How to build a compensation plan [2025 Guide]

A well-designed compensation plan can make or break a sales team. Studies show that organizations with structured sales compensation plans outperform those without by 50% in revenue growth (McKinsey & Company). Yet, many companies struggle to create a plan that truly motivates employees while aligning with business goals.

A great compensation plan does more than pay people—it helps attract top sales talent, keep employees engaged, and improve overall sales performance. This guide explains how to build a compensation plan that works, covering:

• The key elements of a strong sales compensation plan
• Different types of compensation plans
• Best practices for keeping sales teams motivated
• Real-life examples of successful sales compensation models

By the end of this article, you’ll have a clear strategy for designing a plan that not only rewards sales reps but also drives revenue growth.

What Is a Sales Compensation Plan?

A sales compensation plan is a structured way of paying salespeople. It outlines how employees earn money based on their performance. A good plan balances a base salary with sales incentives like commissions or bonuses.

For example, a sales rep might earn a fixed salary of $50,000 plus a 10% commission on every deal closed. This setup encourages them to close more deals while ensuring they still have a stable income.

A great compensation plan should:

• Align with company goals (e.g., increasing new sales, retaining customers)
• Motivate sales reps to work hard
• Be simple and easy to understand
• Stay competitive with industry standards (Harvard Business Review)

The best way to design the incentive plan your business needs is by using a sales compensation tool. With Remuner you can create compensation plans tailored to your business without the limitations of fixed templates. Build plans that perfectly suit your needs thanks to our no-code modular designer.

Key Elements of a Sales Compensation Plan

Every compensation plan includes different parts that influence how much a salesperson earns. Here are the essential components:

1. Base Salary

This is the fixed amount a sales rep earns, regardless of performance. Companies offer base salaries to provide financial stability. In the U.S., the average base salary for a salesperson is $60,000 per year (Glassdoor).

2. Sales Incentives (Bonuses & Commissions)

Sales incentives reward employees based on performance. These can be:

• Commission: A percentage of each sale (e.g., 5% of all revenue generated)
• Bonuses: One-time payments for reaching goals (e.g., $5,000 for closing 10 deals in a quarter)
• Stock options: Shares in the company as an incentive for long-term commitment

3. On-Target Earnings (OTE)

OTE refers to the total earnings (base salary + incentives) a salesperson can expect if they hit their targets. For example, if a sales rep has a $50,000 base salary and expects to make $30,000 in commissions, their OTE is $80,000.

4. Quotas

A quota is a sales target a rep must achieve in a specific time. For example, a company might set a quarterly quota of $200,000 in revenue per salesperson. Quotas help sales teams stay focused and track progress.

5. Performance Metrics

These are key indicators used to measure a salesperson’s success. They include:

• Revenue generated (total sales value)
• New customers acquired
• Customer retention rate
• Upsell and cross-sell performance

Types of Sales Compensation Plans

Selecting the appropriate compensation structure is crucial, as it influences sales behavior and overall performance. Here are some common types of sales compensation plans:​

Salary Only

Sales professionals receive a fixed salary with no additional incentives. This structure offers stability but may lack motivation for exceeding targets.​

Commission Only

Earnings are entirely based on sales performance, with no base salary. This high-risk, high-reward model can drive aggressive sales behaviors but may lead to income instability.​

Salary Plus Commission

Combines a base salary with commission on sales. This balanced approach provides financial security while incentivizing high performance.​

Territory Volume

Compensation is based on the total sales within a specific region or territory, encouraging collaboration among team members operating in the same area.​

Profit-Based

Incentives are tied to the profitability of sales rather than revenue alone, promoting the sale of higher-margin products and services.​

Designing an Effective Sales Compensation Plan

Creating a successful sales compensation plan requires careful consideration of various factors to ensure it aligns with both company goals and employee motivations. Here are steps to guide the process:​

1. Define Clear Objectives: Determine what the company aims to achieve with the compensation plan, such as increasing market share, launching new products, or entering new markets.​
2. Understand the Sales Role: Analyze the responsibilities and expectations of the sales team. Different roles may require distinct compensation structures.​
3. Research Market Standards: Benchmark against industry standards to ensure the compensation plan is competitive and attractive to top talent.​
4. Set Achievable Quotas: Establish realistic and clear quotas that align with business objectives and market conditions.​
5. Balance Fixed and Variable Pay: Determine the appropriate mix of base salary and incentives to motivate performance while providing financial stability.​
6. Incorporate Accelerators and Decelerators: Implement mechanisms that reward overachievement (accelerators) and address underperformance (decelerators) to encourage desired behaviors.​
7. Communicate the Plan Clearly: Ensure that all sales team members understand how the compensation plan works, including how they can maximize their earnings.​
8. Regularly Review and Adjust: Continuously assess the effectiveness of the compensation plan and make adjustments as needed to respond to market changes and business goals.​

