1. Separate New and Renewal ACV Metric Crediting Rules
New vs. Renewal Measurement: Define new business as contract value above the total value available for renewal, rather than measuring growth at the individual product level. For example, a customer has $100,000 in available to renew ACV for Product A. The seller restructures the contract into $50,000 for Product A and $50,000 for Product B. Because total ACV remains $100,000 and even though Product B is new to the customer, the full amount is credited to renewal ACV and no new ACV credit is awarded. This approach rewards overall dollar growth instead of shifts between products. Companies still need safeguards to prevent sellers from discounting core business, such as Product A, to sell another product—such as Product B.
Churn Offset Policy: Apply expand ACV to offset any churn ACV within a defined time window before and after the renewal date (e.g., six months or one year) so that replacing lost revenue does not earn new business credit. For example, let’s say a seller allows $200,000 in available to renew ACV to churn in January and then sells a $500,000 expand ACV contract in February. Under the churn offset policy, $200,000 is credited to the renewal ACV and $300,000 is credited to new ACV (including expand and new logo). This approach requires tracking churn and expansion and applying the offsets throughout that time window. Companies must set the window wide enough to account for deal timing shifts that could otherwise result in higher payouts without corresponding revenue growth.
2. Single Metrics
Total ACV Metric: Use a single measure that includes new, expansion and renewal ACV, without paying a premium for new business. Quotas must reflect the existing renewal base plus a higher growth expectation so that larger payouts depend on growth. To drive more focus on growth, some companies introduce an inflection point below 100% quota attainment, paying at a lower rate for the portion of attainment associated with renewal business. While simple, this solution may not put enough focus and pay on growth.
New Net-Churn ACV: Use a single measure that combines new and expansion ACV and subtracts churn ACV. Compared with total ACV, this measure directly rewards net growth more but doesn’t directly compensate sellers for renewals. This can create frustration when retaining a customer requires a substantial reselling effort rather than a routine renewal. Administration is also more complex because the measure requires both positive and negative credits. That complexity increases in companies or segments with lower-than-average gross retention rates (GRR), where more churn deductions must be calculated.
Annual Recurring Revenue Growth: Measure the period-over-period dollar change in all annualized recurring revenue, regardless of when the business was sold. Calculate the change as ending-period ARR minus beginning-period ARR, using monthly recurring revenue (MRR) × 12 to annualize each periods end value. This approach aligns sales compensation with financial growth metrics. However, quota setting and administration must account for seasonal patterns in deal timing and account activity. Additionally, administration requires complex period-over-period calculations.
Choosing among these approaches requires balancing growth alignment, new vs. renewal effort and administrative complexity. The following case illustrates why selecting a measure is only the first step: the quotas, policies and governance supporting it must also change.
Case Study:
Alexander Group recently worked with a global technology company seeking to realign sales compensation with ARR growth.
The company used separate new and renewal ACV metrics, defining ACV as the annual contract value in the final year of a contract. Under this definition, a ramping contract worth $100,000 in year one, $200,000 in year two and $300,000 in year three generated $300,000 in sales credit that’s based solely on the final-year value. This approach encouraged sellers to structure steep ramps to maximize sales credit. It also encouraged two behaviors that contributed to the company consistently missing its in-year ARR growth goals and obscured its outyear ACV forecasts:
- Sellers renegotiated contracts before the final, highest-value year to establish another inflated outyear value and maximize pay.
- Sellers allowed contracts to churn before selling new deals with inflated outyear values.
The company ultimately wanted to measure sellers on ARR growth but found period-over-period growth measurement too complex. It therefore chose new net-churn ACV, combining new and expansion ACV and subtracting churn ACV. With the company’s gross retention rate (GRR) at 94%, administering the churn deductions was manageable. For this plan, ACV was valued using the average annual contract value over the contract term rather than final-year ACV. This approach sought to shift seller behavior from maximizing final-year value to maximizing value across the full contract. Subtracting churn also prevented sellers from increasing pay by manipulating new-versus-renewal deal timing.
Moving from a separate new ACV measure to a new net-churn ACV measure required more than changing the compensation formula—it required updating desired role behaviors, quota methodology, policies and governance. New seller playbooks demonstrated key customer engagement priorities and rules of engagement across roles. Quotas had to be recalibrated for average ACV over the contract term and expected churn, with consideration for each territory’s growth opportunity, installed base and seller responsibilities. Policies had to clearly define churn attribution, contract restructuring and deal timing. Governance needed clear processes for approving exceptions and resolving disputes. Together, these changes made the new measure actionable, supported fair and meaningful targets and built seller confidence in the plan.
Key Takeaways for Revenue Leaders
For recurring revenue companies, the test of a successful sales compensation plan is whether higher payouts reflect genuine growth—not simply changes in deal timing, product mix or contract structure. Whether adding crediting rules to new and renewal ACV measure plans or adopting a combined growth measure, revenue leaders should keep five principles in mind:
- Start with strategy, not metrics. Define the growth outcomes the plan should reward, then assess which solution best supports those outcomes.
- Evaluate each solution’s trade-offs and feasibility. Compare the advantages and limitations of each option against the company’s needs. Confirm that the measure is measurable, transparent to sellers, trackable in company systems and suitable for setting meaningful quotas.
- Test for unintended consequences. Look for deal-timing shifts, product-mix changes and other unintended consequences that could increase payouts without corresponding ARR growth.
- Align quota methodology with the measure. Set quotas using the selected measure’s definition, territory growth opportunity and seller responsibilities to create challenging, fair and equitable targets.
- Treat the change as a business transformation. Update role expectations, seller playbooks, policies and governance alongside the compensation formula.
Ultimately, a growth-oriented sales compensation plan requires more than the right metric. It requires clear crediting policies, fair and challenging quotas and an operating model that aligns seller rewards with genuine recurring revenue growth.
