SaaS OTE Design and Quota Planning: Minimum Viable Comp Plan for Founders

The Minimum Viable Comp Plan: Core Components

Moving from founder-led sales to hiring your first Account Executive (AE) is a critical growth milestone and a significant financial commitment. Structuring your first sales rep compensation plan can feel complex, with direct consequences for your cash runway and ability to attract top talent. Founders often struggle to balance a competitive package with the need to manage cash flow, especially when sales cycles and rep productivity are unproven. Getting this wrong can mean overspending on commissions for deals that churn or creating targets so unrealistic they demotivate the very person hired to drive growth.

This guide provides a practical framework for how to structure SaaS sales compensation, focusing on the core mechanics you can implement with tools you already use, like Google Sheets. The goal is to build a “Minimum Viable Comp Plan”: simple, clear, and effective for your current stage. For a broader overview of key performance indicators, see the SaaS metrics hub for ARR, churn, CAC and related metrics.

Your plan does not need to be perfect, but it must be understandable. It is built on three core elements: On-Target Earnings (OTE), Base Salary, and Variable Commission.

• On-Target Earnings (OTE) is the total potential annual income a salesperson can earn if they hit 100% of their target.
• Base Salary is the fixed, guaranteed portion of their compensation, providing financial stability.
• Variable Commission is the performance-based component, designed to incentivize sales and align rep success with company revenue goals.

For early-stage companies, a 50% base / 50% variable split is a common starting point for early-stage SaaS OTE. This structure provides the rep with a reliable income while heavily incentivizing performance, making their success directly proportional to the company’s growth.

Part 1: How to Structure SaaS Sales Compensation by Setting the OTE

One of the first questions founders ask is, "How much should I budget for a salesperson?" This is not about guesswork. On-Target Earnings are market-driven, reflecting the talent, experience, and skills required for the role. Setting an OTE that is too low will fail to attract qualified candidates, while setting it too high can strain your runway before the sales engine is proven. The key is to anchor your number in relevant industry data.

Anchoring OTE in Market Data

To determine a competitive OTE, start with external benchmarks. For example, a 2023 GTM Partners report found that the average OTE for a SaaS AE at a sub-$10M ARR company ranges from $120k to $180k. Where your company lands within this range depends on several factors specific to your business and market.

Key Factors Influencing OTE

Consider the following variables when defining the OTE for your first AE:

• Product Complexity and ACV: An AE selling a high-ACV product with a six-month sales cycle to enterprise clients will command a higher OTE than one selling a simpler, transactional product to small businesses. The more complex the sale, the more experienced and skilled the salesperson needs to be.
• Geographic Location: Compensation varies significantly by region. An AE based in a major tech hub like San Francisco or London will have a higher market-rate OTE than one in a lower cost-of-living area in the US or UK.
• Required Experience Level: The ideal candidate profile dictates the price. Do you need a seasoned enterprise seller with a decade of experience, or a rising star with two to three years of SMB SaaS sales experience? Define your requirements before setting the OTE.

A Practical Example of OTE Calculation

Once you weigh these factors, you can set your target OTE. If you decide on a $150,000 OTE, applying the 50/50 split means a $75,000 base salary and $75,000 in potential variable commission. This number becomes the foundation for all subsequent calculations, including setting sales targets and forecasting expenses. It is a critical financial lever for your growth model.

Part 2: Setting Achievable SaaS Sales Targets with the Quota-to-OTE Ratio

Once you have the OTE, the next question is how much revenue a rep must generate to justify their compensation. This is determined by the Quota-to-OTE ratio, a metric that directly links SaaS sales targets to pay.

Choosing the Right Ratio for Your Stage

While the industry benchmark for Quota-to-OTE ratio is often cited as 5x-6x, this is typically for established companies with a refined sales playbook, strong brand recognition, and a consistent flow of marketing qualified leads. The reality for most early-stage startups is more pragmatic. For a first sales hire navigating an unproven process, a recommended starting Quota-to-OTE ratio is 3x to 4x.

Using our $150,000 OTE example with a 4x ratio, the annual quota would be $600,000 in Net New ARR ($150,000 OTE x 4). This target provides a clear goal, but it must also account for the initial learning period.

Incorporating a Structured Ramp Time

You cannot expect a new hire to be fully productive from day one. New sales reps typically require a 3-6 month ramp time to reach full productivity. A fair and effective variable pay plan in SaaS builds this learning curve into their initial targets. This protects the company from paying for unearned performance and prevents the new hire from feeling demotivated or burning out.

A standard ramp model applies a tiered percentage of the full quota over the first several months. For example:

• Month 1: 0% of quota
• Month 2: 25% of quota
• Month 3: 50% of quota
• Month 4: 75% of quota
• Month 5: 100% of quota

This tiered approach ensures the rep is motivated but not penalized while they are still learning the product, market, and sales process. This is a crucial element of your sales rep compensation plan design.

