Sales Commission Calculation Methods

In recent weeks, I’ve had a surge of inquiries about structuring commission and OTE (On-Target Earnings) for Sales Executives and BDMs. It’s a crucial topic—get it right, and you’ll attract and retain top talent. Get it wrong, and you risk demotivated sales teams and missed targets. So, how should you approach it? 1. Start with the Total Earning Potential (OTE) OTE is a combination of base salary and commission. A competitive OTE should align with industry standards and reward high performers. The typical ratio varies: ✅ 50/50 Split – Common in enterprise/B2B sales. ✅ 60/40 or 70/30 – More common for transactional sales, where a higher base ensures stability. 2. Define Clear, Attainable Targets A common mistake is setting unrealistic sales targets, leading to disengagement. The best practice? 🎯 Set a realistic baseline target that at least 60-70% of your team can hit. 🎯 Provide accelerators for over-performance (e.g., higher commission rates after 120% of quota). 3. Choose the Right Commission Model Different structures work for different sales cycles: 💰 Fixed % on Revenue – Simple and effective for high-margin products. 📈 Tiered Commission – Motivates overachievement (e.g., 5% up to target, 10% beyond). 🏆 Profit-Based – Ideal when margins vary widely. 4. Avoid These Common Pitfalls ❌ Capping Commission – Nothing kills motivation faster! ❌ Complex Structures – If your team can’t calculate their earnings easily, it’s too complicated. ❌ Changing the Plan Mid-Year – This damages trust and retention. 5. Regularly Review and Benchmark Against the Market The sales landscape is constantly evolving. Reviewing your commission plan against market trends and competitor packages ensures you remain competitive. 💡 Looking to structure an effective commission plan for your sales team? Let’s talk—I’ve helped many companies find the right balance to drive performance while attracting top talent. What’s working for your team? Drop a comment below! 👇

😬 One of the things that sales leaders definitely struggle with is setting up the comp plan for their BDRs. A lot of people get it wrong. And getting it wrong will most likely mess up your system of incentives and get your BDRs to underperform. I spent some time writing out ours deeply thinking about what I wanted to optimize for, and validated it with 5 sales leaders. We created a nice system that incentivizes our BDRs to get as many qualified pipeline as possible. And it works so far! 🚀 But also, they're incentivized on the medium term (leads that close with great ACVs), and the longer term (through equity). So this is how we pay Jake and Rory: Base -> straightforward. It's a function of seniority and location. Commission: this is the interesting part. Each company with less than $20k ACV counts as 1 lead Each company with a $20k-$30k ACV counts as 2 leads Each company with a $30k-$40k ACV counts as 3 leads Each company with a $40k-$50k ACV counts as 4 leads Each company with a $50k+ ACV counts as 5 leads Commission per lead: $50 per lead generated. $120 per lead that progresses to a demo. If over 110% quota achieved, qualified leads are paid $150 instead of $120. Additional commission: 2% of the total deal value once the deal is closed. If over 110% quota is achieved, commission on deals is 4% instead of 2%. Performance requirements: 50% of generated leads must be qualified (progress to demo). Ramp: they need to get a minimum of 40 leads by month 4. And we actually expect them to outperform that quota by 150%. Equity: they receive stock options. If they outperform their quota 3 months in a row by 200%, they get a one-time boost of an extra 33%+ of their stock options. It could sound aggressive, with high rewards behind these targets, but so far it's working. Am I missing anything? Would love to get your thoughts!

