Sales Commission Plans: Structures, Costs, and Financial Impact
Commission plans are where motivation meets economics. Design well, and reps sell what the company needs. Design poorly, and you either demotivate or overpay.
Sales commission represents one of the largest variable costs for growing companies. Get the structure right, and you attract top talent while maintaining healthy unit economics. Get it wrong, and you either can't hire or can't afford the people you have. Commission design is a critical part of revenue operations, and many growing companies work with a fractional CFO to model compensation costs and align incentives with business goals.
The Commission Budget
Total sales compensation (base + variable) typically runs 15-25% of new business revenue for SaaS companies. Commission alone is usually 8-15% of revenue at quota attainment.
Commission Structures
Common Structure Types
Linear Commission
Same rate from dollar one to dollar infinity.
Example: 10% of every dollar sold
Pros: Simple, predictable
Cons: Doesn't incentivize overperformance
Accelerators Above Quota
Higher rates for performance above quota.
Example: 10% up to quota, 15% at 100-150%, 20% above 150%
Pros: Rewards top performers
Cons: Higher cost for overperformance
Threshold/Cliff
Commission only kicks in after minimum performance.
Example: 0% until 50% of quota, then 10%
Pros: Protects against underperformers
Cons: Can demotivate early in period
Tiered Rates
Different rates at different achievement levels.
Example: 8% for 0-80%, 10% for 80-100%, 12% for 100%+
Pros: Graduated motivation
Cons: Complex to administer
OTE and Key Ratios
Key Compensation Terms
| Term | Definition | Typical Value |
|---|---|---|
| OTE | On-Target Earnings (base + variable at 100%) | $150K-300K for AEs |
| Base:Variable Split | Ratio of salary to commission | 50/50 to 60/40 |
| Quota:OTE Ratio | Annual quota divided by OTE | 4-6x |
| Commission Rate | Percentage of deal value earned | 8-12% |
Example Calculation
AE Compensation Example
- OTE: $200,000 (50/50 split = $100K base, $100K variable)
- Quota: $1,000,000 (5x ratio)
- Commission Rate: 10% ($100K variable ÷ $1M quota)
- At 100% attainment: $200K total comp
- At 120% attainment (with 1.5x accelerator above quota): $230K
Financial Impact Modeling
Commission as % of Revenue
| Business Type | Commission % of Revenue |
|---|---|
| Enterprise SaaS | 8-12% |
| Mid-Market SaaS | 10-15% |
| SMB/Transactional | 5-10% |
Accrual vs. Cash
Finance should accrue commission expense when the deal is booked, even if paid later. This matches expense to the revenue-generating activity. Failure to accrue properly distorts monthly P&L. See our guide on billings and collections for more on timing differences.
Need Help With Compensation Planning?
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