SaaS Sales Compensation: How to Design the Right Plan





Sales compensation is a more complex topic for SaaS/subscription revenue companies. Unlike traditional software sales, the job of sales doesn’t end when a new customer signs a contract. Instead, it is crucial to retain customers over many years, as that is how you maximize your revenues. In this blog post we will explore how to design sales compensation plans that help drive the right behaviors.

While much has been written about sales compensation, we have heard enough requests for help on these topics, that we thought it was worth putting together an in-depth discussion and “how-to” type guide.

The Guiding Principle

When we’re designing sales compensation, the goal is to align sales behaviors with the desired business objectives. Therefore, the process should start with identifying your key business objectives.

What are the key business objectives for a SaaS business?

The primary business objectives related to sales are usually some combination of:

  • Book as much new recurring revenue as possible.
  • Collect as much cash upfront as possible. (Particularly important in the startup phase where cash is in short supply and expensive to raise).
  • Sign longer term contracts (e.g. annual terms vs. monthly, multi-year vs. annual)
  • Make sure customers are happy after purchase so they will remain long term customers.
  • Drive the maximum renewal rate.
  • Drive expansion revenue with existing customers to have a revenue retention rate of greater than 100%, even when you lose some customers due to churn.
    • (We often refer to this as “negative churn”. Since this is a crucial concept for success in SaaS, if you are not already familiar with it, we would highly recommend that you read this blog post: SaaS Metrics 2.0.)

Secondary objectives

Beyond these primary objectives, there are likely some secondary objectives:

  • Add as many new logos as possible.
  • Optimize deal size (sometimes worth trading this off for faster sales cycles, and then expanding after getting in the door).
  • Drive a specific product mix: i.e. selling a new product that has just been added to the product line.
  • Drive gross margins as high as possible.

Other objectives

And there may be other objectives that might matter in the early days of a startup, such as:

  • Sign up accounts that are willing to be references.
  • Sign up a particular type of customer: i.e. larger customers, well recognized brands, customers in a specific new vertical, etc.
  • Reward sales reps that don’t discount too much to win deals.
  • Get a consistent flow of bookings, as opposed to a few very large deals that are unpredictable in timing and certainty of closing.
  • Get a large number of customers quickly to maximize market share, which might be done at the expense of optimizing the deal size.
  • Land and expand: use a low entry deal size to break into accounts, and then expand once you have a foot in the door.
  • etc.

The point we’re trying to make here is simple: it helps to write down and prioritize your business objectives so you can drive the sales compensation accordingly.

Keep Sales Compensation Simple

While the thinking behind the comp plan may not be simple, it is important to keep the plan itself as easy to understand as possible. The sales reps need to easily understand the plan, and it should be very obvious how to behave to get the best rewards.

Marcus Bragg, SVP of WW Sales and Customer Success at Zendesk, advises “Hopefully you have no more than two to three major drivers of the variable commission.”

It’s OK to then layer on top of that one or two SPIFFs to incent some additional, but secondary objectives.

Designing Sales Comp to Drive Desired Behaviors

The primary element of sales comp is the variable piece. Here are the components that will likely drive that:

New sales

Usually the biggest part of sales comp goes to finding and winning new accounts. This is typically rewarded in the form of a commission paid on MRR (monthly recurring revenue) or ACV (annual contract value). When paying on MRR or ACV you are paying commission ahead of when you can recognize the revenue which is a risk if a customer churns before the contract is up. An alternative approach is to pay salespeople when the cash is received but this can be confusing and difficult for sales reps to track.

Note: ACV is different to TCV (total contract value) when you have contracts longer than one year. It is rare to see full commission paid on TCV unless the whole amount is paid in cash up front.

The importance of gross margins

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. 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. In certain companies, sales can’t affect this, so it’s not worth complicating their compensation by factoring in gross margin. But in other companies, sales can affect gross margins, e.g. by selling to customers that do not require a lot of support, and selling less professional services, etc.  In the latter situation, you may consider paying lower commission on low margin products such as professional services, or simply paying commissions on the gross margin dollars, instead of the total booking.

