ARR-Based Commission
What is ARR-based commission?
ARR-based commission pays a rep on annual recurring revenue rather than on bookings or contract value. In its strictest form, it pays on net new ARR — new business plus expansion, minus churn and contraction — which makes the rep's payout a direct function of the metric the board actually watches.
That is the appeal, and it is also where the trouble starts. Aligning a rep to net new ARR means aligning them to outcomes they only partly control.
What counts as ARR
What this means?
The first three rows are uncontroversial. The last two are the entire design problem. A pure net-new-ARR plan reduces a rep's attainment when a customer they closed two years ago churns — for a reason they may have had no ability to influence, in a period during which they did nothing wrong.
That is either rigorous alignment or an arbitrary tax, and which one it is depends entirely on whether the rep could have prevented it.
Gross ARR vs net new ARR
The correct answer depends on one thing: does the rep own the account after close? If they do, a net ARR plan is fair and powerful. If a CSM takes over on day one, charging churn back to the AE is charging them for someone else's performance.
A worked ARR quarter
An AE on a net new ARR plan. Quota: $600,000 net new ARR. Rate: 10%.
The rep closed $580,000 of new and expansion ARR — 97% of quota on the work they did — and finished at 67% attainment, because a customer was acquired by a competitor and shut the account down.
Whether that is fair is not a rhetorical question. It is the question the plan has to answer explicitly, in advance, in writing.
Making net ARR plans fair
Three mechanisms make the model defensible without abandoning the alignment:
A churn exclusion list. Churn from acquisition, bankruptcy, or a product sunset is excluded from the rep's number. Churn from a bad-fit customer the rep pushed through is not.
A time window. Churn within 12 months of close counts against the rep; churn after that does not. This is the same logic as a clawback window, and it is defensible for exactly the same reason: the rep influenced the first year and not the fifth.
A floor. Churn cannot reduce attainment below a stated level. It caps the downside of an event the rep did not cause.
Why ARR-based commission matters for finance teams
An ARR plan is the only structure that makes the sales team's incentive identical to the company's north-star metric — which is powerful and also means commission expense now moves with churn, a variable your comp model has probably never included.
It also complicates ASC 606: commission is capitalized against a contract, but a net ARR plan pays on a portfolio movement rather than on a contract. Mapping a portfolio-level payout back to individual contracts for amortization is genuinely difficult, and it is the thing most likely to be handled badly in a spreadsheet.
Common mistakes with ARR-based commission
1. Charging churn to a rep who does not own the account
If a CSM owns retention, churn is the CSM's number. Charging it to the AE is charging them for someone else's job.
2. No churn exclusions
A customer acquired by a competitor is not a sales failure. A plan that treats it as one will lose the rep, not fix the churn.
3. Not defining expansion
Does a seat expansion the customer self-served through the product count as the rep's expansion ARR? Most plans have never been asked and have no answer.
How Visdum handles ARR-based commission
Visdum computes net new ARR from the underlying CRM movements — new, expansion, contraction, and churn — as distinct, configurable components, so churn exclusions, time windows, and attainment floors are plan settings rather than manual adjustments someone makes at close. The rep's statement shows each movement as its own line, which means a rep at 67% attainment can see exactly which account cost them 30 points and why. And because each movement stays mapped to its underlying contract, ASC 606 amortization does not have to be reverse-engineered from a portfolio-level number.
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Related terms
MRR Commission · Commissions on Renewals · B2B SaaS Sales Commission · Clawback · SaaS Sales Compensation Models
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Frequently asked questions
What is ARR-based commission?
Commission paid on annual recurring revenue rather than on bookings or contract value. In its strictest form it pays on net new ARR — new business plus expansion, minus churn and contraction — which makes the rep's payout a direct function of net revenue retention, the metric SaaS boards watch most closely.
What is the difference between gross and net new ARR commission?
Gross new ARR pays on new business plus expansion only. Net new ARR subtracts churn and contraction. Gross aligns the rep with acquisition and risks rewarding bad-fit customers who churn. Net aligns them with retention and risks punishing them for churn they had no ability to prevent. The right choice depends on whether the rep owns the account after close.
Should churn count against a rep's commission?
Only if the rep owned the account and could have influenced the outcome. If a CSM takes over on day one, charging churn back to the AE is charging them for someone else's performance. Where churn does count, most defensible plans exclude churn from acquisition, bankruptcy, or product sunset — events that are not sales failures.
How do you make a net ARR plan fair?
Three mechanisms. A churn exclusion list, so acquisition and bankruptcy do not count against the rep. A time window, so churn within twelve months of close counts and churn after that does not — the same logic as a clawback window. And an attainment floor, capping how far churn can drag a rep's number down.
Does expansion count as ARR for commission?
Usually yes, and often at the full new-logo rate, because incremental ACV requires a real sales motion. The question most plans never answer is whether product-led expansion counts — if a customer self-serves additional seats without any rep involvement, is that the rep's expansion ARR? Decide before it happens.
How does ARR-based commission complicate ASC 606?
Commission is capitalized against a specific contract, but a net ARR plan pays on a portfolio movement rather than on any one contract. Mapping a portfolio-level payout back to individual contracts for amortization is genuinely difficult, and it is the part most likely to be handled badly when the calculation lives in a spreadsheet.