To make this process smoother, Remuner gives you the solution. Define time ranges, handle multiple currencies, or compare alternative scenarios in your sandbox for informed decision-making and cutting edge variable remuneration structures with Remuner’s compensation plan manager.

Examples of Sales Compensation Plans

To illustrate how different compensation plans can be structured, consider the following examples:​

Example 1: Entry-Level Sales Representative

• Base Salary: $40,000 per year​
• Commission: 5% on all sales above $100,000 annually​
• OTE: $50,000​
• Quota: $150,000 in sales per year​

This plan provides a stable income with opportunities to earn additional compensation through achievable sales targets.​

Example 2: Senior Sales Executive

• Base Salary: $70,000 per year​
• Commission: 10% on all sales​
• OTE: $120,000
• Quota: $500,000 in sales per year
• Additional Incentives: Stock options and profit-sharing

This plan is structured to attract and retain top talent by offering a competitive base salary along with significant earning potential through commissions and long-term incentives.

Example 3: Customer Success Manager Compensation Plan

• Base Salary: $60,000 per year
• Bonus: 15% of total renewal revenue managed
• Quota: 90% customer retention rate
• OTE: $80,000
• Additional Benefits: Paid time off, gym memberships, and indirect compensation like travel stipends

This plan encourages customer retention by aligning incentives with long-term relationships rather than just new sales.

Best Practices for a High-Impact Sales Compensation Plan

A well-structured compensation plan does more than just pay employees—it drives performance, attracts and retains top talent, and aligns the sales team with business objectives. Here are some best practices:

1. Align Compensation with Business Goals
   Ensure that your compensation strategy supports the company’s overall revenue and growth objectives. If expansion is the focus, structure incentives around new business rather than renewals.
2. Offer a Competitive Compensation Package
   Sales roles vary from company to company, so benchmark your plan against industry standards to remain attractive to top-performing sales professionals.
3. Ensure Transparency
   A compensation plan should be easy to understand. Sales teams perform better when they clearly see how their efforts translate into earnings.
4. Incentivize the Right Behaviors
   Avoid rewarding short-term wins at the expense of long-term success. If your company relies on recurring revenue, ensure the compensation plan includes customer retention incentives.
5. Use a Mix of Direct and Indirect Compensation
   Total rewards should include not just commissions but also stock options, health insurance, paid time off, and performance bonuses.
6. Leverage Performance Analytics
   Regularly assess how compensation influences employee performance. If reps are consistently missing quotas, consider adjusting targets or incentives.
7. Regularly Update Your Plan
   Market conditions change, and so should your compensation plan. Conduct annual reviews to ensure the plan remains competitive and motivating.

Conclusion

A compensation plan is more than just a paycheck—it is a critical driver of sales performance, motivation, and business growth. By strategically designing compensation structures that align with company objectives, offer clear incentives, and support employee engagement, businesses can create a competitive advantage in attracting and retaining top talent.

FAQs about Compensation plans

1. What should a compensation plan include?

A compensation plan should include a base salary, sales incentives (commissions, bonuses, or profit-sharing), quotas, and additional benefits like paid time off and indirect compensation.

2. How do I create a compensation plan that retains employees?

Developing a compensation plan that retains employees involves offering competitive salaries, clear incentives, and indirect compensation like stock options and professional development opportunities.

3. What is a fair commission structure?

A fair commission structure varies from company to company. It should balance base salary and variable pay while ensuring reps are incentivized to exceed sales quotas.

4. Should commission be capped?

Commission caps can limit motivation. Many companies avoid them to encourage overperformance. However, decelerators may be used to prevent excessive payouts.

5. What role does a compensation manager play?

A compensation manager oversees the compensation strategy, ensuring alignment with company goals, employee performance, and industry benchmarks.

6. How does compensation affect sales performance?

A well-structured compensation plan enhances sales performance by motivating reps to hit quotas, improving retention, and aligning sales efforts with company goals.