Reward your winners / penalize your losers

High performing salespeople are very profitable for the company, and underperformers are usually expensive. When a sales rep sells beyond their quota, this really drives profits for the organization. Base salaries remain fixed, so all new revenues above quota will have a much higher return. There is also an opportunity cost of underperforming reps taking up valuable sales slots. The goal is to reward behaviors that separate the top salespeople from the average ones.  The classic way to do this is with accelerators – i.e. the commission rate gets higher after the rep has exceeded quota. This can really drive performance. Another less common approach, which not only rewards your winners, but also penalizes your low performers, is to have graduated commission rates that start low.  If you want to push performance even higher, you might want to consider a tiered accelerator model. 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 McNeil of HubSpot comments “we combined the top tier accelerators with President’s Club and stock awards over 125% and it really drove over performance”.

Accelerators and other awards can also help attract other top talent. It can be a big help to recruiting to have some stories floating around of reps who have made big money and award trips by exceeding quota.   

This blog post describes an approach used by Gary Messiana, former VP Sales and CEO of Netli that does exactly that. And this plan used by Jason Lemkin of Saastr has a similar approach of penalizing the low performers.

Expansion bookings

You will also want to incentivize expansion bookings through upsell and cross sell. Our SaaS survey shows that it can be about five times cheaper to get expansion revenue than new revenue, which would mean you can pay a lower commission rate for expansion revenue. But this can vary greatly from company to company, and your own situation needs to be thought through and commission set accordingly. You may even decide to separate who is upselling vs cross selling. There is no right or wrong here – it will depend on the nature of what you are selling and the best way to get it sold.


Who is responsible for making sure customers renew? At the highest level, the answer to this question is many different groups, including on-boarding, customer success, product management, development, Q&A, operations, etc. But, to actually get the renewal contract signed, most SaaS companies will use their Account Managers. Renewals are typically paid a much lower commission than new sales.

Here are the relative commission rates our survey found:

Median commission rates by type of sale


Source: 2015 SaaS Survey

(1) Same rate (or higher) as new commission sales

Note: Paying commissions on a combination of new business, add on sales, and renewals can be confusing so keep it simple and design a compensation plan that aligns to primary business objectives. You can use other tactics such as spiffs, awards and (or) promotion criteria to drive alignment with secondary objectives.

SPIFFS to incent specific additional business goals

Beyond quota based commissions, it is very common for SaaS companies to use extra incentives to drive specific business goals. The most common business goals rewarded in this way are collecting more cash upfront and multi-year contracts. While all revenue is good, collecting cash up front can really help cash flow. At one post-Series A company we work with, salespeople got an additional 2% if the customer paid for 12 months in advance, and 2% on top of that if they closed a 24-month or longer contract. Incentives can also be cash bonuses. Another company we work with offered a $2,000 bonus to anyone who closed a deal with one of the “target logos” they wanted to add to their website.

Non-cash rewards

Also keep in mind, incentives do not always need to be cash-based awards. The traditional “President’s Club” type vacation awards continue to be used for good reason – they are strong, very public motivators. We’ve also seen companies, especially those with more team-oriented sales orgs, get good results offering team based rewards like group parties or outings. A good steak dinner or a staff party after hitting a quarterly team goal can help build enthusiasm and team spirit.

Unit Economics for the Sales Person

As a very rough guide, when your sales process starts to work well, quotas should be at least 5x the OTE (On Target Earnings), which includes base salary + bonus. Ideally quotas are 6-8X OTE to be considered high performing. These are guidelines we’ve observed based on empirical data from a number of successful companies we’ve worked with. But, this is just a guideline. The complexity and difficulty of your sale will determine the ratio your business can support.

Matt Bertuzzi at The Bridge Group shared this graph showing the relationship between quotas and OTE:


But, it’s worth noting that because many of the respondents to this survey were early stage startups, the numbers here are lower than you might expect and there is significant divergence.

How Sales behavior Can Drive Higher Revenue Retention

A common view of sales is that they should be responsible for signing up new accounts, and let the rest of the organization worry about how to retain that customer. But you will quickly find that this way of thinking has negative consequences on your churn rate/revenue retention.

Here are four sales behaviors that you may want to incent to avoid these issues:

Don’t oversell

It is easy for sales to oversell a customer, in a way that the product cannot deliver, which will lead to an unhappy customer who will churn quickly. While you have a contract, you have very little leverage should they decide to break the contract. So sales commissions need a penalty for this situation. If commissions are paid upfront, we typically see this in the form of a clawback when a customer churns. This creates the right disincentive so that sales people don’t oversell or sell to the wrong customers where there is not a good fit.

Sell to the right types of customers where the product is a good fit

You may also find that there are certain types of customers that are the right fit for the product and vision, and have lower churn.

Sell the sticky feature/module

In the early days while you are still refining product/market fit, you may discover that your product is not sticky unless the customer implements a specific feature/module. In this case, customers who purchase that additional module will be far more valuable over their lifetime than the other customers who will likely churn faster. So naturally you would incent your salespeople to optimize sales to customers who purchase and implement that module.

Sell to the most valuable customer segments

Your most valuable customers will have a high LTV:CAC ratio, and a short time to recover CAC. To get high LTV, we are are looking for customers that have a high ACV, low churn, and a high potential for expansion revenue. If you are able to identify a particular segment that has these characteristics, and it doesn’t cost too much to sell to them, then they are your optimal segment.

Sales Comp Should Change as Business Objectives Change

As you have probably realized while reading this, your business objectives are going to change as new challenges emerge and priorities shift. This means you will want to adapt your sales comp plans to keep them aligned. For example, if your company is doing really well at signing up new customers, but these customers are churning out very fast, then your top priority may be retaining customers and driving renewals, with new customer signups falling slightly behind this. Or, you may be launching an additional product, and want to get your salespeople to shift some of their efforts to selling this in addition to the existing product. A balanced approach is important, you don’t want to create a plan that shifts the focus too quickly. For example, paying a 2x rate on a new product that is not ready to sell could impact core product growth, or paying commissions on up-sell could slow down new business acquisition. Always make sure you have checks and balances built into the compensation plan (i.e. minimum new business dollar thresholds before accelerators are paid) to mitigate the risk of shifting too quickly to something new.

Sales comp in the very early days

While you are still searching for product/market fit, you’ll need “first-in” salespeople who can help you figure out the sales process, rather than just maximize the number of sales. You need someone who is passionate about the product and can help you figure out such areas as:

  • Which customer segments to focus on?
  • Who to sell to in the organization?
  • What problem are you solving for them?
  • What message?
  • What missing product features are needed to solve the problem fully?
  • What pricing?

This is usually not your typical salesperson, but rather someone who is very entrepreneurial and can troubleshoot each potential sale, referring issues back to the product team. And since revenue is both low and unpredictable, you may want to pay a higher base and less variable compensation at this stage. Justin Roberts, the Vice President of Sales at Lever, a Matrix portfolio company, says:

“In the early stages, I like to keep compensation very straightforward, emphasizing base and equity and investing primarily in learning what is holding each sale back.”


Sales compensation for SaaS/recurring revenue companies is a little more complex as there are more business objectives to consider when creating the plan. In particular, a SaaS business needs to focus on selling to customers who will stick around for the long term, and have the ability to expand their contracts over time. We recommend starting by writing down your primary business objectives, and then figuring out which are the most important of these.

