An Account Executive compensation plan that pays different sales commission rates based on the length of the contract and quota attainment.
Use this compensation plan to incentivize your team to sell longer contract terms by paying a higher commission rate on multi-year deals. Then, add in accelerators to encourage reps to sell above quota. Note: Under this plan, reps still typically have one quota and all deals count toward that one quota regardless of the contract term. This is a fairly complex sales compensation plan example, but one that many companies adopt because extended contract terms are an integral part of their go-to-market strategy.
A Quota to OTE Ratio of 4 - 8 is best.
This path is for deals when the customer agrees to a 1-year term. The commission rates are the lowest of the three paths. However, it is still possible to achieve OTE closing exclusively 1-year deals. There is also an accelerator on this plan, so if a rep overachieves, they can earn even more.
This path is for deals that are 2-year-long contracts. The commission rates for these deals are higher than single-year deals. Remember, the commission rate is based on ARR, so reps aren’t double-dipping on the commission. These deals also count toward the same quota as 1- and 3-year deals.
With this commission path, the highest commission rates pay out on the longest deal terms. If a rep closes a deal that is 3 years (or more!) then they get paid out at a rate that is higher than any of the other deals.
We’re early stage and trying to get customer acquisition cost (CAC) under one year. Until we can get our top of funnel more efficient and CAC in line, these multi-years are what make the unit economics healthy.
1-2 year deals:
1-2 year deals:
3-4 year deals:
As with most compensation plans, the two major components that will vary across sales teams are:
To determine a quota for your sales team, you must first set the quota period or length. This dictates how frequently the quota resets for your reps.
We’ve found that about half of companies follow quarterly quotas, while the others split between annual and monthly quotas. We also occasionally see other quotas, such as weekly and semi-annual, but the quarterly frequency is most common.
Upon setting your quota periods, you’ll next need to define your quota amount. This will play an integral role in creating your on-target earnings (OTE). To help, we created the Quota:OTE Ratio calculator.
Once you have the quota determined, you will need to define your commission rates.
Finding the ‘base rate’ is relatively easy: divide a rep’s on-target variable pay by their annualized quota. However, you’ll need to determine a few ‘multipliers’ on that base rate.
For quota attainment accelerators, you’ll want anywhere from 1.1x to 2x the base rate. For multi-year contract accelerators, you’ll want anywhere from 1.25x to 3x depending on how much you want to incentivize longer contracts.
Be careful when you add these two multipliers together though, as they can cause very high commission rates if you’re not careful!
A multi-year contract involves a signed commitment from a customer to purchase services from a vendor for a period that extends beyond the first 12 months in which the contract is signed upon.
Longer deals are generally preferable because they create a reliable and guaranteed source of revenue for more than one year. A customer that has agreed to work with you for three years gives you the time needed to properly create a longstanding relationship. Typically longer contract terms also come with a discount for the client, so you’ll need to pay a higher rate to prevent salespeople from earning less when selling a more desirable deal.
Accelerators, which we sometimes refer to as multiple rate commissions, bump the commission rate to a higher rate once a rep has reached a quota attainment parameter, deal size, or total amount of sales in a month or quarter.
Accelerators (and decelerators) are designed to encourage overachievement of quota and motivate sales reps. Not only are they one of the most common compensation plan components (80% of comp plans use accelerators), but they’re very well understood by sales reps. If you’re hoping to see a lot of reps overachieve, it’s recommended to include accelerators.
This is definitely a more complex sales commission structure. If you’re worried about this compensation plan being overly complicated, you could try one of our other plans like Account Executive: Commission with Accelerators or Single Rate Commission with Contract Term Multiplier.
If you sell more than one product and want to have the same commission rate across products, this sales compensation plan model would still work just fine for you. If you want to pay different commission rates for different products or have different quotas for each product, this plan might not be best. It’s already a fairly complex plan, so adding in another layer with different product rates might make it too complicated for your reps to understand fully.
It generally doesn’t make sense to give different quotas for each different contract length. This is because that would add in extra complexity for no additional gain. By paying your reps based on their quota attainment and the contract length, you are signaling that you want them to close longer deals.
Contracts that aren’t exactly 1, 2, or 3 years long should be rounded down. So if you have an 18 month contract, that would be paid out at the one year rate. If you have a 2.5 year long contract, that would be paid on the 2-year commission rate.
You want to make sure to pay off of ARR (Annual Recurring Revenue), ACV (Annual Contract Value), or MRR (Monthly Recurring Revenue) to ensure you aren’t double compensating your reps for closing longer deals. If you paid them off of TCV (Total Contract Value), they’ll earn a higher commission rate and at a higher amount, which essentially double dips.
With QuotaPath, give your reps, leadership and finance real-time earnings and attainment data for accurate and trusted commission reporting. Our commission tracking and sales compensation software. Plus, use our forecasted earnings function so that reps can see how the next deal impacts their path to the next accelerator tier.
An Account Executive sales compensation plan that pays a higher commission rate on deals that exceed 1 year.
An Account Executive compensation plan that pays the same commission rate on all deals closed, regardless of quota attainment.