Executives at the helm of SaaS sales teams face the daunting task of setting up a sales compensation plan for their reps.
But you’re not alone; we’re here to help demystify this complicated topic. Get ready because today, we’re going deep into the topic of SaaS sales compensation.
Creating a sales compensation plan is crucial to encourage sales and set clear goals for your sales managers and sales team.
A sales compensation plan tells your sales team how they will be paid for their sales and contributions to your SaaS business. Often this includes two primary elements: base pay and variable pay (also known as incentive pay or commission).
This article will discuss why you should create a sales compensation plan, how to create a compensation plan for SaaS sales teams, how the experts do it, a calculator that will help you do the necessary math, and mistakes to avoid.
Speaking of experts. Let’s talk about some SaaS sales professionals that we’ll be referencing today.
Why create a SaaS sales compensation strategy?
Creating a comprehensive compensation strategy clarifies to the entire SaaS company the goals and benchmarks that matter to your company leadership.
To attract and retain a strong sales team, you need more than the ping-pong tables, free lunches, and bring your dog to work policies that many companies rely on.
Set clear standards
You don’t want to leave your SaaS sales team guessing about how they will be earning their money. The SaaS industry is growing rapidly, and to compete and retain sales reps in this market, you need to be smart about your business strategies.
Companies should create sales compensation plans to set clear expectations of what the business’ goals are and how the sales team will be rewarded for making those goals happen.
Align business goals
A good sales comp plan should align the behavior and actions of your sales team with your business goals.
Andrus Purde, Co-founder and CEO of Outfunnel, said, “Study after study has shown there’s a correlation between alignment and revenue growth—so if your teams work well together, they’ll bring in more revenues and get higher overall compensation in return. It’s a win-win!”
As a sales executive, some common business sales goals that your SaaS sales teams need to accomplish include:
- Booking recurring revenue
- Getting as much cash upfront as possible
- Signing longer-term contracts
- Customer happiness/referrals
- Maximum renewal rates
You can achieve these goals by tailoring your sales commissions to reward the outcomes you want to see.
Creating a strong sales compensation plan can help you budget better. Trust us; your accounting team will thank you.
When you clearly state how much sales reps will be compensated, you can ensure that your budget aligns with your company’s financial goals.
However, creating a complete compensation plan isn’t always easy. There are wrong and right ways to build out a plan.
How sales compensation stabilizes your teams
The SaaS sales process isn't immune to turnover. Technologically empowered remote reps have more options today than ever, and competing product-led sales teams are always eager for new talent.
And even with the best web-based software, the SaaS sales model is still challenging. Many reps quiver at engaging a new potential customer, especially if they're used to a self-service model.
Thirdly, some of your reps may not understand or appreciate their position in their team or even the greater company. Let’s find out how to bring clarity and loyalty to your reps.
Consistency is key to customer relationship management
High rep turnover often leads to low customer retention when key salespeople and their customer touchpoints are lost. You’ll then lose the relationships that started with particular product demos and continued throughout customer success.
Consultative selling hinges on 1:1 strategic meetings, and new reps might struggle to fill the previous hire's shoes so far down the sales pipeline.
Let's forget about this year’s sales trends for a minute and reconsider the classic approach to sales—one where your reps constantly engage with and add value to your customer base.
Sales metrics like customer acquisition cost (CAC) are good standards for filtering qualified leads, but reliable sales techniques won’t mean much if trial users don’t match a rep’s energy.
Many consider modern SaaS business relationships cold, automated, and distant. A world where automated tech stacks can handle every customer touchpoint, like how the machines take care of humans plugged into The Matrix.
Amazingly, high-touch sales models are vital to retaining a prospective customer. You can think of a sales rep who has internalized the high-touch philosophy as their team's Neo or Trinity.
Modern SaaS sales strategies are driven and maintained by a positive and ongoing customer experience. One that's maintained by a rep's dedication to your target customer.
An opportunity to train and upskill
Your reps want to know how you’ll professionally upgrade them beyond the average base salary attached to a promotion.
