Salary + Commission Agreement: Structuring Sales Compensation (for Sales Managers)

Designing a sales compensation plan is one of the highest-leverage things a sales manager can do—and one of the easiest places to accidentally create disputes, misaligned incentives, and expensive attrition. A salary plus commission structure can be the sweet spot for many B2B sales teams: it provides stability for reps while still rewarding performance. But the contract language and the math must work together.

This guide explains how to structure a base salary commission agreement (and related documentation) so the business gets predictable cost of sales, reps understand how they’re paid, and everyone avoids the “that’s not what I thought it meant” commission fight.

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Why a salary + commission agreement matters (especially in B2B)

A strong salary plus commission employment contract or independent contractor agreement is more than a payroll artifact. It’s a tool to:

• Align rep behavior with revenue goals (new ARR, expansion, retention, margin)
• Reduce disputes by defining commissions precisely
• Protect the business with clear eligibility, timing, and clawback terms
• Support compliance across employment vs. independent contractor relationships
• Create a predictable, defensible cost structure for finance

In B2B sales, deal cycles are long, revenue can be recognized over time, and multiple roles touch a deal. Without clear rules, commission misunderstandings become inevitable.

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Salary plus commission structure: the core components

At a high level, a salary + commission arrangement typically includes:

1. Base salary: fixed compensation paid regularly (e.g., biweekly)
2. Commission: variable compensation tied to defined performance outcomes
3. Commission plan document (often separate from the core agreement): detailed calculation rules, rates, accelerators, territory/crediting, and examples
4. Administration terms: payroll timing, dispute process, audits, and changes to the plan

Many businesses use a “two-document approach”:

• The employment/contractor agreement contains legal terms and broad compensation principles.
• The sales compensation plan contract (commission plan) includes the operational details and may be updated periodically.

This approach can be cleaner—if your documents clearly state which controls in the event of a conflict.

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Step 1: Decide the right pay mix and OTE (On-Target Earnings)

Sales managers typically start with:

• OTE (e.g., $120,000)
• Pay mix (e.g., 60/40, 50/50, 70/30)

Example

• OTE: $120,000
• Mix: 60/40
• Base salary: $72,000
• Variable (commission): $48,000 at target

From a buyer/client perspective, the business should pressure-test:

• Can we afford base salaries if the market dips?
• Does the variable component meaningfully change rep behavior?
• Do we want aggressive upside (accelerators) for top performers?

Practical tip: A salary plus commission structure is often best when you need consistent activity and customer coverage (base salary), while still emphasizing results (commission).

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Step 2: Define “commissionable” events with precision

This is where most disputes start. Your sales compensation plan contract should clearly define what triggers commission eligibility.

Common commissionable events:

• New bookings (e.g., signed order form)
• Revenue recognition (commission paid as revenue is recognized)
• Cash collection (commission paid after customer pays)
• Milestones (e.g., implementation completion, go-live)

Bookings vs. revenue vs. collection (choose intentionally)

• Bookings-based: motivates closing; can create risk if deals churn quickly.
• Revenue-recognition-based: aligns to realized value; may frustrate reps if slow.
• Collections-based: protects cash flow; may be seen as penalizing reps for billing issues.

Buyer-friendly approach: Tie commission to booking but include a chargeback/clawback if the customer cancels within a defined window, or tie part of the payout to collections.

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Step 3: Set crediting rules (who gets paid for what)

In modern sales motions, multiple people contribute: SDR, AE, account manager, solutions engineer, channel partner manager. Your agreement should state:

• Who is eligible for commissions (role-based eligibility)
• Territory definitions and how territory changes are handled
• Deal split rules (e.g., 70/30 split between two AEs)
• Credit for renewals, expansions, multi-year prepay, upgrades/downgrades
• What happens when a rep leaves mid-cycle

The “rep must be employed on payout date” clause

Many plans include language requiring active employment at the time of commission payment. This can be enforceable in some contexts and restricted in others depending on jurisdiction and whether commissions are considered “earned wages.”

Safer drafting approach: Define exactly when a commission is “earned” vs. “paid,” and align with local wage/payment laws. If you operate in multiple states/countries, consider jurisdiction-specific review.

