Framework: Sales Compensation Plan
- Construction: When in doubt, let people exceed during early days- don’t stress about overpaying for performance. Consider MBO and variable plans not 100% tied to revenue. 50/50 plans doesn’t always work
- Commission Operations: Provide visuals, calculators so it’s an open conversation on expectationsPay expense reports and commissions as quickly as you can align payment schedule between sales rep and customer. Prepay to give sales reps consistent earnings
- Set Expectations: Review annually and extend career laddersForecast 2-3 years plans when possible. Set expectation that quota, targets, and OTE will go up as business matures
Most Importantly: KEEP IT SIMPLE! Don’t confuse COMMISSION PLAN with PERFORMANCE MANAGEMENT. You don’t need an incentive (commission) for every behavior you want. You can set expectations in your performance management document on minimum acceptable performance.
Sales compensation terminology
- Base salary: guaranteed base income
- Variable compensation: commissions (income based on performance)
- OTE (on-target earnings): total compensation including base + commission @ 100% year 1 target
- Commission rate: percentage/dollars paid on closed revenue
- Commission plan: document that explains commission operations
- Accelerators: elevated commission rates for exceeding revenue goals
- SPIFs: Sales Performance Incentive Fund are good for driving short term incentives and behaviors
- MBO: management by objectives (Peter Drucker concept). The idea of using objective-based goals as opposed to revenue-based goals to align commissions. Good for early sales learning curve and leadership hires.
- Draw: loans against future expected earnings/commissions Recoverable: Rep has to pay it back in event of termination. The outstanding draw amount accumulates from month to month. Non-recoverable: Rep does not have to pay it back in event of termination. No accumulation. More like an elevated salary for a defined period of time.
Determine total compensation levels
What other alternatives does a person with this skill set command?
First, like most other verticals, what a candidate may command in the market in alternative options often set the bar for comp. So if you’re looking to hire someone from a big company or name brand logo, or get a passive candidate to change in the middle of the year, you’re going to pay a premium on marketing benchmarks as the market is very competitive.
Does the compensation make sense for the economics produced by sales rep?
Second, beyond the market benchmarks, one should also look at the sales yield to make sure it makes sense. For example, it's not scalable to hire a sales rep and pay them $100k a year in total earnings if they are only generating $200k a year in revenue. The margin is too low and when you add in sales support, and administrative costs on top, they are most likely below the breakeven point. Typically should aim for 3-5x ratio even in the early days to build a path towards profitable unit economics.
Historical performance & sales maturity:
How confident are you in quota attainment and sales performance?
Third, if you have historical data on prior reps performance, then you should use those figures to ascertain whether the revenue quota assumptions you’ve set and OTE’s are truly attainable. When in doubt, add a 20% discount to come up with conservative estimates. Too many startups use the best case scenario to determine OTE’s (based on 1 rep’s performance) and thus all the subsequent hires are setup for disappointment.
General IC compensation levels in United States
SDR (XDR) compensation design
- Skew towards higher base as metropolitans cost of living is expensive.
- Don’t make them do too much- generating qualified meetings should be the focus.
- Keep commission plan simple and within their control.
- Consult with our Global XDR Compensation Benchmark Report
- SDR comp plans are a stepping stone into the sales org. Often if you have a weaker SDR plan, it behooves you to showcase the Account Executive comp plan to show them where they can go. However, this idea can also backfire if their progression from SDR to AE takes longer than you set expectations.
- For SDRs that are working top of the funnel, they don’t have as much control over deals once they hand it off to their Account Executive. So you want to commission them on what they can control which is qualified meetings set.
- In some sales orgs, they give a small spiff to SDRs on deals that close but usually, this is small versus their primary responsibility of setting up great meetings.
- Since SDR turnover is high - nationally we’ve seen ~20% turnover in the last 90 days or 80% annually, so you really need to have a SDR career ladder on day 1. The best thing to do is keep them engaged by building SDR 1, SDR2 career ladders that are merely 6-9 months apart so you can show them a quick career progression in the first 9 months of the job if they hit goals.
AE Compensation Design
- Add accelerator/de-accelerators once you know your breakpoints.
- Be diligent and clear on commission operations (when will commissions be paid, what happens if customer churns).
- Don’t forget to factor ramp time into year 1 OTE. Be conservative in setting year 1 OTE.
- Build career ladders as soon as possible.
- There’s a big variance in AE compensation between SMB and Enterprise. At the high velocity end of the spectrum, inside sales / AE comp plans are similar to SDR plans as outcomes are fairly fast and predictable if the effort and hustle is there.
- In enterprise sales however, a longer sales process requires more attention to ensuring commission payouts line up with payment collection and when and how much of the total commission check you pay to an enterprise rep becomes more important. There’s a lot of tradeoffs in paying your AE on revenue booking (the day the deal is signed) vs. revenue collection (when customer actually pays). For larger deals and commission checks, it’s fine to align payment schedule with collections and actual deal size since the check size is larger to the rep. But if the commission check is small, then often reps will want to see the commission recognized on bookings because they want to track towards their OTE schedule.
- One big mistake we see companies make is provide reps an unrealistic year 1 OTE that doesn’t factor in ramp time. If the rep is going to do $1 million in revenue annually once they are ramped but it takes them 3 months to do so, than year 1 OTE should really be discounted to $750k revenue attainment. In those cases, it’s often helpful to show reps a 2 year comp plan so they get an accurate but still inspiring vision of how their modern year 1 OTE is offset with a higher year 2 OTE. They will also appreciate the thoughtfulness and candor as most other companies will not do this exercise.
- Don’t add too many accelerators and incentives in the core commission plan. It’ll confuse reps and not actually have the motivational lift you think it will. It’s far better to overlay a special bonus incentive in the middle of the year if you’re trying to add an extra motivator to an already over-achieving rep. For example, a rep that is 100% to goal 6 months into the job, you can tell them they get a special $10,000 bonus if they hit 200% of goal by year end.
CSM & AM compensation design
- Pay on net revenue book of business (churn, renewals, and upsells). Separate the two roles and specialize when you hit critical mass.
- Plans are generally richer in base vs. variable.
- Reserve portion of variable on customer experience (NPS score, QBR survey, etc.)
- The post sales comp plan is typically based on net revenue which has offense: upselling/cross selling and defense: churn and renewals.
- Typically for new post sales functions, we’d recommend using MBO or qualitative or product usage / conversion rate metrics instead of revenue because it’s hard to tell what the natural rate of net revenue would grow to without intervention.
- For more established organizations where there is a historical benchmark on natural momentum in upsell and renewals/churns. You can aim for your CSM + AM to improve by X% and pay them on the improvement gains.
- Note that post sales talent tend to make far less than sales reps so you can actually get some really great people by being a little more competitive than market rates. This is probably a great function to pay above market because a $10k extra base salary has very high ROI vs. sales where as a percentage of overall compensation it doesn’t move the needle as much.
Management compensation design
- Diagnose and reduce scope of requirements to 1-3 strategic objectives over next 12 months
- Provide a single override commission rate on total net new revenue growth, don’t silo them in early stages.
- MBO and non-revenue goals can help but keep the core plan simple.
- Add kickers and larger bonuses for meanful inflection points in the business (ex. Achieving $10M ARR)
- Management compensation is a completely a different beast and is very nuanced to your stage of company, revenue base, and who you hiring for what job.
- We won’t dive too far into this but we will just provide the backdrop that average tenure in startup sales is probably south of 18 months according to some figures we’ve seen online.
- Because of this, you should really be careful about not over-hiring in the early days since the fail rate and expected tenure will be short.
- In most cases, startups should hire functional sales leaders who are more comfortable with front line management as that will be the primary duty of the job (to be with the reps).