How to set commission plans for SaaS Account Executives

Cracking the Code: Commision plans that Drive Growth

Building a high-performing sales team is arguably the most critical lever for growth in any SaaS organization. But as any seasoned sales leader knows, the engine of that team—the compensation plan—is notoriously difficult to design.

Get it right, and you attract top talent, motivate the right behaviors, and watch your Annual Recurring Revenue (ARR) climb. Get it wrong, and you face high turnover, missed targets, and stagnant growth.

The challenge is balancing motivation with unit economics. Where should the base salary start? What’s a fair commission rate? Should you set "stretch" quotas that only a few can achieve, or realistic ones that most can hit?

In the SaaS world, it’s easy to get bogged down in complexities: differing contract lengths, the distinction between new bookings and renewals, and how to handle customer churn. While these nuances matter, they are secondary to the foundational structure of the plan. The most critical element to master is the relationship between Quota and OTE (On-Target Earnings), and how this ratio dictates the success of your entire sales organization.

The Foundations: Understanding the "Rules of Thumb"

Before drafting a compensation plan, it’s essential to understand the industry standards. These benchmarks have been used so frequently by hiring managers and VCs that they are now considered the foundational "rules of thumb."

1. The 50/50 Split: Balancing Risk and Reward

The 50/50 split is the cornerstone of most enterprise SaaS compensation plans. It refers to a salesperson’s OTE (On-Target Earnings—the total amount they earn if they hit exactly 100% of their quota) being comprised of two equal parts:

• Base Salary (50%): This provides stability and covers the salesperson's living expenses.
• Variable Commission (50%): This provides the incentive to close deals and drives performance.

This balance is crucial. If the base salary is too high (e.g., an 80/20 split), salespeople may become complacent. If the base is too low (e.g., a 20/80 split), you create excessive risk for the employee, which can lead to burnout and high turnover.

2. The 5x Rule: The Golden Ratio of Quota-to-OTE

The 5x rule defines the relationship between the total yearly quota an Account Executive (AE) carries and their OTE.

Quota / OTE = Quota-to-OTE Ratio

Ideally, this ratio should fall between 4x and 6x, hence the "5x" name.

This rule isn't arbitrary; it reflects the unit economics of a healthy SaaS business. A 5x ratio means that the company is generating five dollars in revenue for every dollar it pays the salesperson (assuming they hit quota). This return sufficiently covers the cost of the sale, the cost of the product/service delivery (COGS), and contributes to the overall operating expenses of the company.

A higher multiple (e.g., 8x) results in a lower commission rate and makes it difficult to attract talent. A lower multiple (e.g., 3x) is highly motivating but can strain the company's financial model.

3. The 10% Standard Commission Rate

When you adhere to both the 50/50 split and the 5x Quota-to-OTE ratio, the resulting commission rate mathematically defaults to 10%.

If an AE has a $200,000 OTE ($100k base / $100k variable) and a $1,000,000 quota (5x ratio), they must earn $100,000 in commission on $1,000,000 in sales—exactly 10%.

While not all plans will split this cleanly, these rules are widely accepted and form the baseline for any effective strategy.

The Quota Conundrum: Does Difficulty Drive Performance?

Once the structure is in place, the next critical decision is setting the actual quota number. This is where strategy and psychology collide.

It's a common management philosophy to set aggressive "stretch" goals, believing that a higher target will inherently drive higher performance. The theory is that even if salespeople fall short, they will land higher than they would have with a more easily attainable target.

However, industry data suggests this approach is flawed.

According to reports analyzing data across the software sales industry, the correlation between the quota level and the percentage of quota achieved is surprisingly weak. When surveyed, AEs from varying segments (e.g., Low Quota: <$750k; Medium Quota: $750k-$1.25M; High Quota: >$1.25M) performed within a relatively narrow band of each other regarding the percentage of quota achieved.

Meaning: The absolute dollar amount of the quota has little predictable impact on the likelihood of an AE hitting that quota.

Setting quotas too high often backfires, leading to demoralization and burnout. The consensus among top sales leaders is shifting towards setting attainable quotas—where at least 60-70% of the sales team can realistically achieve 100% attainment.

