The glossary is a collection of incentive compensation management terms designed for anyone seeking an understanding of the process of planning and implementing effective sales compensation plans.
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A
Accelerator
An accelerator is applied to the Base Commission Rate and increases the commission payout when a certain quota attainment level is reached. Accelerators motivate your sales force to overachieve their quota.
For example, there is a 2x accelerator applied to a 10% commission base rate when quota attainment is over 100%.
Note: Sometimes an accelerator is referred to as a “Kicker”
Account Manager
A specific title of a salesperson who is responsible for direct sales in the company and will be working with customers to close deals.
May also be known as “Account Executive”, “boots on the ground” or “hunter”.
Attainment
Describes the salesperson’s achievement towards their quota. For example, if a salesperson reaches 80% of their set quota, they’ve attained 80% of the quota.
Agent
A general term to describe a commissionable person. Also known as a sales representative, the person in the company responsible for closing deals.
Analytics
Collecting data and applying logic to gather insights and information is as follows: Analytics is an important driver in understanding sales compensation plan performance and allows the business to correct course when certain trends are spotted.
At Risk Pay
Also known as Variable Pay or Incentive Target, it refers to the non-guaranteed portion of compensation. At-risk pay is tied to individual performance measures such as quota, bonus, etc.
For example, person A is hired with a 100K base salary and 100K at-risk pay to achieve a 1M quota.
ACV
Stands for Annual Contract Value and is the annualized amount of the total contract. For example, a 300K 3-year contract would have a 100K Annual Contract Value.
ARR
ARR stands for Annual Recurring Revenue, which is the yearly amount of recognized revenue. QRR (Quarterly Recurring Revenue) and MRR (Monthly Recurring Revenue) can also be used.
B
Base Commission Rate
Typically calculated as At Risk Pay (variable)/Quota and is the calculated commission rate paid to the salesperson. The relationship between At Risk Pay and Quota guarantees that at 100% of quota attainment, 100% of the variable is paid unless an accelerator or decelerator is applied.
Base Pay/Salary
Base pay is the guaranteed portion of compensation. The amount is fixed and, unlike at-risk pay, is not tied to a quota. HR/Compensation teams determine base pay and offer it to employees at the end of the interview process.
Billing
Once a customer receives an invoice for agreed services, the company will bill them.
Bonus
Typically paid quarterly for performance not tied to specific deals or when a quota is difficult to set. A bonus can be tied to at-risk (variable) pay or, on top, as an extra incentive.
Booking
A booking occurs when a salesperson closes a deal. The deal is considered booked when the customer signs a contract, and all required sales activities are completed.
C
Cap
Limit set on the amount of commission/bonus that can be earned from a single deal or in total. Also, commission rates themselves can be capped to a certain maximum percentage.
For example, a maximum of 200K in total commissions can be earned annually. Once the maximum of 200K is earned, the salesperson will not receive additional commission for the plan year. Another example is a cap of a maximum 30% commission rate that can be set on a commission plan.
Cash Collection
When a customer pays an invoice for the received product or service, the company collects cash based on the agreed-upon payment schedule.
Clawback
Commission/bonus recovered from the salesperson due to a commission calculation error or customer returning the product or not paying for the services rendered by the company. For example, when a customer does not fulfill contractual obligations and misses an invoice payment, there may be a clawback for earned commissions.
Recommended reading » What do Clawbacks mean in Sales Commission?
Commissions
Earnings are paid to the salesperson based on their sales performance. Most often, a percentage of each deal sold is paid back to the salesperson in the form of commission.
Commission Accrual
An estimate of the total commissions owed for the upcoming payment period. Commission accruals will often include any held commissions that will be paid out in the future.
Commission Hold
The unpaid amount of commission held back until a future event. Often, commissions are held until the company collects cash for the deal sold.
Commission Rate
Typically represented as a percentage and is a fixed rate given to the salesperson to apply against sales activity. For example, a given % commission rate of 10% is applied to 200K in sales revenue, resulting in 20K in commissions.
Commission Rate Table
It is a summary of different commission rates applied to revenue based on different levels of quota attainment. For example, a Base Commission Rate is applied to deals closed between 0-100% attainment, a higher commission rate is applied to deals closed between 100-150% attainment, and yet another commission rate is applied to deals closed over 150% attainment.
This payment structure would be visually presented in a commission rate table.
Commission Split
Allocation of the total deal between multiple salespeople. For example, a deal may be split 50%/50% between 2 direct salespeople.
Commission Split Agreement
A formal agreement between all participating salespeople. Often, these agreements are signed by the salespeople and approved by the management before commissions are calculated.
Compensation
General compensation manages and designs overall employee compensation structures, including salary, at-risk (variable), bonus, stock, and other forms of compensation. For example, the compensation team will establish the general salary bands to hire for each role at the company, including sales. It may be established that a typical Account Manager.