“The thing that is most important is that you’re thinking about the company goals,” Marcus Bragg of Zendesk, says. “Is it new logos? Is it customer expansion? Are you going for lots of customers, or a few big customers? Do you do trials on your website, where there’s going to be a lot of inbound leads?”

All of these questions will help hone the way your sales comp plan evolves. It’s also important to keep sales comp simple and easy to understand, so that means ideally no more than two to three (maximum four) elements driving the variable portion.

And since your business challenges will change over time, be prepared to change your plan to reflect the new priorities.

The journey may not be simple, but hopefully the end result will be. If your plan is aligned with your objectives and your sales team knows what they need to do to earn a great commission, you will be well positioned to attract the best reps, and drive great performance from them.


I want to thank Marcus Bragg and Jennifer Jagusch at Zendesk, David McNeil at HubSpot, and Justin Roberts at Lever. Through our board seats at these companies, we’ve had the chance to closely interact with these sales leaders and see the immense impact they’ve had on the growth of their respective companies. They are some of the SaaS industries’ best sales – and business – minds and we appreciate their contributions to this article.

More Discussion On Sales Comp

Two more important topics

Figuring out Quota and Commission Rates

When to Pay and Account for Commissions

Other data that may be of interest

  • Readers of this post may find the following survey questions of interest. They are covered in the latest Bridge Group report.
    • How are Territories assigned?
    • How many accounts are owned per rep?
    • What percentage of pipeline is sourced by marketing?
    • Are the groups front-ended by an SDR team?
    • How many leads does each rep receive?
    • Do you specialize into Hunters and Farmers?
    • What do you require as experience before you hire?
    • How long before a new rep becomes fully productive?
    • What is the average tenure of your reps?
    • What are base salary and OTE?
    • What percentage of reps are at Quota?
    • What are revenue quotas?
    • At 100% of Quota, what is the commission rate?
    • Metrics for daily activities such as calls, conversations, etc.


About the Author

David Skok

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  • Thank you, very good overview.
    The compensation question is complex, especially in the situation, when sales and support teams are different people.
    Thanks again.

  • Well, it doesn’t actually have to be this complicated. You could simply pay people their market value and then make performance non-optional!

    Piece-rate pay used to be common in production environments too, until division-of-labor and centralized scheduling rendered it redundant.

  • Hi Justin, this approach is so radically different to most sales comp plans that I believe it warrants further explanation as to how a flat pay rate would lead to the same motivation as a base plus variable. I believe you have thought about this deeply and have strong views on that topic. Would you care to share them here?
    Thanks, David

  • I have. And I would! Just let me stagger home from this wine bar.

  • Okay.

    So, your question encapsulates two interesting assumptions.

    1. That variable pay causes salespeople to be more motivated
    2. That salespeople’s motivation makes a material contribution to their productivity

    We could spend many hours exploring each of these innocent-looking assumptions. The time spent on the former would be more entertaining but it’s the time spent on the latter that would be more productive. So let’s focus there.

    If you do an analysis of a typical sales team’s performance you’ll likely determine that the variable that makes the biggest contribution to a salesperson’s productivity is actually their volume of sales activity.

    In other words, the number of ‘meaningful selling conversations’ they perform each day.

    Now, there’s an indirect link between motivation and activity, of course. But, if you’re really committed to driving up sales activity levels, then ‘motivation’ is not the obvious place to start.

    If you really want to move the needle, you’ll do three things.

    1. Move all customer service and account management activities elsewhere

    2. Move the responsibility for originating sales opportunities elsewhere (so salespeople no longer need to prospect)

    3. Ensure that salespeople spend close to 100% of their available time engaged in meaningful selling conversations. (That’s about 30 a day for inside salespeople.)

    Once you do these three things, you’ll notice something very interesting. The enormous variation that used to exist between different salespeople’s productivity has disappeared!

    When activity levels are normalized, the productivity of *competent* salespeople is more predictable and less variable (both individually and between salespeople).

