Sales is a major element in the world economy. In the US, there are over 13 million salespeople, representing almost 10% of the 151 million-person labor force. A single salesperson in the service or manufacturing industry supports, on average, 22.26 other jobs within their company.
What you’ll learn
What you’ll learn
Updated: March 19, 2025
Key takeaways
- Sales compensation is a framework for how your company rewards salespeople for their performance
- You can adopt different compensation models, such as base salary plus commission, tiered compensation, and commission-only structures
- The ideal compensation strategy depends on what your business wants to achieve
- In addition to customizing your compensation strategy to optimize sales and profits, you should learn more about HR strategies to effectively manage your business
These figures illustrate how important it is to motivate salespeople to cultivate sales prospects and close deals for your business. How do you design a sales compensation plan that leads your salespeople to achieve the results you are looking for?
Key components of an effective sales compensation structure
Beyond providing the framework for paying your sales team, an effective sales compensation structure is integral to recruiting top sales talent, improving retention, and aligning sales efforts with your business goals. One of the biggest HR challenges is creating sales compensation strategies that meet both business and sales team expectations. You must understand what makes an effective sales compensation structure to build an ideal plan.
Commission rates
A commission rate is the percentage you pay a salesperson for successfully closing deals or meeting sales targets. Generally, the percentage is applied against the amount of revenue generated by the salesperson.
While this sounds straightforward, establishing the ideal commission structure can be challenging. Paying a competitive commission that both motivates sales reps and helps ensure a robust bottom line for your business requires strategic consideration.
Depending on your business and desired outcomes, you can employ the following commission structures:
- Flat rate: A consistent percentage for all sales
- Tiered rates: A set of increasingly high percentages tied to revenue thresholds
- Split rates: Different commission rates for new customer acquisition versus repeat business
Many businesses use one of the aforementioned structures, but a hybrid approach is not uncommon. Ultimately, the goal is to establish a framework that helps you achieve your company’s mission, while motivating and rewarding your reps.
Sales quotas
A sales quota is a revenue target your business sets for a specific period (usually, monthly, quarterly, or annually). You can set a quota for each salesperson or the entire team. Generally, it is more effective to set individual quotas, because this framework emphasizes accountability and rewards top performers. That said, team quotas make sense when the sales process is highly collaborative.
Setting sales quotas for your sales personnel is an art form. If you set them too low, your business will struggle to meet its financial goals. Conversely, if you set them too high, your sales team will struggle to be successful and morale will suffer. Aim to strike a healthy balance; quotas need to be aggressive, yet achievable.
Performance incentives
Performance incentives are additional rewards you can use to motivate your sales team to achieve and exceed their targets. A few of the most common incentives are as follows:
- Bonuses: A bonus is a fixed reward for achieving a specific goal. For example, you could offer a sales rep a $100 bonus for signing up 10 new clients. Alternatively, you could offer a sales rep a $20,000 bonus for reaching the $1,000,000 lifetime sales mark.
- Non-monetary rewards: Non-monetary incentives include recognition programs, travel incentives,, and flexible work hours, all of which can enhance performance – in the right situations.
- Accelerators: Sales accelerators are incentives that increase team members’ commission rate once they exceed their quota. For example, if your normal commission rate is 5% of revenue, you can award a 7% commission for any team member who exceeds his or her quota by 20% or more.
Now that we’ve explored the key components of a compensation plan, let’s take a top-level look at the most commonly used compensation models. Below, with the help of Tom Brock, a licensed CPA and CFA charterholder who has spent over a decade working with small business owners, we explore three popular models.
Different compensation models explained
For the most part, industry norms dictate the appropriate compensation model to drive revenue and minimize employee turnover. That said, it’s important to consider your business’s specific needs when crafting a compensation model and establishing the optimal balance between fixed and variable pay.
Base salary plus commission plans
The base salary and commission model is among the most common ways to pay salespeople. With this structure, you provide each salesperson a salary and offer the potential for extra earnings via commissions, depending on how much he or she sells.
Typically, this model is structured with a 60 percent salary and 40 percent commission earnings target. However, you can customize the ratio mix to incorporate the following factors:
- Experience/technical proficiency required
- Complexity/longevity of the sales cycle
- Number of leads a salesperson can work with simultaneously
- Historical lead conversion rate
- Amount of influence your sales rep has over purchase decisions
Tom’s take on why this structure works
“The base salary and commission model is effective, because it offers salespeople financial security while incentivizing sales production. It is ideal in industries with long, complex sales cycles and/or unpredictable revenue streams.”
