I am working on creating a sales compensation plan for a recurring revenue model are there any pitfalls I need to be aware of when creating this?

Personally, I'm a fan of sales comp plans being tied to ongoing performance. Sure, the salesperson should get some of that long tail, but only while he continues to work productively at the company. Once he leaves, he should lose the tail, since someone else will likely need to step into the relationship with his customers. But there are too many variables to give a universal answer.

The true answer is this: You need to pay your salespeople enough so that they are motivated to keep working for you rather than seeking alternative employment. This means you need to analyze at-quota pay, and ensure that your base and commission structures provide a market-level of compensation at quota. You can muck with anything you want as long as that goal is met.

I think you are making it far too complicated. I would target 1st year payment only. I also wouldn't pay a percentage of sales, I would make it target based e.g. If you want the rep to sell $1M a year in ARR you give them a target of $1M and pay a percentage against achievement. This breaks the direct correlation to deal value and instead focuses them on achieving a set outcome.

My concern on something like this would be the contractual obligations to pay out the tail portion of the incentives, even in the event your arrangement with the sales person is terminated. You are going to want to have an attorney draft a bullet proof contract. I had a client who failed in that regard and had to pay out sales people even after they had departed the company.

Also, if it is structured as you mentioned you might expect sales people not to provide much if any support after the initial sale but instead to just focus on the new growth, since the commissions reduce so strongly after the 2nd year. No big deal but you will want to make sure you have adequate account management staff depending on the required support of the product.

Also, how would the sales people be compensated if the cross sold or increased product/platform usage after 2nd year? Would their be incentives to that?

Hope some of this info helps!