TLDR

Sales compensation is the most powerful tool for driving sales behavior. A well-designed plan aligns salesperson incentives with company goals. Key principles: keep it simple, pay for outcomes not activities, set quotas that are achievable but stretch.

The OTE Framework

OTE (On-Target Earnings) = Base salary + Variable compensation (commission)

Typical base/variable split:

  • SDR (outbound prospecting): 70/30 or 60/40
  • AE (account executive, closing): 50/50
  • Account Manager (expansion): 60/40 or 70/30

Quota Setting

The 70% rule: ~70% of the sales team should achieve quota. < 50% = quotas too high. > 85% = quotas too low.

Quota-to-OTE ratio: Annual quota should be 4–6x OTE for SaaS AEs. $150K OTE → $600K–$900K annual quota.

Ramp periods: 50% quota months 1–3, 75% months 4–6, 100% from month 7.

Accelerators and Decelerators

Accelerators (higher commission above quota):

  • 0–50% of quota: 50% of standard rate
  • 50–100%: 100% of standard rate
  • 100–150%: 150% of standard rate
  • 150%+: 200% of standard rate

What to Pay On

New ARR: Primary metric for AEs. First-year value of new contracts

Expansion ARR: Pay account managers on net expansion

Gross margin: Consider paying on gross margin to discourage excessive discounting

Avoid paying on: Activities, pipeline created, metrics the salesperson cannot control

Common Compensation Mistakes

  1. Too complex. If a rep can't calculate their commission in their head, it's too complex
  2. Paying on the wrong metric. Revenue without gross margin encourages discounting
  3. No accelerators. Top performers have no incentive to exceed quota
  4. Changing plans mid-year. Destroys trust and disrupts behavior

Key Takeaways

Key Takeaways
  • OTE = Base + Variable. Typical AE split is 50/50.
  • 70% of the team should hit quota.
  • Annual quota should be 4–6x OTE for SaaS AEs.
  • Accelerators above 100% quota incentivize overachievement.
  • Keep plans simple. If a rep can't calculate their commission, the plan is too complex.