What is Sales Commission?
Sales commission is the variable compensation paid to salespeople based on the revenue or deals they close. Commission structures directly impact sales team motivation, company profitability, and hiring competitiveness. The right structure aligns rep incentives with company goals, the wrong one creates perverse incentives that damage long-term growth.
The Formula
Commission = Deal Value × Commission Rate On-Target Earnings (OTE) = Base Salary + Expected Commission at 100% Quota
Most SaaS companies use a 50/50 or 60/40 base-to-commission split for account executives.
Worked Example
An AE has $500K annual quota, $80K base salary, 10% commission rate, with a 1.5x accelerator above quota.
- At 100% quota: Commission = $500,000 × 0.10 = $50,000
- OTE = $80,000 + $50,000 = $130,000
- At 120% quota ($600K): Extra = $100,000 × 0.10 × 1.5 = $15,000
- Total comp at 120% = $80,000 + $50,000 + $15,000 = $145,000
📌 The AE earns $130K at quota and $145K at 120% attainment. The accelerator rewards overperformance while the base salary provides stability.
Why This Matters
Talent attraction
Competitive commission structures are the primary way to attract top sales talent. The best reps compare OTE, quota attainability, and accelerator structures when evaluating offers.
Revenue alignment
Commission structures shape selling behavior. Commission on annual contracts encourages long-term deals; commission on MRR encourages volume. Design your plan to match your revenue goals.
Cash flow planning
Commission payments are a major variable expense. Understanding commission obligations helps forecast cash requirements and avoid cash crunches after large deal closes.
Common Mistakes
❌ Setting unattainable quotas
If fewer than 60% of reps hit quota, your quotas are too high. This leads to demoralization, high turnover, and ultimately costs more in hiring and ramp time than the savings from lower commissions.
❌ No clawback for churned customers
Without clawbacks, reps are incentivized to close bad-fit customers who churn quickly. Add a 3-6 month clawback period for early cancellations.
❌ Capping commission
Commission caps demotivate top performers and encourage them to sandbag deals into the next period. Your best reps should be your highest-paid employees, uncapped commission ensures that.
Industry Benchmarks
| Category | Good | Average | Poor |
|---|---|---|---|
| SaaS AE (SMB) | $120-160K OTE | $90-120K OTE | Below $80K OTE |
| SaaS AE (Enterprise) | $200-300K OTE | $150-200K OTE | Below $130K OTE |
| Commission Rates | 10-15% of ACV | 8-10% of ACV | Below 5% of ACV |
Source: Gartner Sales Benchmark Report
Benchmark data sourced from Gartner Sales Benchmark Report.