Weaving your sales compensation plan into your team's hierarchy shows junior reps what awaits them regarding promotions.
Getting your reps up to speed with your ideal customer profile (ICP) and familiarizing them with your key metrics (and other revenue-related motivators) is a good start.
But your salespeople also need to feel like you value their individual progress, beyond appreciating your definition of sales qualified and buyer persona.
Upskilling your reps doesn't just lead to more high-quality leads and a shorter sales cycle. It makes their general sales experience in your company far more enjoyable and appreciative.
We'd recommend that you consider setting some company time aside for courses. Here are three of our favorites:
How to compensate SaaS sales teams
If you’re in a hurry, scan this and go about your day, we won’t judge.
SaaS Sales compensation benchmarks:
- Standard SaaS commission: 10%
- Standard OTE: 50/50 base/variable pay, or 2x base pay
- Quota: 10x base pay
- Quota Capacity: typically 70% attained
- Manager's Quota: 80% of the quota capacity
- Keep it simple, consistent, and clear
- Pay attention to gross margins
- Offer non-cash rewards
- Focus on annual recurring revenue (ARR)
- Fall behind on hiring
- Make your sales representatives collect payments
- Jump into hiring “farmer” reps
- Compensate your sales team for renewals
Read on for a more detailed discussion of these topics.
First, it's important to note that creating a sales compensation plan for a SaaS sales team isn’t the same as creating a standard sales comp plan. With SaaS sales, a salesperson’s job doesn’t end when a sale is made.
The key to healthy SaaS sales behavior is to retain your customers for many years.
This is among the many things that you need to consider while creating your commission plan, including your primary business objectives, annual targets, and customer acquisition costs.
As a rule of thumb, most salespeople are paid a base salary in addition to commission and cash bonuses.
Your first step in creating a sales compensation plan is to create a plan for an individual sales rep.
Here are the key elements you’ll need to focus on:
- Base pay
- Variable pay
- On-target earnings (OTE)
- Commission rate
We’ll go into detail about the OTE, commission rate, and variable pay soon, but for now, let’s just take a look at how this can be broken down annually.
For the sake of this example, we went with a typical quota (10 times the base pay) and OTE (2 times the base pay).
|Role||Territory||Base Pay||Quota (10x Base Pay)||OTE (2x Base Pay)|
|Giant-Killer||Strategic Accounts||$130k||$1.3 million||$260k|
Once you have your individual sales compensation plan complete, it’s time to look at the bigger picture and create a plan for your entire sales team.
Your total quota for your entire team is known as a Quota Capacity (QC). This is pretty straightforward. If you have five sales executives and each has a $500k quota, your QC will be $2.5 million.
This is important to know for budgeting. Say you are forecasting $10 million in new ARR for the next year, but you only have five sales executives with a quota of $2.5 million. You’ll be in trouble.
According to David Sacks, the average sales team only attains about 70% of their QC. Therefore, he says:
A manager’s quota should be set at 80% of their team’s QC. The manager’s OTE (also 50/50 between base and variable) will be set by market rates for a manager, director, or VP in their position. Commission rate will be the dependent variable.David Sacks, Co-Founder of Craft Ventures
If your team is going above 70-80% of QC, you should consider growing your sales team.
How can you structure a sales quota with a product-led growth (PLG) motion and salespeople? By compensating your sales team based on fair market value and their individual performance.
Sara Archer, Director of Sales & Marketing at ChartMogul
In a product-led business, prospective buyers realize the value of your product by experiencing it — whether via a free trial or a freemium offering.
That’s why your sales team and their compensation are crucial for a PLG company. These sales experts will be the reason why your customers understand your value. They will also be responsible for your sales data, negotiating contracts, and facilitating free trials and demos.
To determine how you can fairly compensate your PLG sales team, you’ll need to nail down how sales works in your business. Tasks such as:
- Sales development and generating new leads.
- Account management and negotiations.
