Variable Pay: What It Is and How to Design It

Variable pay is any compensation that changes based on performance — commissions, bonuses, profit sharing, or short-term incentives paid on top of base salary. It's not guaranteed. Earn more by hitting targets; earn less by missing them.

According to SHRM, roughly 85% of organizations use some form of variable pay program. The structure varies widely by role: sales teams primarily use commission, while non-sales roles usually receive bonuses tied to company or individual performance.

The design of variable pay matters more than whether you have it. A poorly structured plan can incentivize the wrong behaviors, erode trust, or cost far more than intended.

Discretionary vs non-discretionary variable pay

This is the most important distinction in variable pay design, and the one most often overlooked.

Non-discretionary variable pay follows a defined formula. A rep closes $500K in revenue. Their plan says 10% commission. They earn $50K. There's no management judgment involved — the formula determines the payout.

Discretionary variable pay is at the employer's judgment. The company had a good quarter, so management decides to pay a bonus. No formula is promised in advance. The amount depends on decisions made after the work is done.

For most sales roles, variable pay should be non-discretionary. The entire point of commission is that reps know exactly what closing a deal is worth before they pursue it. Remove that certainty and you remove the motivational mechanism.

Discretionary bonuses can work for roles where outcomes are harder to measure directly — customer success, sales engineering, operations. But for quota-carrying reps, discretionary bonuses create disputes and erode trust.

Types of variable pay

Commission is the standard for sales. A rep earns a percentage of revenue or deal value when a deal closes. It's directly tied to output and pays continuously — every deal contributes to variable earnings. Commission can be flat (same rate on all deals), tiered (higher rates at higher attainment), or split across multiple metrics like new logo and expansion.

Target bonus is a fixed payment when a defined threshold is hit. Often used for non-quota roles or roles where revenue linkage is indirect. A sales manager might earn a bonus when their team hits a bookings target. A customer success rep might earn one at renewal rate thresholds.

Profit sharing distributes a portion of company profits to employees, usually annually. More common in manufacturing and services than in SaaS, where gross margins vary significantly by customer cohort.

SPIFF (Sales Performance Incentive Fund) is a short-term cash payment for specific behaviors — closing deals before a deadline, selling a particular product, or hitting a sprint metric. SPIFFs add to base commission; they don't replace it.

For more detail on each type and how they apply to sales comp specifically, see variable compensation: types, structures, and best practices.

Variable pay in sales: the OTE connection

In sales, variable pay is the performance-based half of OTE (on-target earnings). OTE = base salary + on-target variable at 100% quota attainment.

A rep with $160K OTE and a 50/50 pay mix has:

• Base salary: $80K (guaranteed)
• On-target variable: $80K (earned at 100% quota)

The $80K in variable is derived from the commission rate applied to quota. If quota is $800K in ARR, the rate is 10% ($80K variable ÷ $800K quota). Every deal contributes commission at that rate until quota is hit, then accelerators may apply above quota.

According to Bridge Group's 2024 SaaS AE Metrics Report, median AE OTE in B2B SaaS is $190K with a 53:47 base-to-variable split — meaning the typical AE's variable comp at target is roughly $89K.

For a complete breakdown of OTE and how to calculate it by role, see on-target earnings: what it means and how to calculate it.

Pay mix: how much should be variable?

Pay mix — the base-to-variable ratio — should reflect how much direct control a role has over revenue outcomes. More control warrants more variable.

Source: Bridge Group 2024 SaaS AE Metrics Report

Two factors should drive your pay mix decision:

Sales cycle length. A rep spending six months on a single deal needs enough base to cover living expenses during that time. Enterprise reps on high-variable plans would earn nothing for half a year on their largest deals. This is why enterprise roles skew toward base.

Control over the outcome. SDRs book meetings but don't close deals. Paying them 50% variable on commission creates misalignment — their income depends on whether the AE closes, which they don't control. Bonus-based variable tied to meetings booked is a cleaner fit.

