How Founders Design Their First Sales Commission Plan

Hiring your first salesperson is a milestone. Deciding how to pay them is where many founders stumble. A commission plan is not just a payroll detail. It is a message about what the company values, and salespeople read it very closely.

A good first plan is simple, fair and tied to the results that actually move the business forward. Here is how to build one.

Start With What You Want to Reward

Before you pick any numbers, decide what behaviour you want. Most early stage companies want new revenue from new customers. Some care more about annual contracts than monthly ones, or about landing customers in a particular market.

Write down the one or two outcomes that matter most this year. Your plan should pay for those outcomes and very little else. If you try to reward everything, from meetings booked to product feedback, the plan becomes confusing and loses its power to focus effort.

Set the Base and Variable Split

Sales pay usually combines a fixed base salary with variable commission. Together, the expected total is called on target earnings, or OTE: what a rep earns if they hit their quota exactly.

A split of around 50 percent base and 50 percent variable is a common starting point for account executives who close deals. Roles that support the sale, such as sales development reps, often carry a higher share of base pay.

In an early startup, many founders lean slightly towards a higher base. Your product, pricing and sales process are still changing, and it is unfair to put most of someone's income at risk while the ground keeps shifting beneath them.

Benchmark Before You Decide

Look at what similar companies in your sector and location pay. Talk to advisers, investors and other founders, and consult published salary surveys. Underpaying makes it hard to hire good people, while overpaying can strain a small budget.

Choose a Realistic Quota

The quota is the target a rep must reach to earn their full variable pay. Set it too high and people give up. Set it too low and you overpay for ordinary results.

A widely used rule of thumb is that a rep's annual quota should be several times their OTE, often in the range of four to five times for software sales. Treat any ratio as a starting point, not a law. Base your quota on real data where you have it, such as your own close rates, average deal size and sales cycle length.

For a first hire, consider a ramp period. New reps rarely close much in their first months, so a reduced quota or a guaranteed portion of commission during that time keeps the plan fair.

Keep the Mechanics Simple

The best first plans can be explained in a few sentences. A typical structure pays a fixed percentage of each deal's value up to quota. Above quota, an accelerator pays a higher rate, which rewards top performers and encourages them to keep selling.

Decide clearly when commission is earned. Many companies pay when the customer signs, others when the customer pays. Paying on cash received protects your finances, but it can delay rewards and frustrate reps, so make the rule clear from day one.

Plan for the Awkward Cases

Agree in advance what happens when a customer cancels early, when two people work on the same deal or when a rep leaves before a commission is paid. A clawback clause, which recovers commission on deals that quickly churn, is common and reasonable if it is explained upfront.

Write It Down and Review It

Put the plan in a short written document that both you and the rep sign. Ambiguity in commission plans is a leading cause of disputes, and a clear document protects everyone.

Review the plan at least once a year, and tell your team that it will evolve as the company grows. Avoid changing the rules in the middle of a period unless you must, because nothing damages trust faster than moving the goalposts after the work is done.

Your first commission plan will not be perfect. If it is simple, fair and clearly linked to the results your company needs, it will give your early sales team every reason to succeed.