TL;DR

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.