Sales readiness and support
Configuration and quote management
Incentive and compensation management
In today’s business landscape, sales commissions are no longer just a line item on the income statement. They are a strategic lever for shaping sales behavior. Awell-designed commission plan directs the sales force toward high-margin products, multi-year contracts, or new logos – depending on the company’s strategic priorities.
This guide examines Sales Commissions through a data-driven lens, moving beyond outdated compensation logic and embracing dynamic models managed through Sales Performance Management (SPM) and CPQ software.
Sales Commissions represent the variable component of compensation – commonly defined as Pay-for-Performance – paid to a salesperson or sales agent. Unlike discretionary bonuses, commissions are governed by predetermined mathematical formulas that tie payout to measurable results, such as revenue (Bookings), recognized revenue (Revenue), or contribution margin (Gross Profit)
To design a system that performs, compensation must be broken down into structured components. In modern B2B organizations, this balance is defined as the pay mix.
OTE (On-Target Earnings)
Total target compensation (Base Salary + Variable Compensation) earned at 100% quota attainment.
Leverage
Indicates how much compensation is at risk.
Hunter roles (New Business Acquisition): typically 50/50 or 60/40 (Base/Variable).
Farmer roles (Account Management): typically 70/30 or 80/20.
Thresholds
The minimum performance level required before commissions are paid (e.g., “No payout below 80% of quota”). Protects the company from under performance.
Accelerators: Multipliers applied above 100% of quota (e.g., commission rate doubles on revenue above target). This is where top performers are retained and motivated.
The mathematical model behind commission calculation directly impacts financial performance and profitability.
1. Revenue-Based Commission
The sales person earns a percentage of the Total Contract Value (TCV).
Analysis: This is the most common model due to its simplicity – but it carries risk. If discount authority is decentralized, reps may offer maximum discounts to close deals and secure commission, eroding company margins.
Best Use Case: Startups in aggressive market share acquisition (“land grab”) phases where top-line growth outweighs margin control.
2. Gross Margin Commission
The gold standard for mature B2B organizations. Commission is calculated on the difference between selling price and cost of goods sold (COGS).
Analysis: This model transforms sales reps into business operators. A 10% discount can halve commission earnings, reinforcing price discipline and margin protection.
The Role of Sales Performance Management: Real-time margin visibility is operationally complex without proper tools. A digital CPQ and SPM platform allows sales reps to immediately see how discounting affects their commission, fostering financial accountability and pricing discipline.
3. Tiered Commission Structure
Commission rates increase as performance milestones are reached.
Example:
0 - 100k$: 5%
101k$ - 200k$: 7%
201k$+: 10%
Analysis: Psychologically powerful. Prevents “sandbagging” (delaying deals to the next period) because incremental performance always unlocks higher earning potential.
Many companies include a “windfall clause.” If a single deal exceeds a defined threshold (e.g., 200% of annual quota), commission may be capped, adjusted, orpaid over time to prevent cash flow strain and post-deal disengagement (“I’ve made my year, I’m done.”).
Paymentfrequency should align with sales cycle length.
Transactional sales: Monthly payouts (immediate feedback loop).
Enterprise sales (6–12 month cycles): Quarterly payouts to smooth volatility.
The opposite of an accelerator. Applied when low-margin products are sold or excessive discounts are granted. Example: “If you discount beyond 20%, your commission rate is reduced by 50%.” It is a strong but effective pricing discipline mechanism.
Channel commissions require the same level of transparency. Many organizations deploy a Partner Relationship Management (PRM) portal integrated with CPQ software, allowing resellers to calculate their earnings autonomously while reducing administrative burden for the vendor.