- Sales operations such as improving the PLG funnel and managing customer relationships.
Once you and your sales development reps nail down these tasks, determine who owns each individual task through your CRM data and how they are compensated for their contribution. You need to find a perfect balance in your OTE and base-variable split for each task and corresponding salesperson.
Ensure that your plan emphasizes what is important to your business, from your marketing team to the sales funnel. Here are some examples of how you can do that.
Sara Archer, Director of Sales & Marketing at ChartMogul
A minimum achievement threshold, incentives for selling longer agreements with attractive payment terms, incentives for selling to new customers that contribute expansion MRR, [and] ‘recovery’ for customers that churn or contract within a defined time period (e.g. 90-days).
On-target earnings (OTE)
The base salary and commission are known as On-Target Earnings (OTE). If your base pay is $45,000 and a salesperson makes $50,000 on commission, their OTE would be $95,000.
But what about the commission rates? The industry standard is 10% for SaaS sales companies. We asked two experts what they think is a fair commission rate.
A good commission rate for SaaS products ranges on the average Contract Value... smaller transactional [will be] probably 10%, but big FU Enterprise [can be over] 6%.Anton Marinovich, VP Sales & Success at Holobuilder
Be generous. You're gonna pay less than corporates in base so once the reps have passed a hurdle, they should be able to make a lot. Around 15% is fair, but you might need to go as high as 20% in the first year.Christian Sjøvold Blomberg, B2B SaaS Go-to-Market Advisor and Board Member
The best OTE structure depends on where you are as a company, but on average, it is 50/50.
Early-stage is more 50/50 (base/ variable) or even 40/60 (with some equity), while if you are really established working a big deal, it might be 60/40.Anton Marinovich, VP Sales & Success at Holobuilder
Expansion and renewals
Setting a reasonable renewal rate is a crucial step in your sales compensation plan. But, that begs the age-old question, who should be in charge of handling your expansions and renewals?
Here are some ideas of how you can credit your team for expansions and renewals.
- Original account executive: the credit and responsibility of renewals remain with their original owner. This person is the most familiar with the customer, and the advantages of this are apparent.
- Customer Success Manager: the CSMs are responsible for renewals. Some teams also pair a sales rep with a CSM and give bonuses based on retention.
- Territories: all renewals are based on geographic regions. This can be very democratic and fair but can be problematic if significant renewals are assigned to new reps.
- Specialists: renewals are assigned to company specialists. These are often sales leaders and experienced executives. This can be a sure way to keep clients by having the best of the best handle their key accounts and enterprise customers.
Experts in the SaaS sales industry have a lot of thoughts on this.
Anton Marinovich said he expects his account executives to handle expansions and leave his CSM team to manage renewals. Brett Queener echoed this and insisted sales managers don’t compensate sales teams for renewals.
I like to let an AE keep the account for 12 months from the initial close to incentivize “land and expand” deals. Any expansion in the account during that time is considered New ARR for which the AE receives full quota credit.David Sacks, Co-Founder of Craft Ventures
Typically, CSM identifies the opportunity and part of their goals to open X amount of expansion opportunities per month/quarter. AEs own the negotiations, so they are compensated a lower % on renewals (2-3%) and higher on expansions.Christian Sjøvold Blomberg, B2B SaaS Go-to-Market Advisor and Board Member
With Accelerators, the sales commission rate increases once the rep has exceeded their quota.
Once an account executive hits their quota, it is a good practice to increase their commission rate to about 15%. This can be a great way to incentivize sales reps not only to hit but exceed their quota.
People are in sales to make money for themselves and the company. Promote the making money behavior.Anton Marinovich, VP Sales & Success at Holobuilder
You can also consider using a tiered accelerator approach.
With a tiered approach, the first-tier is set at a point where the majority of the company’s sales reps historically attained (i.e. 100-110%), the second-tier is set at a point reached by a much smaller percentage (i.e. 110-125%), and the third-tier target at a point hit only by a small percentage (>125%).David Skok, General Partner at Matrix Partners
When creating a SaaS sales commission plan, one central accounting principle you should consider is ratability.