There were years at Botify where ~50% of our new bookings came from upsell revenue. Going into specific years, we saw that we had this potential but in order to maximize, we had to ensure we had the right comp plans.   Here’s the different methods we explored: 𝟭) 𝗡𝗥𝗥: Have a quarterly bonus be based on a NRR target. I usually set a table with different attainment levels based on the performance level. Pros: ◾ It blends upsell and renewal revenue into one target making it simple to follow. ◾ It also guides the team to a core business metric. And at the end of the day, if these targets are hit, you are seeing nice growth from your client base. Downside: ◾ Can vary a lot from one rep to the next depending their client base. ◾ You might have some reps lean heavily in one area which (some reps may crush renewals but not generate any upsell rev which could hurt new bookings but still hit OTE). This plan will probably give you the most balance. 𝟮) 𝗨𝗽𝘀𝗲𝗹𝗹 𝗤𝘂𝗼𝘁𝗮/𝗥𝗲𝗻𝗲𝘄𝗮𝗹 𝗚𝗼𝗮𝗹: You give the rep a quota/commission rate plan and then a renewal rate goal by quarter and a corresponding table based on attainment to that goal. Pros: ◾ Allows you to dial in on both a new bookings goal and renewal goals. ◾ You can shift the % of OTE on the variable comp side based on what is more important to the business (renewals vs upsells). Downside: ◾ TAM can be finite for upsell attainment. ◾ One person’s book may be easier to hit than another for each of these goals. This is the structure I have used the most. 𝟯) 𝗦𝘁𝗿𝗮𝗶𝗴𝗵𝘁 𝗖𝗼𝗺𝗺𝗶𝘀𝘀𝗶𝗼𝗻: In this model, you pay a commission rate on both upsells and renewals (think .5 - 1%). Pro: ◾ Very easy to calculate for reps and finance. Downside: ◾ A rep could secure a big renewal, get paid a healthy amount but still be way off the renewal target ◾ At risk renewals could be ignored This plan is more advantageous for a rep but I have seen it make sense for the business. All in all, you may change comp models over time as the needs of the business change. The most important thing you want to do when you are fleshing these models out is to make sure they are attainable but also work with finance to make sure they make sense for the business.

Recently, someone asked me about how companies with usage-based models calculate sales commissions. Drawing from my own experience and insights from our advisors, sharing a more standardized explanation here. Unlike traditional subscription models, where the Annual Recurring Revenue (ARR) is fixed and clear at the time of contract signing, usage-based companies face the challenge of not knowing in advance how much they will earn from a customer. This uncertainty requires a flexible approach to calculating sales commissions. 1. Based on Realised ARR a. Based on every quarter: This method evaluates commissions quarterly in the first year, based on the realized ARR over the past three months. End of Q1: Commission is calculated based on the ARR realized at the end of the first three months. For example, if the ARR is $100K, the commission is $100K multiplied by the base commission rate (BCR). End of Q2: The commission for the second quarter is calculated on the incremental ARR since the end of the first quarter. If the ARR at six months is $250K, the commission is based on the additional $150K ($250K - $100K) using the BCR. End of Q3: The commission for the third quarter is calculated based on the increase in ARR since the end of Q2. For an ARR of $300K at nine months, the commission is on the additional $50K ($300K - $250K) using the BCR. End of Q4: The final calculation at the year’s end adjusts for any further increase in ARR. With an ARR of $400K at twelve months, the commission is on the incremental $100K ($400K - $300K) at the set BCR. If a quarterly decrease in ARR exceeds $25K, the annualized amount of the decrease is subtracted from the quota achievement. b. Three-month average: The companies will wait three months to establish an average, then annualize this figure (multiplied by four). c. One-month snapshot: This method is based on the ARR recognized in the latest month and annualizing it (multiplied by twelve). 2. Based on Contracted ARR Another approach companies take is to calculate commissions based on a contracted ARR agreed upon at the time of signing with the client. I would love to know if there are other methods that you deploy. Rakib Azad David Woolliscroft #usagebased #salescommission #B2BSaaS

