Sales Compensation Plan Explainer Template

From the plan document, list on-target earnings (OTE), the split between base salary and variable pay, and the quota, including what counts toward it. Add any threshold, the accelerator above quota and every bonus. Then work out the base commission rate, even if the plan never states it: variable pay at target divided by quota.

If the plan is changing, put last year's figures in a second column. On-target earnings can rise while the rate falls, if quota grows faster than variable pay. Base salary can fall too when the split shifts toward variable pay, so check the new base against your salary bands.

A plan doesn't only set how much reps earn. It tells them which deals are worth their time. To see what yours says, group last year's closed deals, won and lost, into the six or so kinds your team sells. For a software company, they might be seat expansions, new mid-market customers and multi-year enterprise contracts.

For each kind, work out two numbers per selling hour. The rep's number is win rate times the commission the deal pays, divided by the hours a pursuit takes. The company's number is win rate times total contract value times gross margin, divided by the same hours. Rank both columns and look for the places they disagree.

In the template's example, an hour spent on a new mid-market customer pays the rep $93 and earns the company $572 in gross profit. A three-year enterprise deal that ramps up in price pays $26 and earns $941, because quota counts only its first year. A rep who notices will reasonably favor the mid-market deal. That isn't gaming; it's doing what the plan pays for.

A threshold paid from the first dollar is a cliff. Below it, bookings earn no commission, and the deal that crosses it unlocks commission on everything booked so far. Modeled at 100% of quota, a cliff looks harmless. Price it instead where a real rep stood last December, with the deals they still had open.

Economist Paul Oyer notes that salespeople's pay typically doesn't rise in a straight line with revenue. That gives them reason to manipulate prices, influence the timing of customer purchases and vary effort¹ over the fiscal year. His 1998 study found a pattern consistent with that: manufacturers' sales ran higher at the end of the fiscal year, and lower at the start, than in the middle.

Pay each rep's actual closed deals from last year under the old plan and the new one, unchanged. Do it rep by rep, not as a team average, because an average hides the person the change hurts most. Give each row a one-line reason, such as the higher quota or the smaller bonus.

Expect an awkward total. In the example, OTE rose $15,000 a head, yet four reps' unchanged deals pay 31% less: $347,960 instead of $505,915. One rep's deals land under the new threshold, and their pay falls from $91,050 to $9,000.

Then compare two reps on either side of the threshold. In the example, one booked $76,000 more than the other and earned $84,200 more, or 111% of the difference, on a plan that pays 10%. Leave out reps who were still ramping, and set their targets with a 30-60-90 ramp plan.

Find every sentence that could be read two ways, and decide it before the kickoff. One to check: does the threshold apply to bonuses as well as commission? In the template's example, the answer is worth $9,000 to one rep. Also pin down when a commission is earned (at signing, invoicing or payment), how split deals are credited, and what is paid if a rep leaves.

Some states require a written plan. California's Labor Commissioner explains that Labor Code section 2751 requires commission plans to be in writing² and to set out how commissions are computed and paid. Each rep must get a signed copy, and the employer must get a signed receipt. The same manual notes that unresolved ambiguities are read against the party who caused them, usually the employer who wrote the plan.

New York's Labor Law requires a commission salesperson's terms to be in writing and signed by both the employer and the salesperson³. The writing must explain how commissions are calculated and what is paid when employment ends, and the employer must keep it for at least three years.

Brief front-line managers first, so every rep hears the same answers. Send the plan, explainer and FAQ a few days before the kickoff, so the meeting is for questions, not a first read. Afterward, go over each rep's row in the comparison with them, one-on-one.

Build worked examples from real mixes of deals, not attainment percentages, and the FAQ from the questions your analysis raised. Answer each with a number, not reassurance. Name any known flaw in the plan and say what you will do about it.

Cover the paycheck too. In the US, the IRS treats commissions as supplemental wages⁴. When commissions are paid or listed separately from salary, employers may withhold federal income tax on them at a flat 22%. Tell reps whether your payroll uses that flat rate.

Once the plan is live, use a sales commission calculation template to pay each deal by the rules you explained. For a faster start, open this template in River with Edit with AI and send your plan and last year's closed deals.