Salespeople expect commission. While there are examples of companies that operate sales roles without offering sales commissions, these are rare. There are many pitfalls when designing commission plans and some areas where research has demonstrated approaches that can be highly effective. This series of three articles will work you through the process so you can take advantage of these opportunities and navigate away from the downsides. While a good commission plan alone will not guarantee sales success, it will put in place a solid foundation that will allow you to build a successful sales organisation.
When hiring, you’ll typically offer a base salary paired with commission. The whole package is often referred to as OTE (On Target Earnings). This is the norm, and deviating from it can limit your ability to attract top talent. That’s not to say that for some industries and cases, an alternative might be more effective.
Why Pay Commission?
Historically, sales commission has its roots in the "no sale, no fee" model. Picture an agent working for a brewery centuries ago: if they sold beer, they earned their commission; if not, they went unpaid. While today’s salespeople are far more than mere agents, the principle of paying commission for a successful sale remains. But sales people are not expected to pursue sales at all costs, while selling they are also expected to act as ambassadors for their company, embodying its values and fostering long-term relationships that drive repeat business.
Modern compensation plans reflect this dual responsibility. Base salaries provide security, ensuring that salespeople can focus on building relationships and adhering to company values. However, commission still plays a critical role in incentivising behaviours that directly drive revenue. Unlike in other professions, where bonuses may have questionable efficacy, for salespeople, commission is essential. It reminds them every day that closing deals and hitting targets is their primary focus.
Salespeople, by nature, often have a higher risk appetite than other employees. They thrive on the potential for upside rewards, making a well-structured commission plan both motivating and aligned with their personalities.
The Unique Dynamics of Sales Roles
Salespeople are the original remote workers. They spend significant time out in the field or video calls talking to customers. They manage their own schedules and priorities. This autonomy is a powerful motivator, but it also comes with risks. Without clear objectives, sales reps may focus on tasks that, while beneficial to the company, don’t directly contribute to hitting sales targets. A well-crafted commission plan mitigates this by aligning individual priorities with the company’s goals.
The Importance of a Commission Plan
A sales commission plan is more than just a compensation structure—it’s a strategic tool. When done well, it drives the right behaviours, motivates your team, and keeps the focus squarely on achieving business objectives. But no plan is perfect. Every commission system, no matter how thoughtfully designed, will have some downsides. From fostering unhealthy competition among reps to encouraging “gaming” behaviours like pulling sales forward or pushing them back, challenges will arise.
Your task is not to create a flawless plan—it doesn’t exist. Instead, ensure that the behaviours that you are driving with the plan are the ones you are seeking. Minimise the downsides and actively monitor the system. Over time, you’ll need to tune your plan as the inevitable issues emerge.
Clarify Your Objectives
Before you can design a great commission plan, ensure you have a clear idea of what you are going to achieve. Going through the process of documenting this ensures this clarity. Don’t overcook it. If you need to sell as many widgets as is humanly possible, then great—this keeps things simple. But if you are in fact looking to take on customers that will not only buy things from you but also come back for more and be advocates of your solutions, then you might need to capture a few priorities.
Have you mapped, and ideally tested, your sales process? This should be everything from how you identify prospects to first contact, to the closing cycle. If you have not yet made any sales, then chances are there are still parts of this process that are unknown to you—don’t sweat this; you can always make tweaks to your plan upon discovering them. For example, if you discover that when selling your cyber cat flaps to new housing developers there is a chance that sales get cancelled if deliveries are not accepted by the on-site foreman, you might want to ensure that sales are not booked until this is the case.
Remember, nothing happens without activity. If your salespeople do not send that email or make that call, you can guarantee that that prospect will not become a lead. So how do you need people to spend their time? How many calls must they make a week to generate ten leads, and how many leads will they need to close a single piece of business? But be very wary of aligning compensation with activities other than closed sales. If you pay commission on the number of first meetings, I can guarantee that the number of meetings you have will increase. I can also guarantee that the number of closed sales will not increase by the same ratio. The meetings will be more weakly qualified, and some will be a complete waste of time. The same applies for the number of calls, number of proposals sent, etc. Save yourself the pain.
In summary, these are the key questions you and your team need clear answers on:
1. What is the organisation’s top sales priority?
Are you focused on acquiring large enterprise accounts, maximising new customer acquisitions, or increasing lifetime customer value? Each objective requires a different approach. Link your commission to closed deals in line with your target. You might, for example, pay a higher commission on enterprise sales and only 50% of that commission on deals with SMEs.