— Thomas J. Brock, CFA, CPA
Tiered compensation plans
A tiered compensation plan, like a base salary plus commission plan, combines a fixed salary and a commission. However, with a tiered plan, the commission rate increases as sales targets are surpassed. This sales compensation plan is ideal when you want your salespeople to continuously strive to exceed their quotas.
Tom’s take on why this structure works
“The tiered compensation model is effective, because it encourages salespeople to hustle, and it rewards top performers disproportionately, thereby cultivating a results-oriented culture. It works best in highly competitive industries where an ambitious, top-notch salesforce can give you a competitive advantage.”
— Thomas J. Brock, CFA, CPA
Commission-only plans
A commission-only compensation structure is strictly performance-based. With this plan, your sales team only earns money if they make sales. With this type of plan, commission rates usually range from 5% to 45%.
This compensation structure is easy to administer, because of its simplicity. Plus, it minimizes your business’s financial risk, because you only incur labor costs as a result of successfully closed deals. Confident, top-performing salespeople are attracted to commission-only structures due to the limitless earnings potential they afford. However, this type of sales compensation model can lead to burnout and high employee turnover.
Tom’s take on why this structure works
“The commission-only model is designed for businesses that seek to minimize fixed labor costs and put an unwavering focus on results for their salespeople. It works best in industries with high-margin products and/or short, straightforward sales cycles.”
— Thomas J. Brock, CFA, CPA
Moving on, because each sales role has unique responsibilities and challenges, it can make sense to have different approaches to how commissions are earned.
Customizing compensation strategies for various sales roles
You can tailor your compensation strategies to fit each role to drive performance and employee satisfaction.
Inside sales vs. outside sales
In many cases, inside sales reps work from the office or remotely to engage with leads using phones, email, video chats, and other digital tools. For them, it makes sense to develop compensation strategies that incentivize inside sales activities, such as those below.
- Number of calls made or emails sent to prospects
- Number of appointments scheduled or meetings held with potential clients
- Number of follow-up activities
- Number of deals closed
Similarly, you can customize compensation for sales reps who meet with clients face-to-face. Because of the increased travel and relationship-building involved, you may want to offer these reps higher base salaries and/or larger commission opportunities.
New business development vs. account management
You can also differentiate how you compensate sales reps in new business development roles and account management. For instance, compensation for sales reps under the new business development category can lean toward commissions and bonuses tied to new customer acquisitions and initial sales.
On the other hand, salespeople in account management roles usually focus on maintaining and expanding relationships with existing clients, which is less commission-driven. In this case, you can focus on base salary and bonuses related to customer retention, renewals, upsells, and cross-selling additional products.
Best practices for managing compensation plans
Evaluating the sales compensation plan options and selecting the ideal one for your business is essential for business success. However, the compensation plan isn’t going to run itself. To harness the full potential of your plan, be sure to employ the following best practices:
- Maintain transparent communication to ensure your sales team understands how and why they are compensated.
- Set realistic performance targets that motivate employees without causing burnout.
- Regularly evaluate compensation effectiveness and make adjustments to maintain competitiveness and drive performance.
- Ensure compliance with workers’ compensation insurance requirements to protect your business and employees.
Legal consideration in sales compensation
When designing a sales compensation plan, consider labor regulations to avoid legal challenges. For example, your compensation plan must comply with your state’s workers’ compensation requirements. It should also adhere to ethical standards, be fair, avoid discrimination, and remain transparent.
Bottom line: Sales compensation plans bring structure to efforts
Implementing a successful sales compensation plan requires thoughtful planning and strategic consideration. That’s because it can help you attract the attention of ambitious business development representatives, keep your sales team drumming up new business, and help you get closer to your business goals.
OnPay offers flexible and customizable in-house payroll software that allows you to compensate employees the way you want to. You can easily set fixed recurring amounts for each worker, or simply add it to their compensation while running payroll. Best of luck as you set up a compensation structure that helps you and your team grow!
Take a tour to see how easy payroll can be.
Jon Davis is the Sr. Content Marketing Manager at OnPay. He has over 15 years of experience writing for small and growing businesses. Jon lives and works in Atlanta.