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Step 4: Choose a commission rate model that matches your business

A salary plus commission structure can be implemented using different variable models:

1) Flat percentage of bookings

Simple and transparent.

Example: 8% of booked ARR for new business.

Watch-outs:

• Does it overpay low-margin deals?
• Does it under-incentivize multi-year commitments?

2) Tiered rates / accelerators

Higher rates after hitting quota. Great for performance upside and end-of-quarter push.

Example:

• 6% up to 100% of quota
• 10% from 100%–150%
• 12% above 150%

Key contract terms: define quota period, measurement, and timing of true-ups.

3) Commission with decelerators / floors

Reduced rates below threshold performance, or no commission until minimum attainment.

Caution: This can harm morale; if used, explain the rationale and keep it defensible.

4) Margin-based commissions

Commission on gross profit (GP) rather than top-line revenue.

Example: 15% of gross profit dollars.

Pros: protects profitability.
Cons: harder for reps to predict; requires reliable margin reporting.

5) Draw against commission

A recoverable draw provides income smoothing for ramping reps.

Key terms: whether the draw is recoverable, how reconciliation works, and what happens on termination.

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Step 5: Write quota and measurement terms the “finance way,” not the “sales way”

Quotas can be based on:

• New ARR / MRR
• Total contract value (TCV)
• Units sold
• Revenue collected
• Retention (for account management roles)

Your base salary commission agreement should define:

• Quota period (monthly/quarterly/annual)
• Proration rules for mid-period hires, leaves, territory changes
• How returns, credits, cancellations affect attainment
• Treatment of multi-year deals (credit all up-front vs. annualized)

Buyer-side guardrail: Avoid paying full commission on multi-year deals if your revenue is recognized annually—unless you have a clear clawback and renewal/retention structure.

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Step 6: Decide timing of commission payments (and state it clearly)

Your commission plan should specify:

• Commission calculation frequency (monthly is common)
• Payment timing (e.g., “paid on the second payroll following month-end close”)
• Required documentation (signed order form, approved discounting, CRM entry)
• Approval workflow (manager + finance approval)
• Dispute window (e.g., reps must raise issues within 30–60 days)

Operational best practice: Include examples and a commission statement format so reps can self-audit.

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Step 7: Handle discounts, pricing exceptions, and approval chains

Discounting is a common compensation loophole. Your sales compensation plan contract should address:

• Whether commissions are based on list price or net price
• Discount thresholds requiring approval
• Reduced commission rates for heavily discounted deals
• How non-standard terms (extended payment terms, free months) affect commissions

Buyer-side protection: If discounting reduces margin materially, tie commission to margin or net revenue to prevent “buying deals.”

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Step 8: Include clawbacks/chargebacks (carefully and fairly)

Clawbacks can protect the business from paying commission on deals that don’t stick.

Common triggers:

• Customer non-payment
• Cancellation within X days
• Material contract changes or refunds
• Fraud or misrepresentation

Key drafting points:

• Define the clawback window (e.g., 90 or 180 days)
• State whether clawbacks offset future commissions or require repayment
• Address partial refunds and proration

Balance matters: Overly aggressive clawbacks can deter reps from selling to legitimate but higher-risk customers. Consider pairing clawbacks with strong qualification standards.

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Step 9: Employment vs. independent contractor considerations

Because you’re operating in the Independent Contractor & Employment space, clarify which relationship you are using.

If the rep is an employee

Your salary plus commission employment contract should include:

• Base salary amount and payroll schedule
• Commission plan incorporation language (and right to modify, if applicable)
• At-will employment language (if relevant jurisdiction)
• Compliance with wage payment laws and minimum wage requirements

If the rep is an independent contractor

Your agreement should address:

• Commission structure and invoicing/payment mechanics
• Responsibility for taxes, benefits, and insurance
• Non-exclusivity and control factors (to avoid misclassification risk)
• Expense reimbursement (if any)
• IP, confidentiality, and non-solicitation (tailored to enforceability)

Important: Misclassification risk is real. A contractor who is managed like an employee (set hours, mandatory meetings, heavy direction) may create legal exposure even with a well-written contract.

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Step 10: Draft the “change rights” clause without destroying trust

Most businesses want the ability to modify comp plans. Reps want stability and predictability.

