Variable compensation is pay that changes based on performance results, such as sales closed, quota attainment, renewals, or other measurable outcomes. It is typically paid in addition to base salary and is used to align incentives with business goals by rewarding specific behaviors and results.
Common Types of Variable Compensation
Variable compensation can take different forms depending on the role:
- Sales commissions: payments based on closed-won revenue or ARR
- Bonuses: one-time payouts for hitting targets or milestones
- Incentive plans: structured payouts tied to multiple metrics, such as revenue and gross margin
- SPIFs: short-term incentives for specific actions or products
- Team-based incentives: payouts based on team results, such as regional quota attainment or retention goals
In customer success and renewals roles, variable pay may be tied to renewal rate, net revenue retention, or expansion ARR.
How Variable Compensation Is Calculated
Variable compensation usually depends on:
- Goal definition: quota or targets for a period
- Payout rate: commission percentage or bonus amount
- Measurement rules: what counts, when it counts, and how credit is assigned
- Adjustments: accelerators, decelerators, thresholds, caps, and clawbacks
- Timing: paid on bookings, collected cash, recognized revenue, or milestone completion
Modern programs often rely on automated compensation systems that pull from CRM, billing, and finance data to reduce disputes and improve auditability.
Why Variable Compensation Matters
Variable compensation affects behavior, cost structure, and forecast reliability:
- Incentive alignment: rewards outcomes the business wants, such as profitable growth and retention
- Performance management: clarifies expectations and promotes accountability
- Cost control: links pay to results, which can scale with revenue
- Forecast impact: poorly designed plans can encourage pipeline inflation, discounting, or end-of-period deal pushing
Effective plans balance speed and simplicity with guardrails for margin, data quality, and customer outcomes.
Frequently Asked Questions
What is the difference between variable compensation and base salary?
Base salary is fixed pay. Variable compensation changes based on performance and is earned when defined results are achieved.
What is an on-target earnings (OTE) plan?
OTE is the total expected pay if targets are met, usually base salary plus variable compensation at 100% attainment.
Can variable compensation apply outside sales?
Yes. It is used in customer success, marketing, operations, and leadership roles when outcomes can be measured reliably.
What is a clawback in variable compensation?
A clawback is a rule that allows previously paid variable compensation to be recovered if a deal is canceled, refunded, or fails a defined condition.
How do companies reduce disputes in variable pay?
Use clear definitions, consistent source-of-truth systems, automated calculations, and audit trails for crediting and adjustments.
