Making Your First Sales Comp Plan? Here's What You Need to Know

This post is for two groups: those of you who have never created a sales comp plan before and now need to (And don’t worry, I was in that group at one point); and those that have a comp plan, but you’ve realized that it’s not right. If you’re in that last camp, you might have even had multiple iterations. It’s too complex. A mess. Or something is just not working. Sound familiar? Keep reading  for Josh Melick’s ideal Sales Compensation Plan.

First, let’s define “Sales comp plan”. When using this term, it’s short for Sales Incentive Compensation Plan. Basically, the details of the commission structure that sales people earn. Funny enough, when we shorten the name we drop the most important word - Incentive. First and foremost, a comp plan’s primary goal is to incent the right behavior. Salespeople are “coin operated” as they say -- so make sure it’s clear how and why they will get their coins!

Two Components of Sales Plans

There’s two parts to an effective comp plan. The numbers of the comp plan, and then the rules - how you implement it. The rules are often more important than the numbers. We’ll discuss both.

Most sales salaries start with a 50/50 split between base pay and incentive pay. So if you say a $150k OTE (On Target Earnings), that means a $75k base and then $75k in commission. And generally that commission should be what the rep will see if they are “On Target”, i.e., hitting their quota. You see some companies playing games where that amount requires more than the target or there may be “potential” to hit $150k but it's actually not the target. Don’t do that.

Here’s the simple steps to follow for a sales comp plan that you - and your sales staff - will get behind.

  1. Set quotas. This topic deserves it’s own post or several posts. In simple terms, find a target that is achievable but will be a stretch. I suggest measuring a quota in “bookings” (first year contract value), and setting them quarterly. It’s also best to have all reps on the same plan. The majority of sales reps should meet or get close to the quota - but if everyone meets it, you didn’t set it high enough. If hardly anyone hits it, it’s too high. Obviously this is a nuanced situation, so put some thought into it.
  2. Set a floor. Sales reps need to hit a certain amount before commission kicks in at all. The fact is that bad reps and their base salaries do damage to your bottom line, not the big checks you write to top sales reps. Not paying commission on the dollars below the threshold essentially covers the base salary expense. See Jason Lemkin’s discussion here. This is a question best solved by better understanding your economics.
  3. Create accelerators. Most plans have 3-4 steps to “accelerate” the commission number as the rep sells more. Again, “incentivize” is the key word here. You want the reps to feel like just one or two more deals will get them into the next tier with a higher %%. Some plans use that higher number retroactively (big bump once hit), others are tiered - check your numbers.

Here’s a common example:  

  • 0% commission at up to 50% to quota
  • 8% from 50%-80%
  • 9% from 81%-99%
  • 10% at 100%-110%
  • 11% at 111%-130%
  • and so on

  1. Pay upfront. You should almost always pay the commission in the month or the quarter the deal was signed. Don’t get creative and space the payments out - that’s the opposite of incentive pay. There’s risk on churn or onboarding etc. There’s cash flow concerns. But you have a sales team for a reason. Pay them. Generally do something like monthly payments based upon that month's close. Then on the quarter reconcile for accelerators / clawbacks / other changes.
  2. Clawbacks. Sales reps hate clawbacks but the company needs them. A “clawback” is when a previously paid commission is taken back. The way to do this is to deduct from future commissions. Generally I recommend a clawback period of 3-6 or maybe 9 months and no longer. The logic is any deal that can make it through the initial time period was good enough. After that, churn or other problems are more likely to be product or implementation issues, not a bad sale. Clawbacks keep reps accountable to bring in good quality deals. It prevents fraud or bad incentives and protects the company. Just don’t make the clawback period too long - your reps should not have to pay for product or implementation failures.
  3. Draw. By “Draw” I’m referring to commissions paid during the training period or new hire period. I know lots of people who don’t like the term “Draw”. It’s confusing as to whether you’re referring to an actual draw that requires re-payment. Call it “Training Pay” then - the idea is that new hires need some time to ramp up. Usually around a quarter or so, depending on sales cycle length, and the base pay is probably not enough during that period. Build in some training targets, like simple reading to exercises to outbound targets, and pay on those in the first quarter. It doesn’t have to be free money, so make some special targets that reps can get paid on in their first quarter.

Whew -- I think I covered the basics. As mentioned, many of these are more “rules” than commission structure - like Draws, Clawbacks, and payment schedules. They impact the math, take home pay, and most importantly the bottom line of the company. Think through all of these details to make them fit your business!

Let’s Talk More Advanced Comp Plans

Net Bookings / Gross Bookings: Some plans add additional features using gross vs. net bookings. There’s plenty of areas where plans can get tough to align, for example, maybe one lead source is way more expensive than others. Some products have very different gross margins. To try to fix some of this, some companies use plans with multipliers that adjust bookings amounts so that then the commission numbers are simpler. Take that low margin product and pay commission at 50% of bookings. Expensive marketing leads take a 25% bookings deduction. Or the opposite, too: get the client to pay upfront and get a 10% bookings “bonus” on the deal. This is all advanced stuff, but I like doing this over having the commission details change. The math is the same, but this is often a simpler way than making different products have different commission percentages. The accelerator schedule stays the same, but the inputs vary based upon that multiplier.

At my startup,, we used this system to have sales reps “pay” for the leads coming from marketing. On cold outbound deals we paid full commission, but leads coming through marketing had reductions in line with the marketing costs of those leads. It worked really well.

Wow, that was a lot! Good luck. Sometimes you need to get lost and then simplify your way into something that works. And don’t forget to double check your math - know what your sales teams cost you, how much of the deal they get, what it looks like when reps hit quota, miss quota, or far exceed quota. Always give your best reps more upside, and protect against the low end. These are all features of great comp plans. There’s plenty more I can cover - maybe next time I'll write up some mistakes I’ve seen and a bit more on advanced topics.

Josh Melick helped write and/or edit sales comp plans at Salesforce, AT&T (Xandr), Demandforce, Intuit,, inDinero, and others!