Sales variable compensation: how to build a simple, fair plan

Variable compensation for sales reps is the part of pay tied to results, such as commission and bonuses. A good plan is simple, fits within the margin, rewards the desired behavior and lets the sales rep calculate it on their own. The design should start from what the company wants to sell, not from a competitor's table.

No management tool is this direct. If you pay on revenue, the team will discount to close. If you pay on the number of contracts, they'll sell the smallest plan to people who will cancel later. If the plan has 12 rules, nobody knows what to do. This guide helps the owner or manager build or review a plan without a ready-made recipe, because the right percentage depends on your margin.

What's the first step in designing the plan?

Answer three questions before discussing percentages:

1. What behavior do we want? Closing new customers, protecting margin, renewing, selling a specific product?
2. How much can we pay? What's the maximum sales cost the margin can support?
3. How much does the sales rep need to earn? What's competitive total compensation in your market for someone who hits target?

The structure is designed from those answers. Going the other way, starting with "everyone pays 5%," is the origin of most bad plans.

What are the variable compensation models?

For small teams, tiered commission with a discount guardrail is usually a good start. There's no absolute best model. Long-cycle sales call for more base pay, because the sales rep goes months without closing. Short, transactional sales tolerate more variable pay.

How do you calculate how much the company can pay?

Start from the margin. Here's an example with hypothetical numbers, for a sales rep who should close R$ 100,000 a month in a service with a 50% gross margin.

Before deciding, include the other sales costs, such as media, tools and management. A 22% share of margin may be comfortable or unworkable, depending on the rest of the operation. To see these costs by channel, use a sales P&L.

Run the numbers for three scenarios: 70%, 100% and 130% of target. The plan needs to stay healthy when the sales rep beats target. If the best news of the year breaks the cash flow, the plan is badly designed.

How do you set the target, threshold and accelerator?

Three components are enough:

• Threshold: the level of target attainment at which variable pay starts. It keeps you from paying for very low performance. Be careful with a threshold that's too high, because a sales rep who realizes they won't reach it this month may hold deals for the next one.
• Target tier: the normal percentage at target.
• Accelerator: a higher percentage above 100%, to reward overperformers.

Hypothetical example:

Define whether the tier applies to the total or only to the portion above it. Applying it to the total creates a jump at the tier boundary, which encourages date manipulation. Paying by bracket, like income tax, is smoother.

Targets need to be achievable. If almost nobody hits them, the plan stops motivating. See how to set targets based on data.

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How do you keep the plan from rewarding bad sales?

Add simple guardrails for the most common problems:

The first guardrail is the most profitable. Example: up to 5% discount, full commission; 5% to 10%, 75% commission; above that, 50% commission. That way, the sales rep feels part of the discount in their own pocket. The values are illustrative. Calibrate them to your margin.

How does it work on a team with SDRs and closers?

If the roles are separate, each needs its own goal, because an SDR doesn't control the close. See SDR vs. closer.

When marketing delivers ready-made opportunities, consider a different commission for company-generated leads versus leads the sales rep prospected. Otherwise, self-prospecting loses its point. This requires logging the source in the CRM, which also helps marketing measure channels.

What legal precautions should you observe?

This section covers Brazilian labor law. This summary doesn't replace an accountant or a labor attorney, and collective bargaining agreements may add rules. Points to take to review before launching:

• Law 3.207/1957, on sales reps, requires monthly payment of commission, allowing a different schedule to be agreed as long as it doesn't exceed three months from acceptance of the deal (art. 4).
• In sales with successive installments, commission is due in the order those installments are received (art. 5).
• The same law allows a clawback if the buyer becomes insolvent (art. 7). So don't assume every cancellation allows a clawback. Get guidance before writing that rule.
• Commission affects other payments. TST Precedent 27 (from Brazil's Superior Labor Court) guarantees commissioned employees paid weekly rest, covered in this summary on DSR (paid weekly rest). Include this in the cost.

Put everything in writing, with acknowledgment, and keep the monthly calculation records.

How do you roll it out without breaking trust?

1. Simulate with past data

Apply the new plan to the last six or twelve months of sales. See how much each person would have received and how much the company would have paid.

2. Look for loopholes

Ask: how could someone earn more without helping the company? Ask a trusted sales rep to try to game the draft. Better to find out beforehand.

3. Write it on one page

Include a calculation example for each role. If the manager can't explain it in five minutes, simplify.

4. Communicate before it takes effect

Explain the reason, show the simulations and define a transition. Changes that reduce earnings require legal and human care. Avoid changing the plan in the middle of a period.

5. Give visibility

The sales rep should be able to see, at any time, how much they've earned so far this month. Clarity reduces distrust and disputes over the spreadsheet. See how to motivate the team with clear targets.

6. Review on a set date

Review it once or twice a year, or when the strategy changes. Constant changes destroy trust.

When does the plan need an urgent review?

Some signs point to a problem before the scheduled date: sales concentrated in the last days of a tier, a sudden rise in discounts, cancellations right after commission is paid, or sales reps turning down leads from a certain channel. These signs show the design is rewarding the wrong behavior, even without bad faith from anyone. Investigate first, talk with the team and only then propose the adjustment, with notice and legal validation.

Common mistakes

• Copying another company's percentage.
• Paying on revenue without protecting margin.
• Creating more than three metrics per person.
• Capping earnings, punishing those who sell the most.
• Changing the rule when someone earns a lot.
• Relying on a spreadsheet only finance understands.

Conclusion

Good variable compensation keeps the sales rep's interests moving together with the company's. Start with margin and the desired behavior, keep the rules few, simulate with real data and validate the legal side. When the plan is simple, the team starts discussing customers, not spreadsheets.

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To place the plan within a management system, see sales structuring.