Align sales commissions with company economics to avoid the cash trough

The Core Metrics That Define a Healthy Sales Engine

Beyond top-line revenue, a few key metrics reveal the true health and sustainability of your business. For founders in SaaS, e-commerce, or professional services, focusing on these numbers provides a clear view of whether your growth is profitable. The reality for most startups is more pragmatic: you need to understand your unit economics before you scale.

The first metric is Customer Lifetime Value (LTV). Critically, this should be calculated using your gross margin, not just revenue. It represents the total profit you can expect from a single customer over their entire relationship with your company. Calculating LTV on revenue alone hides the true profitability of your customer relationships and can lead to overspending on acquisition.

The second is Customer Acquisition Cost (CAC). This must be a fully-loaded figure. It includes the salesperson’s salary, commission, benefits, payroll taxes, and the prorated cost of their tools, software stack, and marketing support. Simply looking at commission-only CAC gives a dangerously incomplete picture of what it truly costs to win a new customer.

These two numbers combine to form the LTV:CAC ratio, a crucial indicator of business model viability. A healthy SaaS business model typically shows an LTV:CAC ratio of 3:1 or higher. This means for every dollar you spend to acquire a customer, you generate at least three dollars in gross profit back over their lifetime. A ratio below 3:1 suggests you may be paying too much for growth.

Finally, the CAC Payback Period measures how long it takes for the gross margin from a new customer to repay the cost of acquiring them. This is a vital cash flow metric. A shorter payback period means you can reinvest cash into growth more quickly. While a healthy SaaS business model typically has a CAC Payback Period under 18 months, top performers are often under 12 months. In fact, according to the KeyBanc Capital Markets SaaS Survey, top-performing public SaaS companies have a median CAC Payback Period of 5-7 months. Understanding these three numbers is the foundation for a sound sales commission structure.

How Your Comp Plan Creates the Cash Trough

Even when you are hitting sales targets, your cash balance can drop alarmingly. This often stems from a mismatch between when you pay commissions and when you collect customer payments. This creates the 'cash trough', a period where your cash outflow to acquire a customer is significantly higher than your inflow from them. The impact of sales on cash flow is immediate and can catch founders by surprise.

Consider this scenario for a UK-based SaaS company using Xero for its accounting. A sales rep closes a £12,000 Annual Contract Value (ACV) deal. The customer pays monthly, so in month one, you collect £1,000. However, your rep’s commission plan pays 20% of the Total Contract Value (TCV) upfront. You immediately owe them £2,400. Add a portion of their monthly base salary, say £4,000, and your total cash out for that rep in month one is £6,400. With only £1,000 collected, you have a £5,400 cash deficit from a single 'successful' deal. A scenario we repeatedly see is that founders are celebrating new logos while their runway shortens dramatically.

This problem isn't unique to the UK. A US-based company using QuickBooks faces the same challenge. A rep closes a $12,000 ACV deal, and you collect the first month's payment of $1,000. If their commission is paid upfront on the total contract value, you could be paying out $2,400 in commission plus their base salary, creating a significant cash deficit from day one.

Beyond cash flow, a poorly designed plan can harm profitability. When commissions are based purely on revenue, reps are incentivized to close any deal, regardless of its quality. Are they selling your highest-margin product or the easiest one to move? Are they offering steep discounts to close deals faster? This behavior directly erodes your LTV and, consequently, your LTV:CAC ratio. Implementing a deal desk can help protect margins and control discounts. Ultimately, aligning sales incentives with gross margin instead of top-line revenue encourages reps to sell profitable deals. This is a crucial step in building a team that contributes to long-term business health, not just vanity metrics.

Practical Sales Compensation Best Practices for Every Stage

So, what should your compensation plan actually look like? The right sales commission structure depends on your company's stage and strategic goals. What works for a Series B company can be counterproductive for a pre-seed startup. The goal is to evolve your sales compensation best practices as your company matures, ensuring sales targets and profitability are linked.

Pre-Seed and Seed Stage: Prioritizing Learning

At this early stage, the primary goal is learning and validating product-market fit, not just scaling revenue. Your compensation plan should reflect this exploratory phase. A higher base salary with a lower variable component, such as a 70/30 or 80/20 split, is often appropriate. This provides financial security for your first sales hires while they navigate an unproven market and a product that may still be evolving. The variable portion can be a simple percentage of TCV or even a flat bonus per new customer. The focus is on rewarding activities that lead to market feedback and initial traction, not just raw revenue. Sales team motivation finance at this stage is about stability and shared discovery.

Series A Stage: Introducing Scale and Sophistication

As you begin to scale with a proven product, your sales commission structure needs more sophistication. The On-Target Earnings (OTE) mix often shifts closer to a 50/50 or 60/40 split between base salary and variable commission. This is the time to introduce accelerators, which are higher commission rates for performance above 100% of quota. This strongly incentivizes top performers to exceed their goals. You can also start solving the cash trough problem. Consider paying a portion of the commission upon contract signing and the remainder as cash is collected from the customer. For US-based companies using QuickBooks, you can track this by running reports on invoices paid versus invoices issued.

