Sales compensation can be confusing. In addition to ensuring the mechanics of your comp plan align with your business strategy, you also have to balance the inputs from every stakeholder, like Finance, RevOps, Sales, and HR.
But — it doesn’t have to be challenging. Whether you’re building your first plan or looking for a refresher, we’ve got you covered.
To learn the basics of sales compensation, start here. This blog introduces different components of comp plans plus commonly used commission rates and structures. You can also explore 20 customizable comp plan templates in-app from Compensation Hub that load directly into your Workspace.
To design a comp plan from scratch, begin by addressing the following three questions:
How much should I pay my reps?
What should my team be paid for?
How should I use commissions and bonuses?
How much should I pay my reps:
Let’s start with setting your on-target earnings (OTE) and pay mix.
OTEs inform sellers how much they can expect should they reach 100% of their target. This number will vary by role, location, experience, industry and company. To experiment with OTEs based on your business, use our free calculator.
Meanwhile, pay mix represents the ratio between base salary and variable pay. In software, most sales roles will follow a 50/50 split, but you’ll also see 60/40 or even a 70/30. Like OTEs, this ratio will change according to several factors, such as industry, product and service, sales role, and complexities of the sales cycle.
For national OTE averages and pay mix splits, check out the most recent numbers from the 2023 Bett’s Compensation Guide.
What should my team be paid for:
Let’s begin by focusing on the applicable quotas and targets.
Your quota amount determines the amount of revenue or quantity that reps are expected to contribute to the business.
You’ll also need to set your quota frequency, or how often quota attainment resets. Your quota frequency should mirror the length of your sales cycle and average sales price (ASP). The shorter the cycle (and likely the lower the ASP), then the shorter the quota frequency, and so forth.
In our 2023 Compensation Trends study, we found that quarterly quota periods were the most widely adopted. Monthly or annual quotas were tied for second.
How can my team reach their earnings:
There are a few different ways in how your team can meet their variable targets and be paid. Let’s talk about how to use commissions and bonuses. Most compensation plans will include 2 to 4 different commissions and/or bonuses.
A commission is a percentage of a currency value that is paid out. This can be a fixed rate (flat rate) or a multiple rate that features an accelerator, decelerator, cap or cliff.
Example plans:
Bonuses, on the other hand, represent a set amount of money earned for doing something specific. Like commissions, bonuses can also be either a single rate (fixed rate, flat rate), multiple rate (accelerator), or milestone.
Example plans:
We have no preferences between commissions and bonuses and most companies will use some combination of both. The key will be to ensure your reps are paid competitively while not hurting the business. To help, use these principles below as your guide.
3 principles every comp plan should follow
Remember, no matter what structure you pursue, every plan should be
simple, logical, and fair.
Your OTEs should be realistic and your quotas attainable. What’s more, the framework of your comp plan should align to business goals. It should be logical in that it pays reps competitively while driving behaviors that make sense to your strategic plan.
For additional resources, check out the following resources: