Do you have a quota? Do you like to hit gongs? Do you drive a BMW 3 Series or Audi A4?
If you answered “yes” to any of these questions, you’re in the right place.
This post is positioned at the intersection of Sales and Finance. Today I’ll take you through a litany (SAT vocab word!) of compensation topics, and explain why companies set pay up the way they do. And we’ll rely heavily on data from ICONIQ, who dropped an absolute HAMMER of a report on the state of sales rep pay.
Here’s a TL;DR:
Earnings
OTE: A typical SaaS account executive makes between $235K - $250K in total cash comp (base + variable)
Base vs Variable Split: Most account executives are on 50 / 50 plans, divided between their base pay and variable pay. Account Managers are usually on 60 / 40 or 70 / 30 plans. Variable pay is comprised of Commission, Accelerators, and Spiffs (and entry level luxury watches)
Quota
Quota to OTE Ratio: As a rule of thumb, a SaaS rep should have a quota of at least 5x their OTE. This goes up to 7x or more as the company matures, goes up stream, and adds more products.
Commission
Commission Rate: A typical base rate paid on a new or expansion deal is 10%. A typical base rate paid on a renewal deal is half that, or 5%
Commission Stack: CFOs look at not just the individual rep’s payout, but everyone involved in the deal. This gets them to a total effective rate as a % of bookings and revenue.
Getting up to speed
Ramp time: Enterprise reps have more time to get up to speed than SMB reps, as their sales cycles and relationship building take longer.
Ramp types: Quota can ramp linearly or in a curved fashion.
Ramp payout structures: Payouts during ramp can be gamed to help the rep (or gamed to help the company hehehe evil finance voice)
Hitting your plan
Over assignment: Companies usually over assign by 20% to 30% to make sure they hit their plans (SHHH! This is a secret!)
Achievement: On average, 7 out of 10 reps hit their quota. If you are one of the 3, there’s always a job at your local airport’s TSA division; they’ll hire just about anybody.
All Gas, No Breaks
Accelerators: Reps can nearly double their base commission rate when they get into accelerator territory, which is over 100% achievement. Get it while the gettin’ is good.
Spiffs: Another way to motivate teams and incentivize them to sell new products or work with new partners. Or as I call them, “fun coupons”.
Earnings
OTE: A sales rep’s “On Target Earnings” is comprised of their Fixed base salary + their Variable payout if they hit 100% of their quota
OTE = Base Salary + 100% Quota’d Commission
A rep earns less than their OTE if they achieve anything under 100% of quota
Typically if a rep comes in under ~80% for two consecutive periods, they are placed on a “PIP” (performance improvement plan). This is the kiss of death.
A rep can earn more than their OTE if they hit 100% of quota
As a rule of thumb, the “best” rep at a company usually hits ~2x their annual quota
If you have reps achieving more than that, your targets are probably too low
Theoretically, a rep’s upside is unlimited. Some company’s will institute “caps” on either the most a rep can make on a single deal or the most quota they can retire on a single deal.
You don’t want the rep to land such a big deal that it makes the company broke because the rep goes into astronomical accelerators
You also don’t want the rep to land one big deal and then chill on the beach for the remainder of the year, knowing they are good to go
Base vs Variable Split: The split between base and variable commission varies by role.
AE’s are typically on 50 / 50 plans, where half of their OTE is on a regular payroll cycle, and the other half is dependent on their commission.
Customer Success reps are typically a bit less leveraged than AEs (e.g., 60 / 40 or even 75 / 25 plans). The same goes for System Engineers.
Below is a chart showing the median total cash comp by position (e.g., Account Executive, Account Manager, SDR, etc.) at SaaS firms, along with their associated Variable portion (to the right in green)
Quota
Source: ICONIQ
Quota to OTE Ratio: This is the ratio between what a rep is expected to bring in for the company in comparison to what the company pays them in total cash comp.
As a rule of thumb, this starts around ~5x, and grows over time to ~7x or more as the company adds more products and enhances its brand awareness in the market
If a rep’s OTE = $200K, then their Quota should minimally be $1M
$1M / $200K = 5x
The quota to OTE ratio is also higher for upmarket reps (Enterprise and Midmarket), who have the ability to close larger deals to retire quota, compared to down market reps (SMB)
Enterprise reps have a higher quota to OTE ratio between 6x and 9x, since they can smash absolute ding dongs
Commission
Source: ICONIQ
Commission Rate: The percentage of a deal that gets paid out to the rep
A base commission rate of 8% on a $250K deal = $20K paid out to the rep
Rules of thumb:
Median commission rate for New Revenue or Expansion Revenue = ~10%
Median commission rate for Services Revenue or Renewals Revenue = ~5%
Commission Stack: The aggregation of all commission rates paid out to people involved in a single deal
You have to remember that it’s not just a single rep getting paid - they have a boss, who also gets a percent, as well as a solutions engineer when it’s a technical sale (think: cybersecurity). Oh, and the inside sales BDR who sourced the lead gets paid too. So you might have something that looks like this:
total commission stack paid by company = 6% (rep) + .5% (boss) + 3% (SE) + .25% BDR) = 9.75%
Effective Commission Rate
At the end of each period, CFOs calculate their total “effective commission rate” on both bookings and revenue (which are different)
Bookings Effective Rate = Cash Commissions Paid Out / First Year ARR
P&L Effective Commission Rate = Total Accrued Commission for the Period / Gaap Revenue Recognized for the Period
Revenue is a GAAP accounting measurement of your topline. And Commission costs can be spread out, or accrued, over the length of the contract to reduce the burden on the P&L (i.e., a $120K commission for a 12 month deal is accrued at a cost of $10K per month for 12 months)
Your commission rate on the P&L will be lower than your Bookings effective rate for as long as the company is growing Y/Y
Getting up to speed
Ramp Time: When an AE starts at a company they typically get a prorated quota that “ramps” in either a linear or curved fashion while they get up to speed.
