A Guide for Setting up Your Own Sales Comp Plans

As you go through this guide, you can download a compensation modeling template to use for your endeavors. It is recommended to open the template and look at the “instructions" tab as you read through the content below.

Eight Simple Steps to Achieve Comp Mastery

1. Pick Your AE Roles

Decide how many sales roles you have. Avoid custom compensation plans for individuals and insist on a consistent approach for a given account executive role—same base, same variable, and same quota. The exception is for hiring in expensive locations (e.g., SF) versus less expensive ones (e.g., Spokane), where you may adjust base, variable, and quota. Early in your company formation and sales hiring, ask yourself if one type of rep can close most of your business, and whether your business is transactional or a longer value-based sell. Define your roles and market segmentation for each role. This will change over time, but clarity is important for salespeople.

2. Set Your Comp & Quotas

For each role, establish the appropriate base, variable, and total on-target earnings (OTE). Junior sales roles tend to have less variable as a percentage of total OTE (50% or less), while senior field reps may want a larger variable (>50%). Keep your quota/OTE ratios above 4x as a guideline. If you cannot, re-examine your product-market fit (average sales price, pipeline generation, or close rate may be too low).

3. Pick your Quota Calculation Period

Choose wisely. Monthly comp plans are for highly transactional, short sales cycle deals; annual comp plans are for long sales cycle enterprise deals. For quarterly plans, ensure sales cycles are no more than 90–120 days.

4. Decide on your Measurement Components

The three components for SAAS compensation plans are ACV, Cash, and Multi-year:

• ​ACV: Net new contracted annual value for license software (and sometimes premium support) for new or add-on business.
• ​Cash: ACV divided by billing terms (Annual = 1, Quarterly = 4, Monthly = 12).
• ​Multi-year: Incremental ACV a customer commits to beyond one year at signing. Can also be calculated as TCV – ACV (TCV excludes one-time non-recurring charges).

Decide how important these components are for your business. For example, in SMB inside sales, multi-year may be excluded as smaller customers tend not to commit to multi-year agreements. In enterprise segments, multi-year is included. Until you reach a few million in ARR, consider skipping multi-year as a component.

5. Decide on your Component Performance Assumptions

Set achievable targets for cash and multi-year assumptions. For example, 100% for Cash means you expect annual billing terms on all deals. Set targets slightly below what you think is achievable to reinforce good behavior. Reps will be empowered to explain standard contracts to customers, which can help drive desired outcomes.

6. Review your Component Quota Amounts

Create separate quota buckets for each component in your rep’s plan. Every deal can contribute to each quota bucket depending on deal attributes. This is simpler for reps to understand than using multipliers.

7. Apply Your Accelerators

For each component, apply accelerators and define the acceleration curve beyond 100%. For example, 1x payout for 1x quota achievement and 3x payout for 2x achievement. Adjust curves to avoid overpaying for over-accomplishment if targets are set too low. At the bottom of each AE compensation plan sheet, you can show reps examples of potential earnings based on deal success.

8. Decide on your One-Time Professional Services Payout Rate

Pay reps for professional services at a rate between 3% to 5% until your business is more established.

You now have compensation plans similar to those used by salesforce.com in its early years. Use the provided templates to make the process easier.

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The Most Common Questions People Have When Implementing this Model

How and when do we count a booking?

A signed deal counts for credit in a given month if the contract/order form is signed in that month and the order start date is in that month or within the first 15 days of the following month. Otherwise, it is not a booking.

What if a contract is signed this month but starts later in the year?

This is a pre-booking. Commission or revenue is not recognized until an invoice can be sent (i.e., after the order is provisioned). It should be recognized as a net new booking in the appropriate future month.

How do we handle ramped deals?

For contracts with ramped ACV, assign component/timing credit based on when incremental ARR is received. For example, a two-year contract with staged ACV increases would allocate ACV and multi-year credit as each stage is reached.

How do we handle pilots or opt-outs that customers demand?

Opt-outs are not committed annuities. ACV credit is only given after the opt-out period has passed. Pilots are not bookable events unless there is a contractual commitment beyond the pilot. If pilots are required, compensate reps as if it’s one-time professional services, but do not retire any component quota for pilot payments.

What language doesn’t work in a contract?

Avoid terms for convenience and order start date/invoice sent when the customer goes live. These make it impossible to determine ACV, MY, etc., and when to recognize revenue and commission expense.

What if it’s early and we have no confidence in setting a specific quota amount for a rep?

If unsure, multiply the rep’s desired base and OTE by four to estimate ACV quota, or pay a flat rate (e.g., 15% of first-year ACV) on anything closed.

What if we are not comfortable enough to set precise targets for cash and multiyear?

Be directionally accurate. For early businesses, setting a target for >60% of deals with annual billing terms is reasonable. For multi-year, wait until you have more data before including it in compensation plans.

What if the nature of our product and offering is low friction/month to month type of agreements?

Compensation plans are simpler. Pay reps for signing up new accounts or as a percentage of new incremental monthly revenue. Do not overpay for recurring revenue already acquired.

What about additional sales incentives?

Use spiffs to drive specific behavior (e.g., more new business accounts, fast starts, competitive swap outs). These are treated as period expenses and are not tied to specific deals. Start with a sales achievement club and add contests with rewards outside the comp plan.

How should I deal with the ramps of new reps in my compensation plans?

Be conservative in ramping new reps. For inside sales with short cycles, a ramp could be M1: 0, M2: 50%, M3: 100%. For enterprise deals with long cycles, the ramp could be M1–M4: 0, M5: 50%, M6: 100%. Adjust based on segment, sales cycle, pipeline, and rep ability.

How should I compensate our sales managers?

Compensate sales managers on the same components as their reps. The manager’s plan should mirror the reps’ plan in terms of components and assumptions. Set the manager’s quota as the sum of ramped quotas of their reps, discounted by at least 10%. Managers should have lower breakpoints for acceleration and less steep acceleration curves. If a manager spans multiple segments, use your best judgment for component mix.

How do I manage this in Salesforce or other SAAS systems?

In Salesforce, use the amount field for ACV, and create calculated fields for multi-year and cash. If using manual quotes/orders, track order start/end date and billing terms as custom fields. CPQ tools can automate these calculations. For commissions, use Excel or a SAAS compensation tool to calculate and administer commissions. Some tools offer “what if” calculators for reps to model compensation.

Start using these tips and tools, make them your own, and you will become a SAAS compensation master. Good luck, and feel free to send thoughts or questions.