A common approach:

• The company may modify the commission plan prospectively (not retroactively)
• Provide notice (e.g., 30 days) unless business necessity requires faster changes
• Clarify that changes do not reduce commissions already earned under the prior plan

Buyer-side tip: Avoid retroactive changes unless you want reputation damage and potential disputes.

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Step 11: Include essential legal terms that prevent disputes

Even if your plan is clear, you need contract “plumbing” to resolve issues quickly:

• Definitions: “Commissionable Revenue,” “Bookings,” “Earned,” “Paid,” “Quota”
• Entire agreement / order of precedence: what controls if plan and contract conflict
• Audit rights: internal right to correct errors, and a reasonable rep inquiry process
• No oral modifications: prevents “my manager promised me…” disputes
• Confidentiality: comp plans and rates are sensitive
• Governing law and venue
• Termination: what happens to pipeline, partially completed deals, renewals
• Dispute resolution: escalation steps before litigation

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Practical example: a clear salary + commission structure (simplified)

Below is a simplified structure you can adapt with counsel:

• Base Salary: $80,000/year paid biweekly
• Variable Target: $40,000/year
• Quota: $500,000 new ARR/year
• Commission Rate:
  • 8% of new ARR bookings up to quota
  • 12% on bookings above quota
• Commission Earned: upon signature and internal approval, contingent on correct documentation
• Commission Paid: monthly, second payroll after month-end close
• Clawback: if customer cancels within 120 days, commission is reversed from next payment
• Discounts: if discount > 20% without approval, commission paid at 50% rate
• Eligibility: rep must be assigned account in CRM at time of signature; deal splits must be pre-approved in writing

This illustrates the key idea: define the event, define the rate, define the timing, define the exceptions.

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Common pitfalls in a base salary commission agreement

1. Undefined “earned” vs. “paid”: leads to termination disputes.
2. Ambiguous crediting: two reps claim the same deal.
3. No guidance on renewals/expansions: account ownership conflicts.
4. Overcomplicated math: reps lose trust and stop believing the plan.
5. Retroactive plan changes: morale and legal risk.
6. No cap/guardrails for outlier deals: can blow out CAC or create internal backlash.
7. Misclassification exposure (contractors): agreement says “contractor,” reality looks like employee.

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Checklist: What to include in your sales compensation plan contract

Use this as a drafting checklist for your next comp plan rollout:

• [ ] Base salary amount and schedule
• [ ] Commission eligibility by role and start date
• [ ] Definitions: bookings, commissionable revenue, quota attainment
• [ ] Commission rates, tiers, accelerators, and examples
• [ ] Crediting rules: territory, splits, house accounts, renewals/expansion
• [ ] Discounting and pricing exception policy
• [ ] Payout timing, required documentation, approvals
• [ ] Clawbacks/chargebacks and refund handling
• [ ] Termination and post-termination commissions
• [ ] Dispute process and correction of errors
• [ ] Modification rights (prospective) and notice
• [ ] Confidentiality and governing law

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Final thoughts: make your comp plan legible, enforceable, and motivating

A well-structured salary plus commission structure can stabilize performance, attract better talent, and keep your cost of sales aligned with growth. The key is to treat it like a contract product: define terms precisely, build in operational reality (discounts, delays, multi-touch sales), and prevent disputes before they happen.

If you want a faster way to generate and refine a salary plus commission employment contract or a commission plan addendum with clear definitions and buyer-friendly protections, you can use Contractable, an AI-powered contract generator, to create and iterate on compensation documents: https://www.contractable.ai

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Other questions people ask (to keep learning)

1. What’s the difference between a commission plan and a compensation clause inside an employment agreement?
2. How do I structure commission for renewals vs. expansions without double-paying?
3. Are “must be employed on payout date” clauses enforceable in my state/country?
4. What’s the best practice for commission on multi-year deals (TCV vs. ARR)?
5. How should we handle SPIFFs and bonuses alongside a salary plus commission structure?
6. What are fair clawback terms that protect the company but don’t punish reps?
7. How do I design accelerators without creating end-of-quarter sandbagging?
8. When should commission be based on margin instead of revenue?
9. How do we write deal-split rules so they’re consistent and auditable?
10. What contract terms reduce independent contractor misclassification risk for commissioned sales roles?