Designing compensation plans and setting revenue targets often feels like a daunting, black-box task for many business leaders, which is why we frequently get consulted on it. From our experience, this process can seem overwhelming, especially when leaders aim to craft the perfect plan that motivates their teams and drives results. But here’s the truth—there’s no such thing as a “perfect” compensation plan.
The goal should be to create a fair, balanced system that motivates the right behaviors while aligning the entire revenue team with the company’s growth objectives. When done right, the compensation plan and revenue targets become two ends of a lever that can powerfully elevate your team’s performance and drive sustained growth. Compensation design is an art and a science. It’s a science because you need to ensure the compensation plan makes mathematical sense and is economically viable, and it’s an art because it has to address the needs of the business, drive the right behaviors, and motivate the team.
In this article we provide you with some helpful tips on how to approach sales compensation and target-setting effectively.
1. Design Compensation for the Behavior You Want to Drive
Compensation should reflect the specific behaviors and outcomes you want each revenue function to achieve. For instance, if customer acquisition is the primary goal, focus Account Executive’s (AE) compensation on new deals. For Customer Success Managers (CSMs), if retention and expansion are the goals, compensation should be tied to renewals and upselling.
Example:
- For AEs, compensation structures (base vs. variable aka commission) vary depending on industry, company size, and deal complexity. We’ve seen ratios from 30:70 to 50:50 (base to commission), and both can work. What’s critical is focusing on new business if that’s the main goal.
- For CSMs, if tied to revenue, the focus could be on retention and expansion, but if the role centers on customers onboarding, metrics like customer onboarding time or satisfaction might be more relevant.
There’s no one-size-fits-all approach—just ensure that compensation drives the outcomes that matter most for growth.
2. Make It Simple, But Stimulating
A compensation plan should be easy to understand and calculate. If reps can’t quickly figure out what they’re earning or how to maximize their pay, they’re less likely to stay motivated. Keep the structure clear, but offer enough incentives to push performance.
Key Guidelines for Simplicity:
- Limit Metrics: Focus on no more than 2-3 key metrics, such as revenue or new logos, to avoid overwhelming complexity.
- Accelerated Pay: Use a “hockey stick” curve where performance rewards increase more aggressively as reps hit higher thresholds—this keeps them pushing beyond just meeting quota.
By keeping the plan simple but stimulating, you encourage reps to focus on key goals without being bogged down by complicated calculations.
3. Make It Challenging, But Achievable
Targets that are too easy won’t drive growth, while overly ambitious ones can demotivate your team. Aim for targets that are tough but attainable to maintain motivation and foster growth. Ideally, 70-80% of reps should hit at least 90% to 110% of their targets, with only 10-15% overachieving (above 110%) or underperforming (below 90%). If more reps exceed 110%, the targets may be too conservative; if more fall below 90%, the targets may be too aggressive.
Best Practices for Target-Setting:
- Historical Performance: Base targets on past data, with a 10-20% stretch depending on historical success.
- Market Conditions: Factor in new product launches, market shifts, or competition, as these affect realistic target-setting.
- Rep Capacity: Make sure targets align with what reps can realistically achieve based on their workload. A rep handling 20 deals a quarter can’t be expected to close 50 deals.
Ambitious yet achievable targets maintain motivation and prevent burnout.
4. Align the Entire Revenue Team to One Goal
Sales isn’t the only team responsible for revenue growth. The entire revenue ecosystem—marketing, sales, customer success, account management, and more—must be working toward the same objective. Aligning compensation across functions ensures that everyone is driving toward shared success.
Cross-Functional Compensation Alignment:
- Marketing: Tie part of marketing’s compensation to sales-qualified leads or pipeline generation to ensure alignment with sales goals.
- CSMs and Support Teams: Compensate based on retention and upsell opportunities to support long-term customer success.
- Professional Services: Consider bonuses based on successful project completion, post go-live adoption, or customer satisfaction, ensuring post-sales teams contribute to revenue outcomes.
When everyone is aligned around the same objectives—revenue growth, retention, or expansion—the organization moves forward as a cohesive unit.
5. Measuring and Adjusting the Plan
Compensation plans and targets shouldn’t be static. They must evolve with market conditions, business goals, and team performance.
Key Evaluation Questions:
- Are reps hitting their targets, or falling short?
- Does the compensation plan still drive the right behavior?
- Are cross-functional teams contributing effectively to the revenue goal?
Assess both the plan and targets regularly to ensure they remain effective, aligned, and motivating. Allow at least two quarters to gauge whether a comp plan is working—avoid making quick changes based on limited time in the field or feedback from underperformers. Good reps can adapt to most fair and reasonable plans, but that’s not an excuse to set unrealistic goals or overly complex structures. If the plan is attainable, most reps will find a way to succeed.
6. Assess the Economic Viability of the Plan
Compensation design is a balancing act, and one of the factors to balance and measure is the cost of your compensation plan, which can be measured by calculating the Compensation Cost of Sale.
Compensation Cost of Sale (CCOS) refers to the total cost associated with compensating sales personnel for their efforts in generating revenue. This metric is essential in compensation planning as it helps businesses understand how much they are investing in their sales team relative to the revenue they are bringing in. Here’s a breakdown of its components:
- Base Salary: Fixed payment to sales reps, regardless of performance.
- Variable Pay: Commissions and bonuses linked to sales performance.
- Benefits: Costs for health insurance, retirement, and paid time off.
- Overhead Costs: Expenses for training, tools, and administrative support.
- Sales-Related Costs: Direct costs like travel and promotional materials.
To calculate CCOS, take the cost of base salaries and variable pay, such as commissions, bonuses, SPIFFs and any other cash compensation, for all your sales roles and divide it by your sales revenue (or bookings). This will provide you with a percentage and this percentage tells you how much of every dollar goes towards compensating your sales teams.
The benchmark for B2B CCOS is approximately 8% however, for B2B SaaS companies that are in high growth mode 10 to 25% may be acceptable. On the other hand, if you are aiming to be profitable then 25% would be too high and the benchmark to aim for should be closer to the 8% to 15% range.
Calculating the CCOS helps organizations evaluate the effectiveness of their sales compensation plans, ensuring that they are competitive, motivating, and aligned with overall business objectives. It also assists in forecasting and budgeting for sales expenses and measuring the return on investment (ROI) from their sales efforts. This link offers additional insights into calculating CCOS.
Bonus Principle: Simplicity in Compensation Administration
A compensation plan should not be overly complex to administer. If you’re spending significant hours and resources just calculating pay or tracking performance metrics, it’s a sign that simplification is needed. Simple systems save administrative time and money, allowing leadership to focus on growth rather than operational headaches. It also reduces frustration and distractions for your entire team by making it clear and straightforward on how and for what they will be paid.
Conclusion: A Balancing Act
Creating an effective revenue compensation plan and setting the right targets require constant balancing. The compensation plan must stimulate the right behaviors, stay simple but challenging, and align the entire revenue team. When compensation is paired with well-structured targets, you’ll see greater engagement, better performance, and sustainable revenue growth.
By aligning incentives across departments, you’re building a unified, revenue-generating engine that propels the entire organization forward.For more on creating compensation plans and other revenue topics, you may enjoy our Quest to Quota Attainment Course. It is broken up into short modules, making it easy to learn and practice new skills in short but effective time blocks each day. And finally, if you need hands-on support for your revenue-generation efforts, check out the services we offer.
