One of the most consequential structural decisions in sales compensation design is whether to differentiate pay based on territory assignment or role definition. Get this wrong and you create a system where equally skilled reps earn vastly different amounts based on geographic luck, where high-potential territories subsidize underperformance, or where your best talent gravitates toward the easiest assignments rather than the most strategic ones.
This guide examines both models in depth, explores when each is appropriate, and provides a practical framework for designing hybrid structures that balance fairness, motivation, and strategic alignment.
Understanding the Two Models
Territory-Based Compensation
In a territory-based model, compensation elements such as quota, OTE, or commission rate vary based on the specific territory a rep is assigned. A rep covering a high-potential metro area might carry a higher quota and earn a higher OTE than a rep covering a lower-density region.
The premise is that territory characteristics, including market size, customer density, competitive landscape, and growth potential, should be reflected in the compensation structure because they directly influence what a rep can achieve.
Role-Based Compensation
In a role-based model, all reps in the same role receive the same OTE, pay mix, and commission rate regardless of their territory assignment. Differentiation comes through the quota, which is calibrated to each territory’s potential, while the earning opportunity at 100% attainment remains uniform.
The premise is that a rep’s job is the same regardless of territory, and the company should equalize earning opportunity by adjusting quotas rather than pay structure.
When Territory-Based Compensation Works
Significant Market Variation
When the addressable market differs dramatically across territories, territory-based compensation can attract and retain talent in the most competitive assignments. A rep covering the Northeast enterprise segment may face stiffer competition for talent than one covering the Mountain West. Differentiating OTE acknowledges this reality.
Named Account Models
When reps own a portfolio of named accounts rather than a geographic territory, the revenue potential of each portfolio is known and can vary by orders of magnitude. Territory-based compensation allows you to right-size pay to the opportunity set without forcing an artificially uniform structure.
Mature Organizations with Rich Data
Territory-based models require granular market sizing, historical performance data, and sophisticated territory analytics. Organizations with mature revenue operations functions and several years of data can make informed, defensible decisions about territory-level compensation.
When Role-Based Compensation Works
Early-Stage Companies
When territories are still being defined and data is limited, role-based compensation provides simplicity and flexibility. You can reassign territories without renegotiating compensation, which is critical during rapid growth.
Promoting Internal Equity
When all AEs with the same title earn the same OTE, the compensation structure reinforces a culture of fairness. There is no perception that some reps have “golden territories” while others are set up to fail.
High Territory Turnover
If territories are rebalanced frequently (annually or more often), territory-based compensation creates constant disruption. Reps may resist territory changes that reduce their OTE, even when the changes make strategic sense. Role-based models eliminate this friction.
Simplified Administration
Role-based plans are easier to administer, communicate, and forecast. The commission model has fewer variables, reducing the burden on finance and operations teams.
The Hybrid Approach: Best of Both Worlds
Most mature organizations land on a hybrid model that combines elements of both frameworks. Here is a practical structure.
Uniform OTE by Role
Set OTE at the role level, ensuring all AEs in the same band earn the same total compensation at target. This preserves internal equity and simplifies benchmarking against market data.
Territory-Calibrated Quotas
Adjust quotas to reflect territory potential. A rep in a high-potential territory gets a higher quota; a rep in a developing territory gets a lower one. Both earn the same OTE at 100% attainment, but the bar for “100%” is calibrated to their specific opportunity set.
Territory-Weighted Accelerators
Use accelerators to create differentiated upside based on strategic priority. A territory the company wants to penetrate aggressively might have more generous accelerators above 100%, rewarding the extra effort required to crack a new market. A mature territory with established accounts might have standard accelerators.
Geographic Pay Adjustments
Apply cost-of-labor adjustments to the base salary component while keeping the variable component uniform. This addresses the legitimate difference in talent market pricing across geographies without creating a perception that some territories are “better” than others.
Designing Territory-Calibrated Quotas
The quality of your territory-based adjustments depends entirely on the quality of your territory scoring and quota allocation process.
Step 1: Build a Territory Scoring Model
Score each territory on quantifiable factors. Common inputs include total addressable market (number of target accounts and their estimated spend potential), historical bookings and pipeline from the territory, installed base and expansion potential, competitive density, and market growth rate.
Weight each factor based on its predictive value. For example, TAM might carry 40% weight, historical bookings 30%, and installed base 20%, with competitive factors at 10%.
Step 2: Rank and Tier Territories
Sort territories by composite score and group them into tiers. A typical structure uses three to four tiers.
Tier A: High-potential territories with large TAM and strong historical performance.
Tier B: Mid-potential territories with moderate TAM or emerging growth.
Tier C: Developing territories with limited historical data or smaller addressable markets.
Step 3: Allocate Quota by Tier
Distribute the total company quota across tiers proportionally to their composite scores, adjusted for headcount. Within each tier, allocate to individual territories based on their relative scores.
Step 4: Validate Against History
Compare the proposed quota for each territory to historical attainment. Flag territories where the new quota represents more than a 15-20% increase over prior year actual performance, as these may require a ramp adjustment or additional investment in pipeline generation.
Managing the Transition Between Models
If you are moving from one model to the other, manage the transition carefully to avoid rep attrition and morale issues.
Transitioning from Territory-Based to Role-Based
Identify reps whose OTE will decrease under the new model. Provide a transition guarantee (typically 6-12 months) where their OTE is held at the prior level while quotas adjust. Communicate the rationale clearly: the company is investing in a fairer system that removes territorial luck from the equation.
Transitioning from Role-Based to Territory-Based
Demonstrate the data and methodology behind territory-level differentiation. Show reps how their specific territory was scored and how their compensation was calibrated. Transparency is essential when introducing pay variation within the same role.
Handling Common Challenges
The “Golden Territory” Problem
In territory-based models, legacy territories with large installed bases can generate outsized earnings with minimal effort. Address this by splitting mature territories, adding expansion or cross-sell quotas, or creating a separate renewal compensation track distinct from new business commissions.
Territory Reassignment Disputes
When a territory changes hands, the incoming rep may inherit pipeline that the outgoing rep developed. Establish clear pipeline transition rules: deals past a defined stage at the time of transfer are credited to the outgoing rep; earlier-stage pipeline transfers to the incoming rep. Document these rules in the compensation plan.
New Market Territories
Greenfield territories with no historical performance are inherently riskier for reps. Offer enhanced guarantees, reduced first-year quotas, or additional SPIFF opportunities to compensate for the uncertainty and attract talent willing to build from scratch.
Multi-Product Complexity
When reps sell multiple products with different margin profiles, territory-based adjustments can interact with product-level commission rates in unexpected ways. Model the combined effect carefully and simplify wherever possible. Reps should be able to calculate their expected earnings without a spreadsheet.
Decision Framework Summary
Choose role-based compensation when your organization is early stage, territories are fluid, you value simplicity, or internal equity is a priority. Choose territory-based compensation when territories have dramatically different potential, you have rich data to support differentiation, and your organization can handle the administrative complexity. Choose a hybrid approach when you want uniform earning opportunity at target but need territory-calibrated quotas and strategic accelerators to align effort with market potential.
Regardless of which model you choose, invest in the analytical infrastructure to evaluate territories objectively, communicate your methodology transparently, and review the structure annually. The goal is a system where every rep believes they have a fair opportunity to succeed, and where the company’s compensation investment is directed toward the outcomes that matter most.