2. What is the sales process that leads to this outcome?
Does your sales process rely on generating a high volume of leads, deepening relationships with existing clients, or a mix of both? Understanding this will help you map compensation to desired activities. For example, you might want to pay considerably higher commission on new business. But what is the definition of new business? Is it the first deal with a new customer or any deals in the first 6, 12, or even 18 months? Winning new customers might be important, but winning new businesses where you grow them into sizeable active accounts might be even more important.
3. What behaviours must your sales team adopt to achieve this outcome?
If you aim to grow sales by 40%, for example, do you need a specific increase in existing customer revenue (e.g., 25%) and a target for new business (e.g., 15%)? Each of these goals might require different strategies and incentives.
4. When will you pay commission?
Will you pay commission when the customer signs the order, when the order is invoiced, when it is successfully delivered to the customer, or when the customer pays you? All of these are OK, but I believe the closer you pay the commission to when the deal is done, the more you reinforce that success equals reward. If a salesperson doesn’t receive their commission for four months after they have signed the deal because the customer is on 60-day terms and a habitual late payer, this might water down your desired objective.
5. Will this work for Year 2 (and 3, 4, 5…)?
This may seem obvious, but there are some common pitfalls when moving from Year 1 to subsequent years. Here are two quick examples of potential "gotchas":
Example 1: The Flat-Rate Trap
You decide to keep things simple: a flat 10% commission on all sales. Each salesperson has a target of £300,000, and if they hit that target, they earn £30,000 in base salary and £30,000 in commission—a total of £60,000—not bad. In Year 1, everything goes according to plan. Most of the team hits their targets (give or take a little 😊), and you’re happy with how things are running.
Then comes Year 2. The same £300,000 target, the same 10% commission—only this time, something changes. By Month 2, every salesperson has already hit their target thanks to repeat business from Year 1 customers. By the end of the year, they’ve doubled their results, each taking home £120,000. You think to yourself, "Fine, great job." But then you realise: for every £10,000 renewal, you’re paying £1,000 in commission for what amounts to a single phone call.
Winning new business, on the other hand, still takes weeks of hard work. It’s suddenly clear that your simple flat-rate plan might not align incentives with the effort required.
Example 2: Moving Renewals to Customer Service
In an attempt to avoid the flat-rate issue, you decide to move renewals to your customer service team. After all, renewals should be simple, right? As easy as ordering a pepperoni pizza. Last year, renewal rates were at 85%, and you’re confident that your product is strong—something customers need rather than just want.
Fast forward a year, and you’re staring at a renewal rate of 75%. Where did the missing 10% go? That’s the difference commission makes. Sales reps, motivated by the promise of commission, were willing to chase down difficult customers, follow up persistently, handle awkward questions, and close the deal. Without that incentive, the extra mile is no longer being travelled. "Still," you tell yourself, "75% isn’t bad."
But wait—run the figures over five years at 75% and compare them to an 85% renewal rate. That 10% gap compounds dramatically, leaving you with significantly lower revenue over time.
Stakeholder Buy-In
Once you’ve clarified your objectives, ensure buy-in from key stakeholders, including the CEO, CFO, and senior sales leaders. Alignment at this stage is critical. A well-defined plan tailored to organisational goals will inspire confidence and minimise resistance during implementation.
Looking Ahead
This three-part series will walk you through creating and implementing a sales commission plan that maximises upside while managing downsides. In this first part, we’ve explored the importance of commission and the foundational step of clarifying objectives.
In Part 2, we’ll dive into designing the commission plan itself, exploring different models and the research on whether they work or not. How to tailor plans to meet your needs, while addressing common pitfalls like gaming and unhealthy competition.
In Part 3, we’ll focus on implementation and ongoing management, covering how to communicate the plan, track its effectiveness, and refine it over time.
A great commission plan won’t guarantee success. It’s not a magic bullet. But it will set the stage for sustainable growth by ensuring your sales team is motivated, focused, and aligned with your company’s goals.
Key Takeaways:
- Commission plans are essential for attracting and motivating sales talent.
- No plan is perfect—your job is to maximise the upsides and minimise downsides.
- The foundation of any effective commission system is clear objectives, stakeholder alignment, and a strategy that aligns behaviours with outcomes.