How to Design a Sales Incentive Structure That Actually Works

A sales incentive plan should answer one simple question:

What do we want the sales team to do differently?

Too many organisations start with commission percentages, bonus rates or market benchmarks before agreeing on the behaviours and outcomes they want to reward.

The result is often a plan that is difficult to understand, expensive to administer and disconnected from the company’s priorities.

A good sales incentive structure does not need to be complicated. It needs to be clear, measurable and commercially sustainable.

This guide explains how to build one step by step.

1. Start with the role, not the incentive percentage

Before deciding how much incentive to offer, understand what the salesperson actually controls.

Ask:

• Do they generate new business?
• Do they manage existing accounts?
• Do they influence the sale or close it directly?
• Are they responsible for revenue, profit or both?
• How long is the typical sales cycle?
• Does the customer relationship belong to one person or a broader team?

A salesperson who independently closes short-cycle transactions should not necessarily have the same incentive structure as an account manager responsible for long-term customer retention.

Practical example

The more directly the role controls the result, the more individual the incentive can be.

2. Define target pay

Sales roles are usually structured around:

• Fixed salary
• Target incentive
• Total target cash

For example:

In this example, the incentive represents 25% of total target cash.

The right pay mix depends on the level of sales influence and risk.

Illustrative pay mixes

These are starting points, not fixed rules.

A higher incentive opportunity may be appropriate where:

• Results can be measured clearly
• The employee has direct control over sales outcomes
• The sales cycle is relatively short
• Individual contribution can be separated from team contribution

A higher base salary may be more appropriate where:

• Sales cycles are long
• Results depend on multiple teams
• The role includes significant relationship management
• Revenue is affected by pricing, supply or market conditions outside the employee’s control

3. Choose no more than three measures

One of the easiest ways to weaken a sales incentive plan is to include too many measures.

When everything is a priority, nothing is a priority.

For most plans, two or three measures are enough.

A practical structure could be:

This structure communicates that revenue matters, but not at any cost.

Without a margin measure, a sales team may increase revenue by offering unnecessary discounts. Without a customer measure, employees may focus only on the easiest existing accounts.

Each measure should have a clear purpose.

Common sales incentive measures

Revenue

Useful when the goal is to increase sales value.

Be careful: revenue alone may encourage discounting or low-quality sales.

Gross margin

Useful when profitability matters.

Be careful: employees need visibility over pricing, costs and margin calculations.

New business revenue

Useful when the organisation wants growth from new customers.

Define exactly what counts as a new customer.

Customer retention

Useful for account management roles.

Define whether retention is measured by customer numbers, contract value or recurring revenue.

Product mix

Useful when the business wants to grow specific products or services.

Avoid rewarding products that employees cannot realistically sell.

Team sales

Useful when sales depend on collaboration.

Be careful not to make high performers feel that their reward is entirely dependent on others.

Strategic objectives

Useful for priorities such as entering a new market, improving pipeline quality or implementing a new sales process.

Keep the weighting relatively small and define the evidence required.

4. Set threshold, target and maximum performance

A sales incentive plan should not operate as an all-or-nothing payment.

A practical performance curve includes:

• Threshold: the minimum level required before payment starts
• Target: the expected level of performance
• Maximum: the level at which the maximum incentive is paid

Example performance curve

If the employee has a target incentive of $40,000 and achieves 110% of the sales target, the payout would be:

$40,000 × 150% = $60,000

This approach rewards performance progressively and provides meaningful upside for strong results.

5. Test whether the target is realistic

A plan will not motivate employees if the target is seen as impossible.

Before finalising targets, review:

• Previous sales performance
• Customer demand
• Market conditions
• Territory potential
• Sales pipeline
• Product availability
• Pricing changes
• Employee tenure
• Sales cycle length
• Business growth expectations

Do not simply increase last year’s target by 10% because the business wants 10% growth.

Check whether the individual employee has the customers, territory, products and support required to deliver that growth.

A useful target-setting test

Ask three questions:

1. Would a capable employee have a reasonable chance of reaching target?
2. Would reaching maximum require genuinely exceptional performance?
3. Would the business still benefit financially if maximum incentive were paid?