The Real Driver of Performance: The Quota-to-OTE Ratio

If the quota level doesn't significantly impact performance, what does? The data points overwhelmingly to the Quota-to-OTE ratio. This is the single most indicative factor correlated with sales success.

When analyzing quota attainment, studies show a clear trend:

• AEs with a <4x Quota-to-OTE ratio achieve the highest percentage of their quota (often near 100% attainment on average).
• AEs with a 4x-6x ratio (the standard range) show solid, but lower, attainment (often around 87.6%).
• AEs with a >6x ratio show significantly lower attainment (often dropping to 73.7%).

Meaning: AEs with lower Quota-to-OTE ratios consistently outperform AEs with higher ratios.

The Psychology of the Ratio

Why does this happen? It comes down to motivation and perceived value. A lower Quota-to-OTE ratio results in a higher commission rate.

Consider two AEs, both with a $200,000 OTE (50/50 split):

• AE Alex (The 6x Plan):
  • OTE: $200k ($100k variable)
  • Quota: $1,200,000 (6x ratio)
  • Commission Rate: 8.3% ($100k / $1.2M)
• AE Blair (The 4x Plan):
  • OTE: $200k ($100k variable)
  • Quota: $800,000 (4x ratio)
  • Commission Rate: 12.5% ($100k / $800k)

When a $50,000 deal comes across their desks, Alex earns $4,150, while Blair earns $6,250. Blair is earning 50% more commission on the same deal.

This difference significantly impacts performance for several reasons:

1. Increased Motivation: When the commission rate is higher, every deal has a more significant impact on the AE's paycheck. This increases the incentive to prospect harder, negotiate smarter, and close faster.
2. Talent Attraction and Retention: Top performers know their worth. A "richer" plan (lower ratio) is highly attractive in a competitive job market and keeps A-players from looking elsewhere.
3. Perceived Fairness: A lower ratio signals that the company values its sales team and has set realistic expectations for the market. Ratios above 6x can feel exploitative, damaging morale.

Beyond the Ratios: Fine-Tuning Your Plan

While the Quota-to-OTE ratio forms the foundation, a sophisticated compensation plan requires additional components to drive specific behaviors and ensure success.

1. Accelerators (Kickers)

Accelerators are increased commission rates that kick in once an AE surpasses 100% of quota. This motivates top performers to continue selling rather than "sandbagging" deals for the next period. For example, an AE might earn 10% up to quota, and 15% on every deal thereafter. This is where top salespeople make significant earnings, and it’s a key feature of a competitive plan.

2. Ramping Periods

New hires cannot be expected to hit a full quota on day one. A "ramping" period—usually spanning 3 to 9 months depending on the sales cycle length—is necessary. During this time, the rep carries a reduced quota, often supplemented by recoverable or non-recoverable draws while they learn the product and build their pipeline.

3. Multi-Year Contract Incentives

SaaS companies prefer multi-year contracts as they reduce churn risk and increase the lifetime value (LTV) of the customer. Your compensation plan should incentivize this. A common approach is to offer a bonus accelerator for multi-year deals (e.g., an extra 2% commission on the total contract value).

4. Handling Clawbacks

Clawbacks occur when a company takes back commission already paid if a customer churns within a specific timeframe (e.g., the first year). While this may seem logical from a finance perspective, it is highly demotivating for salespeople, who often have little control over the implementation or adoption issues that lead to early churn. It is generally better practice to handle adoption through Customer Success incentives rather than penalizing the AE.

In Summary: Compensation as a Strategic Lever

Designing your SaaS compensation plan is not merely a financial exercise; it's a strategic imperative. As you decide on the plan that best fits your company's stage, market, and sales team:

1. Start with the Fundamentals: Use the 50/50 split for OTE and aim for the 5x Quota-to-OTE ratio as your baseline.
2. Set Realistic Quotas: Aim for a structure where 60-70% of your team can achieve their goals.
3. Prioritize the Ratio: Recognize that the Quota-to-OTE ratio is the most significant driver of performance. If your financial model allows, skewing closer to 4x will yield better results than pushing toward 6x or higher.

The data is clear: higher commissions drive higher performance. By investing in a competitive compensation structure, you aren't just rewarding your sales team—you are fueling the growth of your entire organization.

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