Typical ramps:
SMB: 2 to 3 months
Commercial / Midmarket: 4 to 6 months
Enterprise: 6 to 9 months
You can take a linear or curved approach to any of these
Ramp payout structures:
Prorated quota: A lower monthly or quarterly quota target at the same or a lower base commission rate
Non recoverable draw: Rep is paid their full variable commission rate in advance, regardless of achievement
Recoverable draw: Rep is paid their full variable commission rate in advance, but it functions as a loan where the rep pays the company back using a portion of future commission checks. And best believe the company will collect.
Hitting your plan
Over assignment: Most companies over-assign quotas by 20-30% to ensure quotas are aligned with the company-wide revenue plan
The simple way to think about this is if you added up all the individual quotas from reps on the street, it would sum to a number larger than that of the actual board plan (best of luck trying to poll them all though!)
This range is smaller at companies with less management layers, increasing as there are more mouths to feed
This provides a buffer against sales rep attrition, underperformance, and macro headwinds (like, well, now)
Source: ICONIQ
Attainment: Not all reps hit their quota. Full stop.
As a rule of thumb, typically seven out of ten do
The percentage of reps hitting their quota goes down over time as the company gets larger, as deals become more complex, and as territories become more crowded. It may even drop into the 50% range.
All Gas, No Breaks
Accelerators: Sales reps are incentivized to hit their quotas by getting a higher payout per dollar sold after 100% achievement.
For example, from 0% to 100% a rep earns 10% base commission
And then from 100% to 120% they earn 13% commission (+3%)
And then from 120% to 140% they earn 15% commission (+5%)…
This motivates reps to get as many dollars in the door before the time runs out on the month or quarter and the clock resets
Spiffs: A fancy word for bonus, or prize. Spiffs are associated with a contest of some sort.
For example, reps may be incentivized using a spiff of $1,000 for whomever gets the most deals done through a new channel partner in the quarter
FP&A teams typically work with a Sales VP / CRO to come up with a quarterly spiff budget, aligning the budget envelopes to desired activities and top down initiatives. This often aligns with a new product launch to help get it off the ground.
Common mistakes with sales rep comp
Not building enough capacity: You need to make sure you always have enough “butts in seats” to more than cover your board plan. I’ve been in situations before where sales reps were taking too long to ramp, or we couldn’t hire enough new people. We had to adjust the expectations of what they would be capable of achieving. This is called having “a capacity gap”. As a result of not hiring enough people, we didn’t have enough dollars on the street, and we couldn’t hit our plan.
Losing sight of your total commission stack: As org’s get bigger, it’s common to lose sight of how many people are getting paid on a single deal. The “pod” of supporting resources surrounding a sales rep grows, and each deal becomes incrementally more expensive, but not necessarily any bigger. This is especially common for companies that layer in product specific experts, biz dev managers, and field CTOs for those super technical deals. It also occurs when you add multiple layers of sales management (managers of managers) as the org grows. Demz is the growing painz.
Throwing good money after bad: Most spiffs don’t work. Many times they end up being a mechanism to just pay reps more money for doing the same work they were going to do anyway. Unless there’s a way to truly change either the time reps spend (like call blitzes after hours) or what they sell (adding another product to their arsenal as an upsell), spiffs usually don’t result in meaningful differences to your overall performance.
Red flags if I’m a sales rep
Unequal “high fiving”: If you see execs high fiving with the finance team in the hallway, while sales reps are crying in the bathroom, this is a sign that goals are misaligned throughout the org. Yes, this can happen from time to time (it’s why over assignment exists in the first place - to safeguard against missing your board plan and execs getting canned) but ideally everyone (or at least the majority) is celebrating when you win.
More than half the team misses quota: As mentioned above, on average 7 out of 10 people on your team should hit their quotas. If you look around the bullpen and see that less than half are hitting the mark, that could be a sign of bad product market fit, too small of territories, not enough leads, or a whole host of other red flags.
High attrition: The average attrition rate in tech is somewhere around ~20%, while the average attrition rate of sales reps within tech is ~30% to 35%. This is due to the competitive, performance based nature of the role. If you see significantly more than 1/3 of your team turning over each year, that’s also a bad sign.