Because SaaS contracts are ratable (over a contracted period), the revenue of those contracts is recognized ratably over the course of an agreement.
Likewise, the commission paid out to salespeople for SaaS contracts is amortized over the course of that agreement.
Brett Queener explains it like this: on a two-year, 100K ACV (annual contract value) a year deal with a comp plan that only pays on ACV with a 15% payout rate:
- Revenue: You would recognize $8,333,33 each month for 24 months ($100,000/12 months)
- Payout: You would write a check for $15,000 to the rep.
- Commission Expense: You would recognize $625 in expense each month for 24 months ($15,000/24 months.
Before you close your wallet and clutch your pearls over this concept, let us assure you that it will not cost you more money in the long run. As long as your renewal rate is set correctly, you won’t run into any problems.
The boundaries within which a salesperson can do business are a crucial component to the success of your sales comp plan. You want to be crystal clear about this to avoid conflicts and ensure coverage.
The world should be divided into territories that are “M.E.C.E.” (mutually exclusive and collectively exhaustive).David Sacks, Co-Founder of Craft Ventures
Here are some ways you can divide things up amongst your sales team:
- Geographical: sales territories are split up based on location. Important to note: you should be splitting up your territories according to the number of leads in the area rather than size.
- Verticals: sales territories are split up based on industry verticals. If your product is specific to a certain persona, or product-qualified lead (PQL) scoring model, you may want to consider this specialized approach.
- Skill or experience level: sales territories are split based on each executive's skill level, leaving the most experienced sales reps to deal with the largest territory or best leads.
- Round robin: sales territories are split up round-robin style. This works best for startups or small teams.
You’ll need to adjust these territories when you gain or lose members of your sales team, no matter which method you go with.
How the experts do it
Before creating your own sales incentive plan, it’s essential to understand the common practice of experts in the field.
It’s also important to know what other SaaS companies are doing to create their sales compensation models. Though, you have your own business model, churn rate, sales cycle, and other factors to consider.
Keep it simple, consistent, and clear
Your sales compensation plan should not read like a novel; in fact, it should be less than three pages long. No one wants to curl up by the fireplace and read a 30-page-long compensation plan.
My personal belief is that your compensation plans should be no more than 2-3 pages.Brett Queener, General Partner at Bonfire Ventures
And, your sales compensation plan should not change often. Consider revamping this plan every year or every few years, but not more often than that.
Do not make the critical error of changing your compensation plans regularly within a quota year.Brett Queener, General Partner at Bonfire Ventures
Pay attention to gross margins
Your gross margins matter, especially as you begin to grow as a company.
Focusing only on bookings, ignoring gross margin, may help to keep things simple in the early days of a SaaS startup. But as the company starts to scale, the impact of good gross margins will become very important.David Skok, General Partner at Matrix Partners
You also need to consider the cost the company retains after incurring the direct costs (COGS).
In a SaaS company, the cost of goods sold includes not only the cost of running the software (e.g. Amazon AWS bill) but also the costs of providing on-boarding and support.David Skok, General Partner at Matrix Partners
Offer Non-Cash Rewards
Prizes are a great way to appease unhappy customers, but they also work wonders for your sales performance.
One creative way that experts beef up their sales commission strategy is with creative non-cash payments. Non-cash rewards can be a variety of things ranging in price.
Finally, this is where you can have some fun with this plan. Not that the concepts of rationality and accelerators aren’t super sexy and fun.
[Offering a] No Question - Day Off Pass (except on closing week) [that] worked really well. Unfortunately, it doesn't have the same effect if you work in a company with unlimited PTO.Anton Marinovich, VP Sales & Success at Holobuilder
We had a trophy for the SDRs called ‘SDR of the month’ and we would set goals every month to focus on and whoever won that month, would keep the trophy on their desk the following month (would need a virtual equivalent these days).Christian Sjøvold Blomberg, B2B SaaS Go-to-Market Advisor and Board Member
Focus on annual recurring revenue
Your company’s value primarily comes down to the annual recurring revenue that you make, and as such, this should be your biggest priority.