If the answer to any of these questions is no, the plan needs further work.

6. Decide how each measure will be calculated

Every measure should have a written definition.

For a revenue measure, specify:

• Whether revenue is based on invoices, orders or cash received
• Whether GST is excluded
• How returns and cancellations are treated
• Whether discounts reduce credited revenue
• How shared accounts are allocated
• How foreign currency is converted
• What happens when a customer does not pay
• When revenue is recognised for incentive purposes

For a new customer measure, specify:

• What qualifies as a new customer
• Whether a reactivated customer counts
• Whether related companies count separately
• Whether a minimum contract value applies
• Whether the customer must remain active for a minimum period

Many incentive disputes come from definitions, not the actual payout rate.

7. Include a profit or quality control

A sales incentive plan should not reward revenue that damages the business.

Consider including a control such as:

• Minimum gross margin
• Minimum customer payment requirements
• No payment on cancelled contracts
• No payment on fraudulent or non-compliant sales
• Reduced payment where customer complaints exceed an agreed level
• Payment only after the cooling-off or cancellation period
• A company profitability gateway

Example

A salesperson reaches 105% of the revenue target but the gross margin is below the minimum acceptable level.

The plan could state:

No revenue incentive will be paid where the gross margin percentage is below 20%.

Alternatively, the revenue payout could be reduced rather than removed completely.

The control should be proportionate. Avoid giving management unlimited discretion to cancel payments without clear rules.

8. Avoid cliffs where possible

A cliff occurs when a very small performance difference creates a very large payment difference.

For example:

• 99% of target pays nothing
• 100% of target pays $30,000

This can feel unfair and may encourage employees to delay or manipulate sales timing.

A smoother payout curve is usually more effective.

For example:

The employee can see that every improvement in performance creates a reasonable increase in reward.

9. Decide whether to cap the incentive

A cap limits the maximum incentive payment.

For example, the maximum payout may be 200% of target incentive.

Caps can protect the organisation from unexpected costs, but they can also reduce motivation once employees reach the maximum.

Before introducing a cap, consider:

• Could one unusually large deal create an excessive payout?
• Is the business still profitable when incentive payments are high?
• Can targets be measured accurately?
• Are there supply or delivery limits?
• Could the employee stop selling once the cap is reached?

For high-value or unusual transactions, consider a separate large-deal rule instead of a low overall cap.

Example large-deal rule

Any individual contract worth more than $2 million will be reviewed before the incentive payment is confirmed. The review will consider margin, implementation risk, payment terms and the employee’s contribution.

This is usually more practical than applying broad discretion to every payment.

10. Consider individual and team performance

Individual measures work well when employees have clear ownership of accounts or territories.

Team measures work well when several people contribute to the outcome.

A blended plan may look like this:

This gives the employee meaningful control over their incentive while still encouraging collaboration.

Be careful when using company-wide measures for junior sales roles. Employees may not feel motivated by a measure they cannot influence.

11. Build a worked example

Assume a Business Development Manager has:

• Base salary: $120,000
• Target incentive: $40,000
• Maximum incentive: $80,000
• Revenue weighting: 60%
• Gross margin weighting: 25%
• New customer weighting: 15%

Their performance is:

Step 1: Calculate the weighted result

Revenue:

60% × 150% = 90%

Gross margin:

25% × 100% = 25%

New customers:

15% × 75% = 11.25%

Total payout factor:

90% + 25% + 11.25% = 126.25%

Step 2: Calculate the incentive payment

$40,000 × 126.25% = $50,500

The employee receives a sales incentive payment of $50,500.

12. Write clear plan rules

A sales incentive document should explain:

• Who is eligible
• The plan period
• The target incentive
• The performance measures
• The weight of each measure
• Threshold, target and maximum performance
• The payout calculation
• When payments will be made
• Treatment of new starters
• Treatment of employees who leave
• Treatment of extended leave
• Treatment of role changes
• Treatment of shared sales
• Treatment of cancellations and bad debts
• How errors will be corrected
• Who approves the final payment
• How disputes will be managed

Employees should not need to ask Finance or HR to explain how their incentive works every month.

13. Handle new starters and leavers consistently

The plan should clearly explain what happens when someone joins or leaves during the performance period.

