In Part 1, we established the critical role of commission in attracting and motivating sales talent. We explored the historical and strategic importance of commission structures, the necessity of aligning incentives with company objectives, and the potential pitfalls of poorly designed plans. Most importantly, we emphasised the need for clear objectives—defining what success looks like, mapping the sales process, and ensuring stakeholder buy-in. With this foundation in place, Part 2 will focus on designing an effective commission plan, evaluating different models, and addressing common challenges like gaming, unhealthy competition, and misaligned incentives.

The Candle Problem: What It Teaches Us About Incentives

Have you ever heard of The Candle Problem? This well-known psychological experiment, first conducted by Karl Duncker in 1945 and later replicated by Sam Glucksberg in 1962, tested problem-solving abilities under different motivational conditions. Participants were given a candle, a box of tacks, and matches and were asked to attach the candle to a wall without dripping wax. The key insight came when Glucksberg divided participants into two groups: one was simply asked to complete the task, while the other was offered a financial incentive for finishing quickly.

Surprisingly, those offered a monetary reward performed worse. They fixated on the most obvious solutions—such as trying to pin the candle directly to the wall—instead of recognising that the box holding the tacks could be repurposed as a candle holder. The conclusion? When solving complex or creative problems, financial incentives can narrow thinking, making people less effective at finding innovative solutions. This counterintuitive finding has been supported by later studies, including Deci (1971), which explored how extrinsic rewards can undermine intrinsic motivation, and Ariely et al. (2009), which found that while financial incentives work well for simple, mechanical tasks, they can be ineffective—or even detrimental—when applied to cognitively demanding work.

Designing a Commission Plan That Works

So, what can we learn from this research when designing a commission plan? If you take one thing away from this series, it should be this: the key to improving sales performance is simplifying and streamlining the sales process. From the salesperson’s perspective, this means reducing friction at every stage—whether through streamlined processes, effective training, or better sales support—so they can focus on closing deals rather than navigating unnecessary complexity. This ensures that we get the most value from our commission plan while avoiding common pitfalls.

Sales Commission is Only for Outcomes

Before finalising your commission structure, determine exactly what you are paying commission for. The answer for salespeople should be closed business. Using monetary incentives to encourage activity along the sales pipeline—such as booking meetings or sending proposals—carries huge risks and should generally be avoided. If you compensate for activities instead of results, you’ll end up with a lot of activity, but not necessarily more sales.

In the previous post, you hopefully set clear objectives for your commission plan. Let’s say you aim for 40% sales growth this year—20% from growing existing accounts and 20% from winning new business. But you also know from experience that new business must be the right type to avoid high churn the following year. If your team is divided into new business development and account management, then separate commission structures make sense.

Building Your Commission Model: Compensation That Will Incentivise Your Sales Force

When designing a commission plan, assume every salesperson should hit their target. Don’t budget for failure as a cost-saving measure—it will backfire by creating an environment where underperformance is expected rather than addressed. Instead, ensure that targets are realistic and achievable, fostering a culture of success and accountability. The plan should be ambitious but achievable.

Flat or Straight Commission vs. Variable Commission Rates

A flat or straight commission plan is simple but only works well when quotas remain relatively stable over time. If salespeople have similar targets in year two as in year one, then flat commission may be appropriate. This approach is used by many companies but can have a number of problems in the longer term. If accounts are expected to grow significantly over time, then a variable commission approach makes more sense.

Variable commission adjusts the commission rate based on quota size and experience. A new salesperson managing smaller accounts may have a lower quota and a higher commission rate, while a seasoned rep handling mature accounts may have a higher quota but a lower commission rate. This helps ensure that the level of effort required to hit targets remains equitable across the team.

Additionally, variable commission can mitigate the problem of “ratcheting” quotas—where a rep’s target is increased each year based on past performance, often leading to burnout and disengagement.

Pay Rises & Career Development

Salespeople expect career progression, not just higher commissions. Exceeding targets is great, but it’s not a pay raise. If you want to attract and retain top sales talent, have a structured framework for career development, with clear pathways, job titles, and corresponding pay increases. Promotions should always come with significant salary increases.

Annual vs. Quarterly (or Monthly) Plans

For longer, more complex sales cycles, annual targets tend to work best. These sales require strategic planning, and reps need time to develop and close deals. For shorter cycles and simpler transactions, quarterly plans can work better, providing a fresh start every three months. Monthly plans are possible but are typically only useful for high-volume, low-complexity sales environments.