The king component for a standard SAAS compensation plan is the annual contract value or ACV of your software license subscription… ACV [is] the net new annualized committed annuity (ie, a contract length of a minimum of one year) a customer has signed an order form with your company.Brett Queener, General Partner at Bonfire Ventures
ACV should be a major focus when creating a sales compensation plan for SaaS companies. This will help your reps ensure that things are simple in the customer lifecycle and when working to negotiate a deal with potential customers.
What matters the most when creating a sales compensation plan is that it makes sense for your team and your business goals.
What not to do
By now, you know what you should do when creating a sales commission strategy, but before you start, let’s cover some mistakes that experts have made so that you can learn from them.
Creating a SaaS sales compensation plan is a little more complicated than a plan for traditional sales organizations. If you’re new to SaaS sales activities, you’ll have much to learn from these experts.
Here are some common mistakes you should avoid in your sales incentive compensation plan from experts in the sales industry.
Fall behind on hiring
Don’t be afraid to hire aggressively for your sales team.
Always stay ahead of your hiring if that is a revenue driver number. Once you fall behind in hiring it can be near impossible to catch up.Anton Marinovich, VP Sales & Success at Holobuilder
Hiring in 2022 has become increasingly complex, and so has non-sequential selling, so you need to work harder than ever to ensure you’re staying ahead of your hiring.
These mistakes can be avoided if you learn from them and use them to shape your sales compensation rate.
Make your sales representatives collect payments
If your team is large enough, it is always a good idea to separate your sales team from the collection of payments. You want your account executives to focus on selling, not collection calls.
They'll probably have their hands full already, combing through your target market and meeting cold calling quotas.
I like my account executives focused 100% on breaking into new accounts and closing business and not on contacting the accounting department to get the check that’s past due on your invoice.Brett Queener, General Partner at Bonfire Ventures
Of course, at a certain point, if you need to get the sales team involved to collect a long-overdue bill, that is a different story.
Jump into hiring “farmer” reps
One thing you should work to avoid, for as long as you can hold out, is hiring “farmer” account executives.
I often have strange discussions with founders and heads of sales at companies with less than 25 account execs who want to start splitting up their ACV targets and quota credit between new business “hunter” reps and existing customer-focused “farmer” account managers.Brett Queener, General Partner at Bonfire Ventures
There can be an exception to this rule if the company is an SMB transactional business where the sales team doesn’t interact with clients. Other than that, try not to mix up the account executive’s role with a customer success role.
Salespeople are salespeople, and customer success people are customer success people.Brett Queener, General Partner at Bonfire Ventures
You want to avoid removing any incentive that your sales team has to sell, and separating your team into “farmer” and “hunter” salespeople can do just that.
Compensate your sales team for renewals
You want to avoid this situation at all costs. You want your reps to be focused on new customers, not renewing existing ones or potentially wasting their time on the wrong customer.
When you compensate AE for renewals, sales teams become insurance agents who can over time make most of their number from previously sold annuities.Brett Queener, General Partner at Bonfire Ventures
This job is for your customer success team, who should be in charge of retention and renewals in the customer journey.
Creating a solid SaaS sales compensation strategy is crucial for early-stage companies and established companies. You’ll want to make sure you’re keeping your current customers and entire team happy with your policies.
By now, you should be comfortable with creating an individual sales plan using the key factors we discussed (Base Pay, Variable Pay, On-Target Earnings (OTE), Quotas, and Commission Rate). And, you know how to use this information to create your team plan.
Plus, you have access to a calculator that can do all the tedious calculations for you.
Your sales compensation plan should not only focus on furthering your company goals but ensuring that your sales team is productive, engaged, and compensated appropriately.
We hope you enjoy engaging with your teams at a higher level and awakening each of your rep’s true potential.