    Now, if you’re committed to building an environment like this (featuring ‘extreme’ division of labor and centralized scheduling) piece-rate pay is impossible. It re-introduces the variability you’ve worked so hard to get rid of — and it renders supervisors impotent (which is kind of a shame because supervision also happens to be a powerful driver of sales productivity — probably, No 2, after activity levels).

    In summary, then, I’m not directly arguing for flat rate pay. I’m actually arguing for division of labor, centralized scheduling and proper management (you know, what salespeople call ‘micro-management’!).

    The elimination of piece-rate pay is not a primary. It’s simply an inevitable consequence of the modernization of the sales function. That’s where the real productivity gains are hiding.

  • BTW, if you’re still at Inbound tomorrow, David, I’m presenting in room W204 at 11:45am!

  • Thanks – Justin. Unfortunately I am tied up in meetings in the office. But I would have loved to hear the presentation, so if there’s a link to it afterwards, please send to me.

  • I’ll post the link here when it appears. BTW, I did answer your question last night (at length!). Not sure if you saw it below.

  • Hi Justin, delighted to see your reply. I am also a strong proponent of specialization to make sure that sales people don’t have to do prospecting (as they’ll always prioritize it lower than other more fun activities), and so that the right training, skills, metrics, etc. evolve for each of the different specialized areas. What is less clear to me is what you mean by the term “centralized scheduling”. Can you enlarge on that?
    Thanks, David

  • David

    In environments where we have field salespeople, then we pair each of those salespeople with a (dedicated) executive assistant (or Bus-Dev Coordinator, as we call them).

    The result is that field salespeople spend all their time in the field and that opportunities are owned and managed centrally. This multiplies the productivity of salespeople, of course, but it also enables management to be more actively involved in resource-allocation decisions (via those central BDC’s).

    In the case of an inside sales team, there are no BDC’s. But resource-allocation decisions are still very much centralized.

    Campaigns are planned by a campaign committee and a campaign coordinator is responsible for replenishing salespeople’s queues each day — maintaining those queues at a constant size.

    Salespeople DO get to choose how to allocate their time across their basket of open opportunities but they do NOT have control over the origination of opportunities. And the campaign coordinator must ‘choke’ the release of opportunities so that salespeople maintain a healthy hunger for new opps.

    The campaign committee is a little like Central Command in a battlefield situation. Via their choice of (and prioritization of) campaigns they get pretty granular control over how salespeople’s time is allocated.

    Also, we have a rule that EVERY opportunity that’s pushed to salespeople’s queues must be precipitated by a pre-approach email (sent in the name of the salesperson.) This also limits the salesperson’s degrees of freedom — meaning that management at least has control over how each conversation *starts*.

    Obviously, our goal is not to clip salespeople’s wings. Our goal is to enable a process of ongoing improvement.

    Our approach normalizes the volume of sales activity. Typically, all salespeople average 30 meaningful conversations a day. Almost all opportunities are originated by the campaign committee (via the campaign coordinator) and all opportunities have a very specific objective (and the first conversation always revolves around this objective).

    This means that the data feed consumed by the campaign committee is providing valuable information that that can be used to inform future decisions about campaign design and prioritization — and decisions about changes to the opportunity workflow and resourcing of the team.

    Some of these changes may sound subtle, but the end result is light years from what you typically see in sales environments.

    This also provides a much nicer environment for salespeople to work in. Rather than being lone rangers, they are members of a tightly integrated team. And management (via the campaign committee) is taking responsibility for offer formulation, which is key determinate of salespeople’s success (but something they lack a mandate to directly influence).

  • David, I think you missed my long reply to your last question!

  • Sid

    Nice post! In a contract SaaS licensing environment, how often have you seen companies set quota as a function of the expected future income beyond year 1. For example, does it make sense to have a quota number (in dollars), and retire quota at a different rate than the direct revenue? -> Quota is $200. Sell contract worth $50 in year one (Year 2 = $50, year 3 = $50). Give $125 in quota retirement.

