If your products or services have a high contribution margin, you can afford to offer a higher commission rate for over-performance, for example at 200% attainment.
Imagine shifting gears in your sales engine without replacing the whole motor. That is what a tiered commission model does. When rates increase with attainment, it becomes far more attractive for reps to move from almost hitting quota to exceeding it. At the same time you pay less when performance is low because the lower tiers have lower rates. The result is a plan that is easy to explain, easy to calculate, and that nudges behavior in the direction you want through solid commission management.
A tiered commission model is a commission structure where performance in a period places the rep in an interval, a tier. Each tier has a dedicated rate. The simple rule of thumb is that only the active tier pays out, so there is no doubt about what applies at a given attainment.
In practice:
It sounds basic, and that is exactly the strength. Teams grasp it quickly, and leadership can simulate impacts in minutes.
There are three situations where a tiered approach is a smart choice.
By clearly increasing the rate after quota, you send an unmistakable signal. It pays to push for the last deals at quarter end because every extra dollar triggers a higher payout. This moves behavior from a comfort zone to extra effort in the final sprint.
In softer periods you cannot overpay. Lower tiers carry lower rates, which keeps profitability on track. You mostly pay premium rates for results above quota where contribution margin is typically stronger.
It is obvious which rate applies and when. Instead of long calculations and exceptions, a rep can see the current tier, the rate, and what it takes to reach the next tier. That reduces friction, builds trust, and saves administration.
Start with intent. Do you want more reps over quota. Do you want larger average deal sizes or more multi-year agreements. Or do you need stronger budget protection in downturns. Once the goal is clear, shape tiers and rates to support the target behaviors.
Consider simplicity as a design constraint. Five tiers work well for most teams. Fewer tiers can create jumps that are too steep. More tiers can make communication heavy.
Cover the full range from 0 to 200 percent with a structure the team can memorize. Most organizations prefer a clear stage before quota, a precise point at 100 percent, and one or two over-quota tiers that power stretch.
When placing the cutoffs, anchor them to meaningful milestones for your business. If 120 percent is your real stretch milestone, let an over-quota tier start just above 100 percent. It helps everyone see the goal line.
Rates must align with gross margin, CAC payback, and your target commission cost as a share of new ARR. A simple guide is to keep rates non-decreasing and give over-quota tiers a meaningfully higher rate. You reward the best deliveries without overpaying when performance is below target.
Calibrate against historical periods. What would the top reps have earned. What would the median have earned. Does total payout at 100 percent line up with OTE. That test removes most surprises.
There are two common ways to calculate in tiered plans. Some pay by segments across tiers. Others pay only by the active tier. We recommend single-tier payout. It is clear and avoids edge cases. When a rep moves into a new tier, that tier’s rate applies to the period’s achievement.
If people can see it, they can understand it. A small calculator with an attainment slider and a table does wonders. Reps see their current tier and the gap to the next one. Finance and leadership can quickly test what happens to the budget if 10 percent of the team moves from 95 to 105 percent.
Assume a quota of 1,800,000 DKK ARR. A sensible setup uses low rates in the lower tiers, a clear point at 100 percent, and materially higher rates beyond quota. If a rep hits 112 percent, they land in the over-quota tier and are paid at the higher rate. The point is not the exact number but the mechanism that makes stretching worthwhile.
No. If proportionality at every level matters most, a linear plan can be the right choice. A tiered commission model is stronger when you want to deliberately reward overachievement while protecting the budget at lower results.
Start with five. It provides control without drowning in detail. After a cycle, tune the structure. Perhaps the over-quota band should be wider. Perhaps the pre-quota area should be adjusted if too many stall just below target.
A cap can make sense if you want to avoid extreme payouts from outliers. Many set a natural stop around 200 percent attainment. Others run without a cap to encourage growth. Choose based on risk profile and strategy.
The biggest mistake is a rate drop between tiers. That undermines trust and creates confusion. Keep rates non-decreasing. Another common issue is vague language. Write exactly when a tier applies, preferably with percentage cutoffs, so there is no room for interpretation. A third pitfall is skipping backtesting. Always run the plan against the last 6 to 12 months. That is where you confirm OTE alignment and budget fit.
Push historical deals through the model. How many would have hit over-quota tiers. What would total payout have been. Does it match budget. If not, nudge the rates and test again. Two or three iterations usually get you there.
A short legal paragraph makes daily life easier. Specify that the plan uses single-tier payout. Define the ranges precisely and how attainment is rounded. Note a cap if you want one. When the wording is clear, the ambiguity vanishes.
Walk the team through examples. Show 95, 100, and 120 percent. Share a simple calculator so everyone can simulate their pipeline. When every rep understands the mechanism, the plan works without friction.
Use this quick list before you launch:
If you can say yes to these points, you are close to a commission plan that motivates reps and is healthy for the business.
A tiered commission model gives you a clean balance between motivation and financial control. Reps can see the upside of stretching. Leadership can protect the budget because payout is low at low performance and high at top performance. When the plan is simple, transparent, and backtested, it becomes more than a pay tool. It becomes a steering mechanism that shifts culture, focus, and results.