How in the world do you compensate salespeople?
October 20, 2026 | Edition #34
Dear People person,
Few types of compensation are as complicated as sales incentive plans.
So, let's break it down.
A classic Account Executive sales incentive compensation plan has 4 main leversโpay mix (% base, % variable), on-target earnings (OTE), quota, and a commission %.
You also usually have an efficiency control (e.g., quota:OTEratio).
Start with constraints (e.g., we want our base/variable mix to be between 50/50 and 60/40, we want our commission to be between 6 to 10%).
Then, decide which 2 variables you want to fix (e.g., OTE, commission rate), a 3rd variable you want to test (e.g., pay mix), and the 4th variable you want to compute based on the others (e.g., annual quota).
Here's what that looks like:
If you want to play around with various scenarios, open this calculator and click File > Make a Copy, then edit the blue cells (inputs).
What "good" plan design looks like
โThere is no universal "good" sales incentive compensation plan, but there are some commonalities.
First, that the base/variable mix is appropriate for the role's typical risk:reward ratio.
For roles that own individual deals, a lower base/variable mix (e.g., 50/50) is more common whereas for roles that own portfolios or do hand-offs (think: CSM or BDR) a higher/base variable mix (e.g., 70/30) makes sense.
Second, that the target quota and OTE matches the sales cycle.
You'll see lower quotas/OTEs for smaller, transactional deals and higher quotas/OTEs for larger, longer enterprise deals.
Third, that the commission rate matches how hard the sale is.
You see higher commission rates (e.g., 8-12%) for new logo deals and lower commission rates for expansion and renewal deals (e.g., 4-6% and 0-4% respectively).
Finally, that you matched the sales efficiency metric (e.g., Quota:OTE) to the size and stage of your company.
Earlier stage companies often have lower Quota:OTE ratios (AE = 2-4x) as they're still figuring out how to generate leads, refine a pitch, etc. whereas later stage companies with larger teams tend to have higher Quota:OTE ratios (AE = 4-6x).
This free quota:OTE calculator from QuotaPath can help you figure out a reasonable quota:OTE ratio based on company revenue.
Similarly, this SaaS Periodic Table of Elements helps you understand many more industry benchmarks by company revenue (e.g., outbound BDR SQL ratios, quota overassignment).
I always suggest starting with your business metrics, then designing based off of that.
Don't blindly use Glassdoor comps for a very different business!
What "good" performance looks like
โWe've all heard stories of quotas being sky high with attainment in the 40s. That sounds bad.
But, is it?
It's common to overassign quotas, or to design plans such that the sum of all quotas from all reps is 120-140% of the team target.
When you do that, actual attainment on average only needs to be in the 70-80% range to hit the team goal.
In reality, your top 10% of performers (90th percentile), usually bring in by far the most revenue and earn 3x their target variable incentive.
But, you don't grossly overpay because other under-performers don't hit their target variable payouts.
Ramps, draws, and accelerators, oh my!
โWhen a rep first joins, they are not going to hit their monthly (or quarterly) quota right away.
That's because they need time to learn the product, perfect the pitch, and build their book of business.
How long it takes an Account Executive to ramp and become fully productive (aka, able to hit quota), depends on the average sales cycle length.
For transactional sales, it can take <3 months whereas for enterprise deals with 6+ month time horizons, it can take 9 months or longer.
You have to account for this in modeling and plan design.
Within individual plan design, you model around annual quotas and OTEs, but need to account for a multi-week or month ramp where the monthly (or quarterly) quota assigned starts at $0 and increases over time.
If the ramp is longer than 3-6 months, a rep may want a draw, or advance payment of commissions to offset the drop in earnings.
You can have recoverable draws, where the amount is deducted from future commission earnings.
Or, non-recoverable draws where the salesperson keeps the full amount without future deductions.
Within company-wide modeling, you need to consider turnover % and new hire ramp time alongside overassignment to know how many reps you need to hit target.
Now, you always want to hit target.
So you can add accelerators to increase the motivation to achieve specific outcomes.
For example, once you hit annual quota, your commission rate goes from 8% to 10%.
Then, once you're at 120% of annual quota, your commission rate goes from 10% to 12%.
What makes sales incentive compensation plans motivating
โWhen designing a sales comp plan, I always ask myself:
Can I explain this to a rep in 15 seconds or less?
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If not, it's too complicated.
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Reps need to be able to understand the plan well enough for it to change their behavior. Otherwise, it's not an effective financial incentive.
I also ask:
How close is the reward to the behavior?
The closer the reward (aka the payout) to the behavior (aka, how quickly a deal was closed, what plan was sold, etc.), the stronger the incentive.
Keep'in it legal
โIt's a best practice to issue written sales incentive compensation plans for signature for roles with more than a certain % variable pay (e.g., 30%).
To draft those up, People teams usually work with Finance, Legal, and Revenue Operations.
In an ideal world, you want these signed before the relevant quota period begins (e.g., design plans in November, write-up plans and get them signed by reps in December, plans go into effect in January).
These plans provide clarity and protection for both parties.
For example, ever wonder what happens if a sales rep gets paid $40k instead of $4k due to a payroll typo?
Or, if a customer writes a $250k check to them directly instead of the company?
Yep, you're gonna want an overpayment clause, to have rules around disclosures and disputes, and plenty more.
To become an expert in sales compensation
โIf this is a topic you truly want to master, then I recommend you check out:
Today, I provided a single example for a mid-market Account Executive.
The resources above are what helped me plan 40+ different sales compensation plans for different roles (e.g., BDR), situations (e.g., mid-year promotion), team sizes (e.g., 3 to 50+ reps), and business models (e.g., annual contract vs consumption-based goods).
Closing Thoughtsโ
Next up, we'll be talking about how to bonus plans for teams, like Customer Success, and for executives.
Until then,
Melissa
P.S. As always, this newsletter represents the opinions of one People person. It should not be construed as legal or financial advice. If you have questions about sales incentive plans, consult a qualified professional.
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