𝗦𝗮𝗮𝗦 𝗦𝗮𝗹𝗲𝘀 𝗖𝗼𝗺𝗺𝗶𝘀𝘀𝗶𝗼𝗻𝘀: 𝗪𝗵𝗮𝘁 𝗰𝗼𝗺𝗽 𝗽𝗹𝗮𝗻 𝗔𝗰𝘁𝘂𝗮𝗹𝗹𝘆 𝗪𝗼𝗿𝗸𝘀 Most SaaS teams screw up comp plans because they pay on the wrong thing at the wrong time. Here’s what research tells us: 1️⃣ 𝗠𝗼𝘁𝗶𝘃𝗮𝘁𝗶𝗼𝗻 𝗱𝗲𝗰𝗮𝘆𝘀 𝗳𝗮𝘀𝘁 Pay reps >90 days after close → motivation drops ~40% Short cycles (<3 months) need fast, simple payouts 2️⃣ 𝗗𝗲𝗮𝗹 𝘀𝗶𝘇𝗲 & 𝗰𝘆𝗰𝗹𝗲 𝗺𝗮𝘁𝘁𝗲𝗿 Complex plans only make sense if deals >$25K or cycles >6 months Small deals = flat MRR/ARR, speed > complexity 3️⃣ 𝗖𝗵𝘂𝗿𝗻 𝗱𝗿𝗶𝘃𝗲𝘀 𝗽𝗮𝘆𝗺𝗲𝗻𝘁 𝘀𝘁𝗿𝗮𝘁𝗲𝗴𝘆 Low churn (<5%) → bookings-based is fine Medium churn (5–15%) → split bookings & collections High churn (>15%) → collections-heavy protects cashflow 4️⃣ 𝗕𝗶𝗴, 𝗹𝗼𝗻𝗴 𝗱𝗲𝗮𝗹𝘀 𝗻𝗲𝗲𝗱 “𝗯𝗿𝗶𝗱𝗴𝗲𝘀” Deals >$100K, 12+ month cycles → milestone payouts or draws Prevents 30–50% rep turnover 𝗕𝗼𝘁𝘁𝗼𝗺 𝗹𝗶𝗻𝗲: Pay timing = your biggest business risk. Churn? Collections. Slow sales? Bookings. Bad-fit customers? ARR with clawbacks. Cashflow? Collections-heavy. The best teams don’t “set it and forget it.” They tweak comp plans every year based on performance data. If your reps are underperforming or your churn is creeping up, your comp plan is probably the problem. Fix it. #SalesOperations #SalesCompensation #RevOps #SalesLeadership #Finance #SalesCommission #SaaS

Here's a technique to model sales commissions and related accruals, ensuring that FP&A and accounting are on the same page. At the top, you see monthly and cumulative sales by employee. At the bottom, you see commissions by tier and commissions in dollars. (1) Phase-in of commissions Because commission rates don't automatically start in January, nor do they get earned all at once, each person's earnings can take place at different time intervals. While employee 5 begins earning her commissions in May, employee 7 doesn't earn his commissions until September. All of this is formulaic, tying sales back to the ERP and commissions to a supporting schedule. But there's more to this calculation. (2) Activation of the accrual Recognize that this model can be backward-looking or forward-looking. In other words, commissions can be calculated on year-to-date. Or they can be calculated on each salesperson's forecast. The accounting team responsible for accruing commissions on the balance sheet can use the year-to-date figures. The FP&A analyst can plan based on the forecast. Why do I use XMATCH? I favor XMATCH over MATCH because the former allows a lookup of values in any direction. The latter only goes from left to right or top to bottom. XMATCH is here to identify where each employee's commission gets triggered by sales in excess of $250,000. It doesn't matter whether an employee starts selling at the beginning of the year or mid-year. His sale performance determines his commission tier. -------------------- For people moving from accounting to FP&A, a common place for analysis is in headcount planning. That may mean analyzing hiring, salaries, bonuses, commissions, and/or benefits. Build a recurring process and you'll be able to update these schedules whether you have 8 employees or 800. You can see more of this technique in Advanced Excel for Financial Planning & Analysis on LinkedIn Learning: https://lnkd.in/ecb__uea

