How to Create a Sales Compensation Plan for SaaS

sales compensation plan saas

Sales compensation plans play a critical role in the success and scaling of SaaS companies. The transition from founder-led sales to scalable, team-driven sales models can be challenging. The transition can stop companies from hitting the next level of ARR. Higher ARR, higher valuation.

A well-designed sales compensation plan motivates teams, aligns with corporate objectives, and attracts top sales talent. This post provides a framework to design an effective sales compensation plan, leveraging insights and best practices from my No Fluff webinar with the experts from QuotaPath.

Thank you to Ryan Macia and Graham Collins for donating their time and expertise to educate our SaaS community. You can catch a replay of the webinar here: No Fluff Webinar Series.

At the bottom of the post, you can download sales compensation agreements for an account executive and VP of sales.

The Fundamentals of a Scalable Sales Compensation Plan

At its core, a SaaS sales compensation plan must address three foundational questions:

  1. How much?
    • What is the On-Target Earnings (OTE) for each role?
    • What is the pay mix (base salary vs. variable compensation)?
  2. For what?
    • What quotas or targets should be set?
    • How frequently should these quotas be reset?
  3. How?
    • What commissions and bonuses will be used to reward performance?

By answering these questions, SaaS businesses can create sales plans that align incentives with company goals, drive desired behaviors, and ensure compensation clarity for the sales team.

How Much?

Determining “how much” involves defining the earning potential for each role through On-Target Earnings (OTE) and establishing the appropriate pay mix. These elements ensure fairness, motivate performance, and align compensation with market standards.

On-Target Earnings (OTE): OTE represents the total earnings a salesperson can achieve if they meet 100% of their targets. This figure includes both base salary and variable compensation. Establishing OTE benchmarks is essential for consistency across roles and attracting competitive talent.

Pay Mix: The pay mix determines the split between base salary and variable compensation. Common benchmarks include:

  • Account Executives (AE): 50/50 split (base/variable).
  • Sales Managers and Directors: 60/40 split.
  • SDRs and Account Managers: 65/35 or 70/30 split.
  • Customer Success Managers and Sales Engineers: 80/20 split.

A higher variable portion is typical for roles directly tied to revenue generation.

For What?

The “for what” question focuses on defining and setting clear quotas or targets. Quotas are vital in motivating sales teams and ensuring their efforts align with the company’s revenue and bookings targets. A well-structured quota system balances ambition with achievability and adapts to the nuances of sales cycles and deal sizes.

Setting Quotas: Quotas are the targets salespeople aim to achieve within a given timeframe. These targets should be:

  • Realistic: Based on historical performance and market conditions.
  • Aligned with Business Goals: Derived from financial forecast models and growth targets.

Quota Frequency: The frequency with which quotas reset play a significant role in maintaining sales momentum and aligning with operational cycles. Quota frequency depends on factors like sales cycle length and average contract value (ACV):

  • Monthly Quotas: Suitable for smaller ACVs and faster sales cycles, allowing for quicker feedback loops.
  • Quarterly Quotas: Ideal for mid-sized ACVs and moderate sales cycles, providing a balance between urgency and strategy.
  • Annual Quotas: Appropriate for high ACVs and longer sales cycles, giving reps ample time to close complex deals.

Organizations often triangulate between methods such as historical performance, financial modeling, and quota-to-OTE ratios to set quotas that are ambitious yet achievable.

How?

The “how” defines the structure of commissions and bonuses to reward sales performance. By designing flexible and motivating incentive programs, companies can drive behavior that aligns with their strategic goals. Hit your bookings targets and most likely you’ll hit you revenue targets.

Commission Structures:

  1. Single-Rate Commissions:
    • A fixed percentage applied to all sales.
    • Simple and easy to understand but lacks flexibility to reward overperformance.
  2. Accelerators:
    • Higher commission rates for exceeding quotas.
    • Example: 10% commission up to quota, 15% beyond quota.
  3. Decelerators:
    • Reduced commission rates for underperformance.
    • Example: 5% commission for achieving less than 50% of quota.
  4. Multi-Year Contract Bonuses:
    • Higher commission rates for longer contract terms to promote customer retention.