Overachievement Bonuses & Stretch Incentives

High performers are driven by overachievement bonuses. This could mean an extra payout for exceeding 125% of quota or a higher commission rate (e.g., 1.5x or 2x) for all sales beyond the target. These structures encourage top salespeople to keep pushing beyond their base goal.

Total Sales Cost & CFO Buy-in

Once you’ve designed your plan, run multiple scenarios. What will sales costs be if everyone hits quota? What if they overachieve by 125% or 150%? A well-designed plan should be scalable, meaning over-performance doesn’t disproportionately increase costs. Having this analysis ready will reassure your CFO that the plan is financially sustainable.

Net Sales/Revenue vs. Gross Margin Commission

Some companies base commissions on gross margin rather than net sales—often as a reaction to declining profits. This approach is often put forward as one of those great strategies for solving the decline in profitability the CEO has been going on about for the last quarter. This is usually a mistake. Pricing and profit margins should be managed at the company level, not by individual sales reps. Adjusting sales mix is better achieved through pricing strategy, marketing, and targeted promotions rather than by tying commission to gross margin. It can also be detrimental to customers, your sales person should be both an advocate for the company and for its customers and this can skew the balance.

When to Pay Commission: Ensuring Financial Stability for the Sales Team

Most companies pay commission monthly or quarterly, but the key question is:

‍When is a deal considered closed? There are three main options:

For startups, paying on receipt of payment is often the safest route for cash flow management. However, some companies choose to offer a draw against commission option, allowing sales representatives to access a portion of their earned or potential commission before payment is fully processed. This can be particularly useful for sales professionals in their early days or when offering a lower base salary. However, companies should carefully balance this approach against their overall sales compensation structure to avoid financial risks. However, long delays between closing and commission payment can demotivate sales reps. If you start with a conservative approach, review it after the first year and adjust as needed.

‍Should You Cap Commission? Don't Hinder Performance

‍Your CFO may suggest capping commissions to avoid massive payouts in case of an unexpectedly large deal. This concern often stems from a desire to maintain predictable cost structures and ensure that commission expenses remain aligned with overall revenue targets. However, while this may seem like a prudent financial decision, it can demotivate top performers and ultimately limit growth opportunities. Avoid this. If a rep lands a game-changing client, you want them to be rewarded accordingly. Studies consistently show that commission caps discourage top performers and limit ambition. Let your salespeople dream big.

‍Example Commission Plan: Aligning Business Objectives with Sales Incentives

‍To illustrate how these principles come together, let’s consider an example commission structure that demonstrates an effective commission structure within a well-designed sales compensation plan. For a salesperson with an On-Target Earnings (OTE) of £100,000 per annum. The objective of this commission model is to incentivise selling our portfolio of three products across the sales force while ensuring that sales professionals are motivated to prioritise Product B—our higher-quality but more expensive alternative to Product A. This approach is designed to provide the right sales commission structure that aligns with business goals and accounts for the more challenging and longer sales cycle associated with Product B. This consists of a £50,000 base salary and £50,000 in On-Target Commission (OTC).

‍The salesperson is responsible for selling three products with the following revenue targets:

Working Out Commission Rates: Commission Calculation for Salesperson on £50k Base Salary and £50k OTC

‍The commission rate is determined by dividing the total OTC by the overall target revenue. However, past analysis indicates that Product B is more difficult to sell since it competes with Product A but offers higher quality at a higher price. To address this, we apply a weighting to the commission distribution.Rather than distributing the £50,000 OTC proportionally across all products, we allocate £20,000 (40%) to Product B to incentivise sales. This results in a commission rate of £20,000 ÷ £250,000 = 8% for Product B.

‍The remaining commission is distributed pro-rata between Products A and C:

Accelerator & Bonus Structure

‍To further incentivise performance, an accelerator is introduced to provide additional motivation and to compare with other common sales commission structures, such as tiered commission, residual commission models, and revenue-based commission plans:

This approach ensures a balanced sales strategy that offsets the temptation for salespeople to opt for the cheaper, easier-to-sell product and instead encourages them to sell the virtues of the higher-quality offering.

‍Looking Ahead: Commission Policies

‍In the next post, we’ll look at putting together a sales commission policy—a formal document that accompanies your commission plan, outlining the rules for how it operates, handling disputes, and clarifying details like what happens if a salesperson leaves.A great commission plan won’t guarantee success, but it will ensure your sales team is motivated, focused, and aligned with your company’s long-term goals.