    This seems needlessly complex to me. Asking for a friend. Thoughts?

    Also, let me know if I missed another post that covers this. Thanks!

  • Heidi Tsang

    In a SaaS model, a contract obtained earlier in the year generates more revenue to the company in the fiscal year than a contract, even at the same monthly subscription fee, obtained later on. Under an OTE scheme where OTE entitlement is calculated based on cumulative monthly fee achievement rate, allowing the reps to make up for shortfall on a dollar-to-dollar basis may result in reps getting 100% of their OTE while the company will have missed its revenue target. What is the industry best practice in order to better align the reps interest with the company’s? Would introducing a multiplier for the make-up amount makes sense?

  • Hi Heidi, I have never heard of this problem before, as most of the companies I work with don’t care about the boundary of the fiscal year. They are more interested in building the long term business and a customer that joins is the same value to them whether they signed in January or December, and they pay their reps accordingly. Sorry I can’t be of more help here.

  • Thank you for such a detailed post! All points were very important and timely for us.

    I’d like to contribute by sharing this link that we’ve been using to get sample sales commission agreements (very helpful for us).

    It says “buy” on the URL, but we found that the sample agreements on the website are actually free. We were able to use the free templates and were able to modify based on our requirements. Do check it out if you’re starting out and are in need of sample agreements. HTH. 🙂

  • Dmitry Isakov

    Median commission rates by type of sale:
    I see the % but don`t understand from what do you calculate this percent?
    MRR? ARR? Is there a difference on the first and next months?
    Can you please give an example of calculations.
    Say I just closed a deal with $1000 MRR, paid monthly. How to apply this 8 or 9% commission?

  • Hi Dmitri, good question. The blog post should have been more clear on this. The standard practice is to have annual contracts with customers, and to pay based on the Annual Contract Value (or ACV).

    Some companies are good at signing longer term contracts (e.g. 2 year and 3 year), and typically a lesser commission is paid on future years, as all you have done by signing a longer contract is to lower the risk of churn at the end of the first year. Then there is another factor to consider: does the customer pay all the future years up front, or only one year at a time. If they were to pay it all up front, and you valued that cash, you might pay a slightly increased amount for a multi-year, paid upfront deal (but still not as much as the commission on the first year’s contract value.
    There are also some companies that don’t sign annual contracts, and in those situations, the commission is still usually paid on the full 12 month value of that customer, and a mechanism put in place to claw back that commission in the event that the customer churns before 12 months are up.
    I hope that helps.
    Best, David

  • Interesting question, @heidi_tsang:disqus .

    The answer, @dskok:disqus’s answer indicates as well, is to not work with an OTE based on the chunk of the ACV, which falls within the company’s fiscal year. Make sense?

  • Sorry for chiming in this late in the game @justinroffmarsh:disqus .

    Just want to see if it’s possible to capture your points about division of labour, central scheduling and how it ties into compensation in a single (short) post.

    If I understand it right, you’re saying that a transformation of sales compensation to flat rate is inevitable if you introduce division of labour and central scheduling.

    Is that a correct understanding?

    You wrote that about a year ago – has your thinking changed or evolved on this topic?

  • Jakob

    If you’re interested in those points, you should probably read my book. I won’t promote it here but I’m sure you’ll find it without too much trouble.

    The basic argument is that a principled approach to division-of-labor and piece-rate pay are antagonistic.

    In this area, my thinking has not evolved much because it’s such a fundamental (and obvious) point. Try convincing a manufacture to re-introduce piece-rate pay on the shop floor and they’ll walk you off the premises in a straight jacket!

    The more important question is not “should we have piece-rate pay?” but “does it make sense to apply division-of-labor (in a principled way) to sales environments?”.


  • Thanks Justin – I’ll have a look at your book. Followed on issuu as well.

    Is the answer to my question in the book?

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