Series B Stage and Beyond: Driving Profitable Growth

By this stage, your unit economics should be well understood and optimized. Now is the time to fully implement advanced strategies. This is where you can firmly tie commissions to gross margin, not revenue. This directly answers the question of how to align sales commissions with business goals. You might also introduce incentives, or "spiffs," for multi-year contracts or specific product sales that are strategically important. The plan becomes a powerful tool for directing sales efforts toward the most profitable and strategic segments of your market. At this scale, it's also worth noting that accounting standards like IFRS 15 and ASC 606 in the US permit you to capitalize incremental contract costs, like sales commissions, and amortize them over the customer's life, which can smooth out their impact on your P&L.

Your Most Powerful Tool: The One-Rep Financial Model

Before you hire your next rep or set next year's quotas, you need a simple way to see the financial impact of a single salesperson. You do not need complex software; a spreadsheet in Google Sheets or Excel is all it takes. The "One-Rep Financial Model" is a bottom-up planning tool that connects a salesperson's quota and compensation to your company’s P&L and cash flow.

Here is a step-by-step guide to building one:

1. Define the Inputs: Start with the core assumptions for one sales representative. These numbers should be realistic and based on your business model.
   • OTE (On-Target Earnings): $140,000 (split 50/50, so $70k base and $70k variable)
   • Commission Rate: 10% of Annual Contract Value (ACV)
   • Fully-Loaded Cost Multiplier: 1.3x base salary. This factor covers employer taxes, benefits, software licenses, and other overhead, making the rep's actual cost $70,000 * 1.3 = $91,000 per year, or $7,583 per month.
   • Average Deal Gross Margin: 75%
2. Calculate the Quota: The quota is the amount of business a rep needs to close to earn their variable pay. Understanding sales quotas is simple math, but the impact is profound.
3. Quota = Variable Compensation / Commission Rate
4. Quota = $70,000 / 0.10 = $700,000 in annual ACV
5. This calculation tells you that a rep must bring in $700,000 in new annual contracts for the company to "break even" on their variable compensation.
6. Model the Monthly Impact: Create a simple monthly table to visualize the cash flow dynamics. Assume the rep ramps up over the first few months. In this model, let's say they close $0 in Month 1, $25k in Month 2, and $50k in Month 3, before hitting their full run-rate quota.
   • Month 1: Cash Out: $7,583 (cost). Gross Margin In: $0. Net Cash: -$7,583
   • Month 2: Cash Out: $7,583 (cost) + $2,500 (commission). Gross Margin In (from $25k ACV): ($25,000 / 12) * 0.75 = $1,563. Net Cash: -$8,520
   • Month 3: Cash Out: $7,583 (cost) + $5,000 (commission). Gross Margin In (from cumulative $75k ACV): ($75,000 / 12) * 0.75 = $4,688. Net Cash: -$7,895
   This model immediately shows the cash trough and allows you to calculate the rep's break-even point and CAC Payback Period at the individual level. It becomes your single source of truth for understanding sales quotas and planning hiring with confidence.

Practical Steps to Align Sales Commissions with Business Goals

Moving from a revenue-focused culture to one driven by profitability requires a shift in mindset, starting with your sales compensation. It's about building a system where your sales team wins when the company wins in a sustainable way. What founders find actually works is taking small, deliberate steps to connect sales incentives to business health.

Here is what you can do today:

1. Calculate Your Three Core Metrics: Before changing anything, establish a baseline. Calculate your fully-loaded CAC, your gross-margin-based LTV, and your CAC Payback Period. Use the data from your accounting software, whether it's QuickBooks or Xero, to get real numbers.
2. Model Your Current Comp Plan: Build a simple spreadsheet to see how your current plan impacts cash flow. Re-create the 'cash trough' example using your own numbers for salary, commission rates, and average contract value. This will make the problem tangible.
3. Build a One-Rep Financial Model: Use the template described above to model the financial impact of a single sales hire. This exercise will inform hiring decisions, make quota setting a data-driven process, and help you forecast cash flow more accurately.
4. Consider Phased Commission Payments: To ease the cash flow burden, explore paying commissions as the customer pays you. For example, pay 50% on contract signature and 50% upon receipt of the customer's first payment. This is one of the most effective ways to align incentives with financial reality.

Ultimately, learning how to align sales commissions with business goals ensures your growth engine is efficient and sustainable, protecting your runway and building long-term value. For more on this topic, continue at the Team Finance Literacy hub for related guides.

Frequently Asked Questions

Q: What is a typical commission rate for a SaaS salesperson?

A: While it varies, a common commission rate in SaaS is around 10% of the Annual Contract Value (ACV). This rate can be higher for more complex enterprise sales or lower for high-volume, transactional sales. It is often paired with accelerators that increase the rate for performance above quota.

Q: Should commissions be paid on booking, billing, or cash collection?

A: Paying on booking (contract signature) is simplest but creates the largest cash flow strain. Paying on cash collection perfectly aligns incentives with company cash flow but can be complex to track. A common compromise is to pay a portion upon booking and the rest upon the first customer payment.

Q: How do you handle commissions for deals with implementation fees or one-time charges?

A: It is a sales compensation best practice to pay a lower commission rate on one-time fees compared to recurring revenue. These services often have lower margins than the core software product. Aligning the commission rate with the margin of each revenue stream ensures reps are motivated to sell the most profitable mix.

Q: How can we implement a gross margin-based plan without confusing the sales team?

A: Simplicity is key. Provide your sales team with a clear, easy-to-understand calculator or rate card that shows the commission for different products or discount levels. By abstracting the complex calculation, reps can easily see how selling higher-margin deals directly increases their earnings, promoting better alignment.