Top Sales Compensation Terms You Need to Know

Sales compensation can be overwhelming with all of the unique terms you need to know – but it’s critical for sales leaders, analysts, and reps to be “in the know” to get the most out of your comp plan.

In this glossary, you’ll find some of the top sales compensation terms that will help set your team up for success and drive more revenue for your organization.

Sales Compensation Glossary

Accelerator

An incremental incentive, whereby a salesperson is rewarded with greater pay for attaining higher levels of productivity. Also known as a kicker.

For instance, a salesperson could have a 3% commission rate for the first $100k of revenue they produce. Anything over that amount would result in a 4% commission rate.

Accrual Accounting

A method of recording revenue and expenses when incurred, regardless of whether revenue was received, or expenses were paid.

Annual Recurring Revenue (ARR)

The amount of predictable revenue a company expects to receive in a year from customers.

Base Pay

A fixed compensation paid to an employee for performing specific job responsibilities. Exclusive of other forms of payments, benefits, or bonuses.

Bonus

An incentive payment that a salesperson receives once they reach a specific goal.

Broker

An individual or business that works on commission rather than consulting fees to assist with placing and managing employee benefits programs.

Cap

The maximum compensation an employee can receive in a specific time period.

Clawback

A recovery of incentives previously paid. For example, when a commission is reversed due to a customer returning a product.

Commission

A portion of revenue generated that is given to a salesperson as part of their sales incentive plan.

Compensable Factors

A value that employers use to determine how much to pay an employee. Common factors include experience, complexity, level of responsibility, impact of errors, or confidentiality.

Customer relationship management (CRM)

A software developed to assist a company’s interactions with customers and sales prospects throughout the sales funnel.

Decelerator

A reduced commission rate, whereby a salesperson’s payout is decreased. Often used to penalize poor performance (before a rep hits quota) or avoid excessive payouts (after a rep hits quota).

Differential

A compensation that is paid to accommodate certain working conditions.

Discretionary Bonus

A plan in which management determines the size of the bonus pool and the amounts to be allocated to specific individuals after a performance period.

Eligibility Date

The date an employee and/or dependents become eligible for benefits under a compensation plan.

Executive Compensation

All aspects of incentive and compensation programs, including annual and long-term incentive plans, competitive benchmarking, unique incentive and retention arrangements, or deferred compensation.

Fixed Compensation

A non-discretionary compensation that does not vary according to the salesperson’s performance.

Frozen Compensation Plan

Qualified sales compensation plans in which future participation has been discontinued, but active participants continue to have participation rights in.

Generally Accepted Accounting Principles (GAAP)

The accounting principles and rules applicable to U.S. companies, as prescribed by the Financial Accounting Standards Board (FASB) and its predecessors, and as deemed required to apply to all public companies by rules established and enforced by the Securities and Exchange Commissions (SEC).

Gross Margin

A profit measure: sales price minus the cost of goods before overhead, profits, and taxes.

Guarantee

A minimum amount that is guaranteed to new sales reps to ensure they earn a certain level of pay; in case their sales activity does not generate enough commissions.

Highly Compensated Individual (HCI)

A person who meets one or more of the following:

1. One of the five highest-paid senior officers
2. A shareholder who holds more than 10% of the stock in the company
3. One of the highest paid 25% of employees

Incentive

Any form of variable compensation tied to a salesperson’s performance.

Incentive Compensation Management (ICM)

A software that helps sales compensation analysts automate tasks, such as making calculations and generating reports.

Incentive Progressivity

A concept whereby the percentage target potential of an incentive award is higher at higher income levels.

Individual Pay Rate

The wage or salary level assigned to a given employee.

Job Analysis

The systematic, formal study of the duties and responsibilities that constitute job consent.

Key Performance Indicators (KPIs)

High-level, quantifiable measures that are used to help a business or organization monitor its success in moving toward its goals.

L-Type Agreements

An agreement when a U.S. employer agrees to continue to make U.S. Social Security contributions on the employee’s behalf, regardless or the employer’s country or the employee’s compensation package.

Long-Term Incentive Plan

An incentive plan that requires the sustained performance of the firm for a period longer than one fiscal year for maximum benefit to the employee.

Management by Objectives (MBO)

A system for sales managers and salespeople to collaboratively identify common performance goals.

Monthly Recurring Revenue (MRR)

The amount of predictable revenue a company expects to receive in a month from customers.

Multiple Measure Plan

An incentive plan designed to measure and reward performance using one or more goals.

Net Retention Rate (NRR)

The percentage change in recurring revenue from a specific group of customers. This includes both reductions and improvements in ARR.