Part 3: Structuring Commission to Reward Quality Revenue

Not all revenue is created equal. A key risk for early-stage companies is paying large commissions on deals that churn quickly, resulting in a net cash loss and poor quota attainment metrics. Your sales commission structure must incentivize quality, sustainable revenue. This involves making critical distinctions about what you pay on and when.

Bookings vs. Cash Received: Aligning with Runway

A fundamental decision is whether to pay commission on bookings (when a contract is signed) or on cash received. Paying on bookings can accelerate sales velocity, but it carries risk if the customer fails to pay. Paying upon first cash receipt better aligns compensation with actual cash flow, a crucial factor for managing runway. For most startups, tying commission to cash in the bank is the more prudent choice.

Net New ARR vs. Total Contract Value (TCV)

Similarly, consider paying on Net New Annual Recurring Revenue (ARR) versus Total Contract Value (TCV). A rep might sign a three-year, $300k TCV deal, but if the customer pays annually, the immediate value to the business is $100k in ARR. Paying commission on the full TCV can create a cash crunch and reward reps for multi-year deals that may not renew. Paying on Net New ARR focuses incentives on what drives the company’s valuation and predictable revenue growth.

Using Commission Triggers and Clawbacks

To further protect against poor-fit customers, you can implement commission triggers and clawbacks. These mechanisms should be clearly outlined in the employment agreement to ensure transparency.

• Commission Triggers: A trigger releases payment only after certain conditions are met. For example, you might release 50% of the commission on contract signing and the remaining 50% after the customer’s third successful monthly payment.
• Clawbacks: A clawback clause allows the company to reclaim commission if a customer churns within a specified period, such as 90 days. The enforceability of these clauses can vary, particularly in the US, so it is important to ensure they comply with local employment laws like those in California or regulations advised by bodies like Acas in the UK.

Part 4: How to Forecast Commission Cash Outflow

Once your SaaS sales team incentives are designed, you must forecast their financial impact. This is essential for managing your runway and providing visibility to investors. You do not need a dedicated CFO or complex software; this can be managed effectively in Google Sheets.

Building a Simple Financial Model

Your forecast model should project two primary costs: fixed base salaries and variable commission expenses. The variable component is the most difficult to forecast accurately. A common mistake is assuming every rep will hit 100% of their target every quarter. In practice, we see that this is rarely the case.

Applying a Realistic Quota Attainment Assumption

A healthy, realistic forecast model assumes 70-80% of the sales team will hit their target in a given quarter. This is your attainment assumption. By modeling your commission payouts based on this more conservative figure, you create a much more reliable picture of your future cash outflows. This approach to SaaS sales performance measurement helps avoid cash flow surprises.

Factoring in Accelerators

Your model should also incorporate accelerators, which are higher commission rates for performance above 100% of quota. For example, a rep might earn 1.5x their standard rate on every dollar of ARR closed beyond their target. While accelerators are a powerful motivator for top performers, they must be factored into your cash forecast to avoid unexpected expenses in a successful quarter. A simple spreadsheet can map out each rep’s base salary, their ramped quota, their forecasted attainment, and the resulting commission payout month by month.

You can use this Sample Google Sheet template for a simple cash outflow forecast model to get started.

Practical Takeaways for Your First Sales Rep Compensation Plan

Building your first sales rep compensation plan is a foundational step in scaling revenue. The key is to start with a simple, transparent structure that aligns incentives with the company’s long-term health. For most Pre-Seed to Series B SaaS startups, a pragmatic approach works best.

• Start with a market-aligned OTE, using the $120k to $180k range as a guide for your first AE.
• Implement a 50/50 base and variable split to balance financial security with performance incentives.
• Set an initial Quota-to-OTE ratio of 3x to 4x, recognizing that your sales process is still maturing.
• Define commission triggers to reward quality revenue, such as paying on Net New ARR after the first cash payment is received.
• Model your commission cash outflows using a realistic 70-80% team attainment assumption to create a reliable financial forecast.

This approach provides a clear, defensible, and scalable foundation for your growing sales team. For broader metric definitions and context, visit the SaaS metrics hub.

Frequently Asked Questions

Q: How should we handle commissions for a rep who exceeds their quota?
A: You should use accelerators, which are increased commission rates for deals closed above 100% of the quota. For example, you could pay a 1.5x rate on all revenue above the target. This strongly incentivizes overperformance and rewards your top reps, but it must be included in your cash flow forecast.

Q: How often should we review or change the sales compensation plan?
A: A sales rep compensation plan should typically be reviewed annually. Avoid changing the plan mid-year, as this can erode trust and demotivate the team. Major changes should only occur alongside significant shifts in company strategy, product pricing, or target market that render the old plan obsolete.

Q: Should commissions be paid on professional services or implementation fees?
A: Generally, for a SaaS business, you want to incentivize the sale of recurring revenue. Commissions should be based on Net New ARR. Paying commission on one-time fees like implementation or training can distract from the core goal of building a predictable revenue stream. You can offer a small, separate bonus for these if they are a strategic priority.