How to Design a Sales Commission Structure That Actually Works

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Incentivising salespeople should be simple: sell more, earn more.

But in practice, designing a commission structure that truly works motivating reps, aligning to business goals, and managing cost is anything but easy.

In this article, we go beyond theory and share what actually works, based on real-world experience and market insight. Whether you're starting from scratch or fixing a flawed structure, this guide outlines what effective commission planning really looks like.

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Why Your Commission Plan Matters

A well-designed commission structure is one of the most powerful levers you have to drive sales behaviour and business growth. Done right, it:

• Attracts and retains high-performing sales talent
• Drives focus toward profitable, sustainable deals
• Aligns effort with customer value and business strategy
• Scales as your business grows

Poorly designed plans, on the other hand, can create major headaches:

• Reps chase low-margin or misaligned deals
• Gaming or manipulation of targets becomes common
• Unpredictable earnings cause team dissatisfaction
• Budget blowouts frustrate finance teams

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The Core Components of a Commission Structure

A high-performing plan balances five core elements.

1. On-Target Earnings (OTE)

OTE represents the total expected earnings for a rep achieving 100% of their target. It includes:

• Fixed base salary
• Variable commission or bonus

Typical pay-mix benchmarks:

• Entry-level reps: 85–90% fixed / 10–15% variable
• Mid-level BDMs: 70–80% fixed / 20–30% variable
• Senior Account Executives: 60–70% fixed / 30–40% variable

The higher the sales complexity and accountability, the greater the variable mix should be.

2. Commission Rates

This is the percentage of revenue, margin, or another metric paid out as commission.

Common formats include:

• Flat rate: A consistent % across all performance
• Tiered: Higher rates unlocked at higher sales thresholds
• Accelerated: Significantly higher rates above target

Example: 5% of revenue up to 100% of target, then 8% up to 120%, and 10% beyond that.

Accelerators are powerful tools to drive high performance and reward your top 20%.

3. Performance Metrics

Revenue is the default metric—but it’s not always the best choice. Other options include:

• Gross profit or margin (better for focusing on deal quality)
• Units sold or bookings (for transactional sales)
• Milestone-based (contract signed, payment received)
• Leading indicators (e.g., meetings booked, pipeline created—for SDR roles)

Choosing the right metric ensures that reps focus on what actually drives value.

4. Thresholds and Caps

Thresholds are minimum performance levels below which no commission is paid.

Caps are maximum earnings limits to control costs—but use them carefully.

Best practice:

• Include a threshold (e.g. 80% of target)
• Avoid hard caps unless there's a compelling budget or compliance reason
• Consider soft caps with manager discretion above a certain level

5. Payout Frequency

Payouts must strike a balance between motivation and financial practicality:

• Monthly: Common for transactional sales cycles
• Quarterly: Preferred for longer, relationship-based deals
• Hybrid: Monthly advances with quarterly wash-ups

Quarterly payouts help align with business forecasting, while monthly incentives maintain urgency.

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Different Structures for Different Roles

Commission plans should vary by role type:

• Direct Sales (BDMs, Account Executives): Clear individual targets, accelerators, higher upside
• Inside Sales / SDRs: Metrics linked to meetings, leads, or pipeline
• Sales Enablement / Support: Often on team targets or bonus-style payouts with a lower variable mix

The closer a role is to the revenue line, the more leverage and reward they should carry.

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Adding Control: Risk and Behavioural Gateways

To mitigate unintended outcomes, many businesses add gateways that must be met for commissions to be paid. These might include:

• Compliance training completed
• No unresolved customer disputes
• Minimum margin or deal quality maintained

These gateways help ensure that high earnings aren’t tied to risky or brand-damaging behaviour.

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Example: Commission Plan for a Mid-Market BDM

Component	Structure
On-Target Earnings (OTE)	$180,000
Base Salary	$120,000 (67%)
Commission at Target	$60,000 (33%)
Threshold	80% of sales target
Commission Rate	5% to target, 8% above, 10% after 120%
Payout Frequency	Monthly with quarterly wash-up
Risk Gateway	Training completed + no client complaints

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Mistakes to Avoid

• Paying commissions purely on top-line revenue with no regard for margin
• Changing the structure too frequently, creating confusion and distrust
• Setting unrealistic targets or payout thresholds
• Failing to model the financial cost of your plan
• Not communicating clearly how the plan works

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Final Thoughts: Keep It Clear, Motivating, and Aligned

The best commission plans are:

• Simple enough for a rep to explain without a spreadsheet
• Fair and motivating across performance levels
• Aligned to both short-term outcomes and long-term value
• Built to scale and evolve with the business

Commission structures are never “set and forget.” They should be reviewed annually and adjusted as your business model, product mix, and customer segments evolve.