Annual contract value (ACV)
Annual contract value, or ACV, is one year of a customer contract's recurring revenue, normalised so that contracts of different lengths and billing schedules can be compared and commissioned on the same footing. A three-year deal worth $270,000 in subscription fees has an ACV of $90,000, whatever the invoicing schedule says.
The reason ACV exists is that a signed contract does not hand you a single number to pay on. A three-year deal and a one-year deal of the same yearly value look wildly different in total contract value, and a customer who negotiates a discounted first year and a loaded third year has changed nothing about the business won. Dividing the recurring portion by the number of years strips all of that out and leaves something a quota can be set against.
Two decisions turn ACV from a clean idea into a contested one. The first is what counts as recurring. Implementation fees, professional services, hardware and one-off training are conventionally excluded, because they do not repeat, and a plan that quietly includes them will pay a rep twice as much for selling services as for selling software. The second is what happens to a contract shorter than a year, where annualising upward produces a figure the customer will never actually pay.
For commission purposes ACV is usually the fairest available basis, because it rewards the shape of the business rather than the shape of the invoice. A rep who wins a front-loaded payment schedule has done the finance team a favour and should probably be recognised for it somewhere. Paying them 67% more commission for it is a larger reward than anyone intended.
A three-year contract with an uneven payment schedule
A customer signs for 36 months. Procurement negotiated a heavy first year and a light third. There is also a one-time implementation fee. Commission runs at 8%.
- Subscription billed, year 1
- $150,000
- Subscription billed, year 2
- $90,000
- Subscription billed, year 3
- $30,000
- Total subscription value over 36 months
- $270,000
- One-time implementation fee (excluded)
- $30,000
- ACV: $270,000 divided by 3
- $90,000
- Commission at 8% of ACV, against 8% of year-one billings
- $7,200 against $12,000
The deal is identical under both readings. The $4,800 difference is created entirely by a payment schedule the rep may not have influenced, which is the argument for normalising before the rate is applied.
Contracts shorter than a year break the annualising
A six-month pilot worth $60,000 has an annualised contract value of $120,000, and a plan that pays on ACV will pay as though the customer committed to twice what they actually committed to. Some companies cap ACV at total contract value for sub-annual deals. Others exclude pilots from the ACV basis entirely and pay a flat amount instead. Either is defensible. Having no rule at all means the first short contract of the year gets decided by whoever runs the pay cycle.
- What is the difference between ACV and TCV?
- Total contract value is everything a customer commits to across the whole term, including one-time fees. Annual contract value is the recurring portion of that commitment expressed as a single year. A three-year subscription worth $270,000 plus a $30,000 setup fee has a TCV of $300,000 and an ACV of $90,000.
- Should sales commission be paid on ACV or total contract value?
- Paying on ACV keeps a one-year deal and a three-year deal comparable and stops a long term inflating a single period's payout beyond what the budget assumed. Paying on total contract value rewards length directly and suits businesses where multi-year commitment is the strategic goal, though it usually needs a clawback attached in case the customer leaves in year two.
Nearby terms
The long form lives in the guides: Commission arithmetic.
Knowing the word is
the easy half
Commish pays annual contract value (acv) the way your plan describes it, shows the arithmetic on every line, and traces each payment back to the deal that earned it.