Compensation Plan
A detailed description of how the salesperson is expected to earn the variable (at risk) portion of total compensation. The plan will contain assigned quotas, commission rates, and detailed terms and conditions.
Sometimes also referred to as an “Incentive Plan.”
Compensation Plan Design
The process by which company goals and compensation strategy are aligned into a compensation plan. Extensive modeling and benchmarking are used to create compensation plans to incentivize correct behaviors while reaching a company’s sales target.
Compensation Strategy
General philosophy related to employee compensation. Effective compensation strategies will attract and retain the best talent.
CRM
Refers to Customer Relationship Management software such as Salesforce, SAP, Oracle, HubSpot, etc. These systems help companies manage their relationships with current and future customers and allow sales teams to track their sales progress. ICM solutions will often extract sales-related data from CRMs to calculate commissions.
D
Decelerator
Opposite to an accelerator, a decelerator is applied to reduce the commission payout within a certain quota attainment range.
For example, a company may apply a 75% decelerator to the base commission rate within 0-50% quota attainment to incentivize the sales team to overachieve. It is common to grant an accelerator as part of the next achievable commission rate to make up the lost commission. Companies with easily attainable sales quotas may choose to decelerate the commission rate to motivate overperformance.
Direct Credit
Recognized amount of effort done directly by the person. It can be in the form of revenue, ACV, ARR, calls, meetings, etc. Direct credit is generally applied to quota for commission calculation.
Dispute Handling
A process by which a salesperson can resolve questions related to carve-outs, splits, applicable commission rate, etc.
Draw
Sometimes referred to as an advance on commissions, draws can be “recoverable” or “non-recoverable” and provide the salesperson with regular cash payments while they build up their pipeline. Recoverable draws are offset against future commission earnings, while nonrecoverable draws do not need to be paid back.
Draws can be calculated as the monthly value of the salesperson’s variable (at risk) amount. For example, a salesperson with a 120K variable may be eligible for a 10K monthly draw for the first 6 months.
G
Gate
A salesperson must reach a specific threshold before another plan component is earned. For example, a salesperson can receive a 10% commission on any deal closed, but they must reach a 70% quota attainment threshold before any commission payment is met (gate reached). Once the 70% quota threshold is met, they are paid all commissions owed.
Guarantee
Similar to a non-recoverable draw, a payment guarantee allows the salesperson to receive a commission without closing a deal.
H
Hierarchy
The reporting structure within the sales organization. A hierarchy establishes teams and is based on a manager-employee relationship. Managers often earn commissions based on deals closed by their teams in the reporting hierarchy.
I
Incentives
A motivational tool to reward employees to perform at their peak level. Sales teams use incentives, such as commissions and bonuses to drive performance.
Incentive Compensation Management (ICM)
Systems and practices support calculating and paying variable compensation (at-risk pay) to sales agents.
Indirect Credit
Sales credit received by a salesperson as part of the team. Sales Managers and other salespeople not directly involved in the deal often receive indirect credit toward their commission rate.
K
Key Performance Indicator (KPI)
A measure often used to calculate a bonus payment. KPIs can be objective or subjective and are set to align with a company’s short or long-term goals.
M
Management by Objectives (MBO)
Similar to KPIs, MBOs set specific objectives that a person must reach to receive a bonus payment. MBOs are often set when accurate quotas are difficult to assign.
Merit Increase
Annual wage adjustment to salary. Typically, within a 3-5% annual increase to account for inflation and work performance. Increases can be higher due to exceptional performance. At risk pay portion of total compensation may or may not increase proportionately.
Modeling
A process that determines various outcomes when new plan design elements are introduced or existing elements are changed.
O
On Target Earnings (OTE)
The total amount is paid to the person when all objectives are achieved. OTE is the sum of all possible earnings, including salary and variable amount.
P
Pay Mix
Describes the OTE split between multiple forms of compensation. For example, a 70/30 split means that 70% of OTE would go towards salary and 30% towards variable pay.
Payee
Refers to any person receiving compensation under the assigned compensation plan.
Proration
Calculations often include a proration factor that considers the person’s hire date or seasonality of the sales cycle.
Q
Quota
It is also known as the “Goal” and is the expected amount of revenue that a salesperson is expected to achieve to earn commissions. If a portion of the quota is attained, then a portion of the variable amount is paid.
S
Sales Performance Management (SPM)
Refers to a broad set of concepts and systems that provide visibility into and improvement to selling activities. Often ICM is part of the greater SPM and is treated as a subset of SPM.
The main difference between ICM and SPM is that where ICM is focused primarily on incentivizing and rewarding the sales team, the greater SPM is focused on cohesive management of the sales process (including non-commissionable individuals), to achieve sales goals.
Sales Territory
Segmentation of all possible customers into manageable groups. Territory boundaries are often geographically divided and may also include sub-territories.
Seasonality
Sales often occur during specific times of the year that align with customer budgets and the product’s overall sales cycle. Most sales occur in the third month of the quarter and closer to year-end.
