How to set commission rates for SaaS salespeople
Now that we’ve set the quota for a salesperson, it’s time to talk about how to set commission rates. In the past, our CEO AJ Bruno wrote about his favorite comp plan but that’s far from the only option you have.
Before we dive in, let’s define some terms:
Commission: a percentage of some other number (usually revenue) that you earn. Do you receive some percentage of every deal you bring in? If so, that’s a commission.
Bonus: a flat value you earn for doing something. Do you earn some set amount of money for hitting your quota, hitting revenue milestones, or for every meeting you set? If so, that’s a bonus.
- Single rate commission: The simplest form of commission is the single rate commission. This means that you earn a set % of your sales, regardless of your quota attainment.
- Multiple rate commission: Multiple rate commissions change depending on some variable. The most traditional multiple rate commission is an accelerator that increases your commission rate when you hit your quota.
- Single rate bonus: Much like a single rate commission, single rate bonuses are very simple. You get paid a specific amount for completing some action. These are more common for non-revenue producing roles, but examples might be earning a flat $500 for closing any deal or earning a bonus for every new logo you close.
- Multiple rate bonus: Again, similar to a multiple rate commission, a multiple rate bonus means that the amount you earn for completing an action changes depending on some other variable like quota attainment.
- Milestone bonus: Milestone bonuses are bonuses you earn for hitting some achievement. For example, you could earn $500 for making 1,000 dials in a month. If you make 999 dials? No bonus. If you make 2,000 dials, you still earn just the $500.
So how do you actually set a commission rate? Well, once you have your On-Target Earnings (OTE) and quota figured out, it’s fairly simple to work backward. Continuing the example from this blog post, let’s say we have a $50k/month quota, an OTE of $120k broken into $60k base and $60k commission. In that example, a flat rate commission would be 10%. That comes from: $60,000 annual commission / 12 months = $5,000 OTE per month and $5,000 OTE per month / $50,000 quota per month = 10% commission.
However, if you want to incentivize overperformance, you could add an accelerator past 100%. I recommend having your accelerators apply to all sales for the month to add an extra incentive. So maybe you’d want to have your reps earn 10% of anything up to quota, but once quota has been achieved, they earn 12% of anything they’ve sold that month. We’ve seen as many as 100 different earnings tiers, but we recommend sticking with 4 max.
Another option would be to add a milestone bonus for hitting your monthly quota, encouraging consistency. An example would be a $1,000 bonus for hitting your monthly quota, which would drop your commission rate to 8% while leaving OTE the exact same.
At the end of the day, you’ll have to play around with all the numbers and find something that works for your organization. It was mentioned at the beginning of this post, but if you’re looking for a simple and effective first plan, you can’t go wrong with this plan from our CEO, AJ Bruno.
QuotaPath is the most adaptable compensation solution for sales reps to finance to everyone in between. Try it for free today!