Non-Discretionary Bonus

A plan in which management determines the size of the bonus pool and the amounts to be allocated to specific individuals after a performance period.

Non-Qualified Plans

A plan that provides benefits in excess of those possible within qualified plans, or otherwise do not meet the Internal Revenue Service (IRS) requirements, and therefore do not qualify for favorable tax treatment.

Non-Recoverable Draw

A non-recoverable draw is a payment given to sales reps that the employer cannot or does not recover. Think of it as a guaranteed minimum commission payment.

If the total commission the employee earns that month is less than the draw amount, they are paid the difference. If the commission they earn that month is higher than the draw minimum, they receive it all but no draw.

For example, if the non-recoverable draw minimum for employee Ying is set at $2000, and the commission Ying earns that month is only $1,000, they will still be paid $2,000.

If Ying makes $3,000 in commission next month, they will be paid the full $3,000 in commission but nothing from the draw.

On-Target Earnings (OTE)

The amount of compensation a payee can expect to receive if all quotas are achieved, and other conditions are met.

Operating Income        

The adjusted revenue of a company after all expenses and depreciation are subtracted.

Override      

An additional percentage or incentive that a salesperson receives for a sale made by another employee. This is similar to a roll-up.

Pension Equity Plan (PEP)

A defined benefit plan where for each year worked, participants are credited with a percentage that will be applied to their final average earnings.

Premium

Sales compensation at greater than the payee’s usual pay rate (e.g., overtime, double-time for holidays, etc.).

Prorate

An adjustment of an incentive, usually based on specific eligibility rules.

Qualified Lead          

A prospective customer that has been researched and vetted – first by an organization’s marketing department and then by its sales team.

Quartile

A distribution that is divided into fourths.

Quota

A target amount that a salesperson must sell for a particular period (month, quarter, year).

Recoverable Draw

A recoverable draw is a way for employees to withdraw from their future commissions to maintain a more regular income.

For example, employee Xu is entitled to a recoverable draw of $1,000 per commission period. Xu earns $1,000 in commissions during that period and uses their full draw amount of $1,000 to take a total variable compensation payment of $2,000.

Next month, Xu earns $3,000 in sales commission and has to repay the $1,000 drawn from the previous period, so Xu still only takes home $2,000 that period.

If Xu only earned $2,500 in commission the next period, their employer will take collect the remaining $500 in the next pay period.

There are no set terms for recoverable draws. These are determined by the employer and laid out in the employee’s contract.

Revenue Operations (RevOps)

A methodology that unifies go-to-market ops functions into one team. RevOps teams strive to improve the buying experience, accelerate decisions, and drive revenue.

Roll-up

A sales commission that rolls from one payee to another. For example, a sales rep earns credit for a sale their sales manager made.

Salary Grade

A group of jobs of the same or similar value, used for compensation purposes.

Sales Compensation

The fixed and variable amount paid to salespeople based on their performance against predetermined targets.

Sales Performance Incentive Fund (SPIF)

An additional incentive that is given to a salesperson to drive certain behavior outside the incentive compensation plan. Also known as SPIVs or spiffs.

Sales Performance Intelligence (SPI)

A specialized type of data analytics that can help your organization better set and exceed sales targets.

Sales Performance Management (SPM)

Sales Performance Management is the practice of employing a data-driven approach to planning, managing, and analyzing your sales process to motivate and incentivize your sales team.

Sales Transformation

The process of changing the way your sales team interacts with prospects and customers to achieve a set goal.

Shadow Accounting

The process of keeping an account of transactions in addition to the primary bookkeeping process, typically to identify mistakes and inconsistencies.

Single Rate System

A compensation policy under which all employees in a given job are paid at the same rate rather than placed in a pay range.

Target Compensation

The expected pay for a position, including both fixed and variable compensation.

Tiered Pay Plan

A sales compensation system that differentiates salary based on time of hire and the nature of work performed. For example, new employees are paid less than current employees for performing the same or similar jobs.

Unreasonable Compensation

A potential tax issue in privately held or closely held companies.

The IRS may challenge compensation in such organizations as excessive or unreasonable and as a distribution of corporate profits rather than salary. If the IRS is sustained, the payment is a dividend and subject to double taxation.

Variable Compensation

A payment given to an employee based on the results they produce. It is usually offered on top of a fixed salary and comes in various forms:

• Commission
• Profit-Sharing Plan
• Bonus
• Stock Option

Windfall

A sales result that was realized outside the normal influencing role of the sales representative.

The more you get familiar with these common sales compensation terms and how to apply them to your comp plan, the better your organization’s sales strategy will be.

Book a demo to learn how Forma.ai makes sales compensation more valuable to your business.