Bonuses: Bonuses provide additional incentives for achieving specific milestones, such as:

  • Closing deals in strategic industries.
  • Securing multi-year contracts.
  • Driving upsell and cross-sell opportunities.

Sample Compensation Plan for an Account Executive

To illustrate these principles, here’s a sample compensation plan for an Account Executive:

Role: Account Executive (New Business Focus)

On-Target Earnings (OTE): $120,000 annually

  • Base Salary: $60,000 (50%)
  • Variable Compensation: $60,000 (50%)

Quota:

  • Annual Revenue Target: $600,000 (Quota-to-OTE ratio of 5x)
  • Quota Frequency: Quarterly ($150,000 per quarter)

Commission Structure:

  • Base Commission Rate: 10% on all closed-won deals up to quota.
  • Accelerator: 15% commission on revenue exceeding quota within the quota term.
  • Decelerator: 5% commission for achieving less than 50% of the quarterly quota.

Bonuses:

  • $1,000 bonus for each deal closed with a multi-year contract.
  • $500 bonus for each deal meeting strategic industry criteria (e.g., specific verticals or company size).

Additional Details:

  • Commissions are calculated on annual recurring revenue (ARR).
  • Payments for multi-year deals are based on the first-year ARR only.
  • Decelerators and accelerators apply retroactively based on final attainment at the end of the quarter.

Best Practices for Sales Compensation Plans

Effective sales compensation plans align with business objectives while remaining simple and motivating. Incorporating data-driven insights and regular reviews can make these plans both fair and adaptable.

  1. Align Incentives with Business Objectives:
    • Ensure compensation plans drive behaviors that support corporate goals, such as reducing churn or increasing annual contract values.
  2. Keep it Simple:
    • Avoid overly complex plans that confuse sales reps. Limit plans to 2-4 components.
  3. Use Data-Driven Insights:
    • Leverage historical data, industry benchmarks, and financial models to set realistic targets and commission rates.
  4. Regularly Review and Adjust:
    • Monitor performance and adjust plans as needed to reflect changes in market conditions or company strategy.

Common Sales Compensation Pitfalls to Avoid

While designing sales compensation plans for your SaaS teams, avoid common mistakes that undermine effectiveness or cause confusion. Sales teams must understand how they are compensated and understand the logic. Often, we like to overcomplicate the plans.

  1. Guesswork in Quota Setting:
    • Avoid arbitrary targets. Use historical performance and market data to inform quotas. That’s why good CRM data and clean bookings reports are critical to the compensation process.
  2. Unrealistic Expectations:
    • Misaligned quotas can demotivate sales teams and lead to high turnover.
  3. Overcomplexity:
    • Plans with too many components or conditions can confuse reps and reduce effectiveness. If we don’t understand how we get paid, how can we align our effort?
  4. Ignoring Team Feedback:
    • Regularly solicit feedback from sales teams to ensure plans remain motivating and fair.

Conclusion

An effective sales compensation plan is a critical tool for driving growth in SaaS companies. As a CFO, I’m very happy to pay high compensation to sales team if they are hitting their targets.

Just like SaaS metrics, you must put in the proper foundation prior to moving from founder-led sales to a sales-led growth motion. You can’t jump in without a plan.

By addressing the key questions above, you can design plans that motivate your team, align with business goals, and scale as your company grows. Remember to keep plans simple, data-driven, and aligned with both sales team and organizational objectives.

Once you have hired out your sales team, be sure to track the metrics that I list in Pillar 5 of my 5 Pillar SaaS Metrics Framework. You can’t ramp sales and marketing spend without calculating the ROI.

⬇️Download an Account Executive and VP of Sales compensation plans below ⬇️ I created these based on the great content in the webinar with QuotaPath. Of course, review these agreements with your CFO, HR team, and legal counsel before putting them into place.

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