New starters

Possible approaches include:

• Prorating the target and incentive based on time in the role
• Providing a guaranteed incentive during a short onboarding period
• Using activity or pipeline measures until the employee has enough time to generate sales
• Setting a reduced target during the first few months

Employees who leave

Consider:

• Whether the employee must be employed on the payment date
• Whether completed sales will still be recognised
• How resignations and terminations are treated
• Whether local employment laws or contracts affect the payment

The rules should be reviewed by HR and legal advisers before implementation.

14. Model the cost before launch

Never launch a sales incentive plan without modelling several performance scenarios.

At a minimum, calculate the total cost if the team performs at:

• 50% of target
• 80% of target
• 100% of target
• 120% of target
• Maximum performance

Also test what happens if:

• One employee generates a very large sale
• Every employee reaches maximum
• Revenue increases but margin decreases
• A major customer cancels
• Sales are concentrated in one product
• The company misses its overall profit target

The business should understand both the expected cost and the worst reasonable cost.

15. Check the plan for unintended behaviour

Before approving the plan, ask employees, managers, Finance and HR to test it.

Ask:

• Could employees increase payment by delaying a sale?
• Could two employees claim the same customer?
• Does the plan encourage excessive discounting?
• Could employees focus on new customers and ignore existing ones?
• Does it reward sales that are later cancelled?
• Does it encourage employees to sell unsuitable products?
• Can managers calculate payments consistently?
• Can employees estimate their own payment?

A strong incentive plan should reward good sales behaviour, not creative interpretation of the rules.

16. Communicate the plan with examples

Do not launch the plan by sending employees a ten-page policy and asking them to read it.

Run a practical session that explains:

• Why the plan exists
• What the company wants to achieve
• How each measure works
• How employees can influence the outcome
• How payments are calculated
• What happens in common scenarios

Provide at least three worked examples:

1. Performance below target
2. Performance at target
3. Performance above target

Managers should also be able to explain the plan confidently.

17. Review the plan after each cycle

A sales incentive structure should not remain unchanged for years without review.

After each cycle, assess:

• How many employees reached threshold
• How many reached target
• How many reached maximum
• Total incentive cost
• Incentive cost as a percentage of revenue and profit
• Whether performance was differentiated
• Whether the plan changed behaviour
• Whether disputes occurred
• Whether data was available on time
• Whether any measures were ignored
• Whether unintended outcomes occurred

Warning signs

The plan may need adjustment if:

• Almost nobody reaches threshold
• Almost everybody reaches maximum
• Payments increase while profit declines
• Employees cannot understand the calculation
• Managers regularly request exceptions
• Finance needs to manually correct the data
• Employees focus only on one measure
• The plan creates regular disputes over account ownership

A simple sales incentive template

The following structure can be used as a starting point.

Plan purpose

To reward profitable sales growth while supporting customer retention and responsible sales practices.

Eligibility

Employees who are formally assigned to an eligible sales role.

Target incentive

30% of base salary.

Measures

Performance curve

Payment timing

Payments are calculated quarterly and paid after Finance confirms the final results.

Key conditions

• Cancelled sales are excluded.
• Revenue is recognised when the customer is invoiced.
• Overdue accounts may be excluded until payment is received.
• Gross margin must remain above the agreed minimum.
• Shared sales must be agreed and recorded before the sale is completed.
• Total payment is capped at 200% of the target incentive.

Final checklist

Before launching the plan, confirm that:

• The purpose of the plan is clear
• Employees can influence the measures
• There are no more than three key measures
• Targets are challenging but realistic
• Threshold, target and maximum are defined
• The calculation can be explained easily
• Revenue quality and profitability are protected
• New starter and leaver rules are documented
• Incentive costs have been modelled
• Finance can provide reliable data
• Managers understand the plan
• Employees have received worked examples
• The plan will be reviewed after the cycle

Final thought

The best sales incentive structure is not the one with the most sophisticated formula.

It is the one where employees understand:

• What they are expected to achieve
• How their performance will be measured
• What they will earn
• Why the outcome is fair

Start with the business objective, keep the measures focused and test the plan using real sales scenarios before it goes live.