📊 How Much Should You Pay Your Sales Reps? A Data-Driven Approach Pay too little, and you’ll struggle to attract and retain top talent. Pay too much, and your CAC skyrocket, eating into profitability. So, how do you strike the perfect balance between competitive pay and sustainable growth? By using a structured, data-driven approach that aligns sales comp with your company’s financial goals, market benchmarks, and long-term strategy. 𝐒𝐭𝐞𝐩 1️⃣ : 𝐒𝐭𝐚𝐫𝐭 𝐰𝐢𝐭𝐡 𝐂𝐮𝐬𝐭𝐨𝐦𝐞𝐫 𝐀𝐜𝐪𝐮𝐢𝐬𝐢𝐭𝐢𝐨𝐧 𝐂𝐨𝐬𝐭 (𝐂𝐀𝐂) One of the most reliable ways to determine a sustainable budget for sales compensation is by leveraging CAC. Why? ✅ It directly ties sales pay to business profitability. ✅ It ensures sales efficiency by controlling cost per deal. ✅ It provides a scalable compensation model as the company grows. Let’s say your company has the following targets & org: - 10 AEs - Other S&M budget = $3M - Average contract value = $25k - AE Quota = $750k (30 new clients/AE/year) - Goal is to have CAC < $18k 𝐒𝐭𝐞𝐩 2️⃣ : 𝐓𝐢𝐞 𝐀𝐄 𝐎𝐧-𝐓𝐚𝐫𝐠𝐞𝐭 𝐄𝐚𝐫𝐧𝐢𝐧𝐠𝐬 𝐰𝐢𝐭𝐡 𝐐𝐮𝐨𝐭𝐚𝐬 & 𝐂𝐀𝐂 In such case, to respect your CAC goal, you might go up to: CAC = [3M+10*(AE_OTE)*1.3]/300 With CAC = $18k … this leads to AE_OTE = 185k In such scenario, paying your AEs 185k on-target-earnings (base + variable) would allow you to respect your CAC goal. So, as shown on the slide below, offering your AEs a 150k OTE should be CFO approved. 𝐒𝐭𝐞𝐩 3️⃣ : 𝐀𝐝𝐣𝐮𝐬𝐭 𝐂𝐨𝐦𝐩𝐞𝐧𝐬𝐚𝐭𝐢𝐨𝐧 𝐭𝐨 𝐒𝐭𝐚𝐲 𝐂𝐨𝐦𝐩𝐞𝐭𝐢𝐭𝐢𝐯𝐞 Even after using CAC-based calculations, you’ll need to benchmark against market salaries and adjust accordingly. If your pay is lower than market rates, consider: ✅ Increasing salaries or commissions to retain top talent. ✅ Investing more in marketing to increase lead flow and justify lower commissions. ✅ Keeping the structure as is if the current CAC is sustainable. If your pay is higher than expected, you can: ✅ Reduce marketing spend and rely more on outbound efforts. ✅ Improve sales efficiency by refining lead qualification and sales processes. ✅ Reassess customer acquisition costs to ensure long-term profitability. 𝐒𝐭𝐞𝐩 4️⃣ : 𝐎𝐩𝐭𝐢𝐦𝐢𝐳𝐞 𝐕𝐚𝐫𝐢𝐚𝐛𝐥𝐞 𝐏𝐚𝐲 & 𝐂𝐨𝐦𝐦𝐢𝐬𝐬𝐢𝐨𝐧 𝐓𝐫𝐚𝐧𝐬𝐩𝐚𝐫𝐞𝐧𝐜𝐲 Salary alone doesn’t drive performance, variable commissions do. But lack of transparency is a major problem: 📉 Only 40% of sales reps fully understand their commission structure. 📈 62% of reps using commission tracking tools exceed their targets, compared to just 30% using Excel or Google Sheets. Solution: Use commission management software (like Qobra) to provide: ✅ Real-time earnings visibility for sales reps. ✅ Automated commission calculations tied to actual performance. ✅ Reduced disputes and increased trust in the compensation process. How does your company approach sales compensation? Are you using CAC-based calculations, or do you rely on market benchmarks? Share your insights!