Designing variable pay

Step 1: Decide what you want to incentivize. Variable pay implicitly prioritizes behaviors. A flat commission rate on all products creates no incentive to sell higher-margin SKUs. A renewal bonus paid quarterly drives different behavior than one paid annually. Be explicit about what you want reps doing more of.

Step 2: Choose the right variable type. Commission works for roles with direct revenue output. Bonus works for roles with indirect output. Mixing them — partial commission plus a quarterly bonus — adds complexity without much benefit for most mid-market teams.

Step 3: Keep the formula traceable. A rep should be able to calculate their own commission within a few minutes of closing a deal. If they can't, trust breaks down. Shadow accounting — reps tracking their own comp in parallel spreadsheets — is the first visible symptom of a formula that's too complex to verify.

Step 4: Model three attainment scenarios. Before launching any variable pay plan, calculate the total payout at 70%, 100%, and 130% of quota (or target). Verify that:

• 70% attainment is livable (reps won't leave mid-year)
• 100% attainment matches market OTE for the role
• 130% attainment is achievable without breaking your cost-of-sales budget

Step 5: Set a quota-to-OTE ratio that works. For B2B SaaS, the median quota-to-OTE ratio is 4.2x (Bridge Group 2024). An AE with $160K OTE at 4.2x implies an $672K quota. The implied commission rate is $80K ÷ $672K = roughly 12%. That number needs to fit within your gross margin targets.

Step 6: Pay frequently enough to reinforce behavior. Monthly variable pay ties payouts to the deals reps close. Annual bonuses are subject to recency bias — the last three months of the year matter more than the first nine. For most sales roles, monthly or quarterly variable pays out close enough to the behavior to feel motivating.

Variable pay and non-sales roles

Variable pay for non-sales roles needs a different approach. Customer success, sales engineering, and operations roles don't have clean revenue outputs to commission against.

The most common structure: a quarterly or annual target bonus equal to 10–20% of base salary, paid when defined objectives are hit. Objectives might include renewal rate, NPS score, support ticket SLA, or a combination of personal and company-level metrics.

A few design principles for non-sales variable pay:

Tie bonuses to outputs the role controls. A CS rep's variable shouldn't depend entirely on company ARR growth. They can influence renewal and expansion, but they don't control what the sales team closes. Metrics like net revenue retention or their own book's churn rate are more appropriate.

Use a mix of individual and company targets. A common formula: 50% of bonus paid on individual performance, 50% on company performance. This creates alignment with broader business outcomes without making individual performance irrelevant.

Avoid overly complex scorecards. Four metrics weighted 20/25/30/25% sounds fair. In practice, it's hard to track, hard to verify, and easy to dispute. Two or three metrics work better.

Common variable pay mistakes

Setting quota too high. Only 51% of SaaS AEs hit quota in 2024, down from 66% in 2022, according to Bridge Group's data. A plan where half your reps can't hit target isn't motivating the bottom half — it's just tracking performance without influencing it.

Changing plans mid-period. Few things destroy trust faster than retroactive quota adjustments or plan changes mid-quarter. If you need to change a plan, do it at the start of a new period, communicate early, and explain why.

Delaying payouts. Variable pay should be paid close enough to the behavior it rewards to feel connected. A bonus paid in December for deals closed in January is nearly meaningless as a motivator for January deal-making.

Not auditing your effective rates. The plan may say 10% commission. But after deal-level adjustments, returns, splits, and product mix calculations, the effective rate can vary widely by rep. Auditing effective rates annually catches misalignment between plan intent and actual payout.

Tools like Carvd automate commission calculations from CRM data, giving reps real-time visibility into their variable earnings — and giving ops teams a clean audit trail without manual spreadsheet reconciliation.

Related reading

• Variable compensation: types, structures, and best practices — deeper on commission structures, pay mix, and plan design for sales
• On-target earnings (OTE): what it means and how to calculate it — the full OTE framework including how base and variable combine
• OTE in sales: how it's set, paid, and negotiated — how to evaluate variable pay in a job offer
• How to build a sales compensation plan (with templates) — end-to-end comp plan design from quota to payout formula
• Total compensation: what's included beyond salary — how variable pay fits into the full compensation picture