sure you help sales people hit their targets. Your merit pay system should keep the team focused and motivated to earn more.

Adjust the Plan Based on the Data

1. Analyze KPIs and feedback to pinpoint specific aspects of the compensation plan that may need adjustment. Look for discrepancies between expected and actual outcomes to identify potential weaknesses.
2. Use insights gathered from performance data, feedback, and evaluations to inform adjustments to the compensation plan. This may involve revising commission structures, adjusting sales targets, or introducing new incentives aligned with business goals.
3. Regularly review and refine the sales compensation plan. Monitor market trends, competitive landscape, and internal dynamics to ensure the plan remains relevant and effective.

Conclusion

Whether you're implementing a sales compensation plan from the ground up or reviewing and revising existing plans, you should be ready to gather feedback and make changes to better align individual sales representatives with the organizational goals.

When everyone is working toward the same goal, business success will come faster and more effectively. Take a data-driven approach to managing compensation, and you’ll be well on your way to success.

Schedule a demo today to see how CapitivateIQ can help you improve your sales compensation plan.