👋 Hi, it’s CJ Gustafson and welcome to Mostly Metrics, my weekly newsletter where I unpack how the world’s best CFOs and business experts use metrics to make better decisions.
Welcome to our March series on Sales Compensation.
I was going to hold out on ya’ll until December to drop this blockbuster series. But I realized people want BANGERS. They want HITS. And they want them NOW.
Kanye West doesn’t just sit on an album until December because he thinks it’s the right “time” to drop.
No; he calls up Ty Dolla $ign and says let’s assign some damn quota.
You can delay your gratification in other areas of life, BUT THE METRICS SHALL NOT WAIT!
Part I: Designing Rep Comp Plans
Who’s involved in comp plan design
Getting the split right: Base vs Variable
Quota to OTE ratio
Baselining achievement
Accelerators
Paying sales managers
A case study: Salesforce’s early comp plans
What counts as a booking?
Comp plan flaws
Part II: The Art and Science of SPIFFS
Why do spiffs succeed or fail?
When’s the best time to run a spiff?
How should you structure spiffs?
What do common rewards look like?
Part III: Commission Stack Benchmarking
What percentage should an Account Exec (AE) make on a deal?
How much should the rep’s manager, SE, and BDR make?
What does a “good” total commission stack look like?
Does this differ based on pricing model?
Source: ICONIQ
Comp Plan Design
There are three parties involved in designing rep comp plans:
People Operations - Market comp benchmarking
What’s competitive for talent?
FP&A - Guard rails
What are we trying to achieve from a topline perspective, and what are we willing to spend to get there?
RevOps - Ground game
What will actually motivate and drive the right behavior on the ground when it comes to rep activity?
All three parties need to have a firm understanding of the organization’s high level goals and how the company monetizes its product. And they need to be consistent when they communicate objectives to reps so they can manage their time accordingly.
Getting the split right
The technology account executive is typically on a 50/50 plan.
When you get outside of concentric circles of sales supporting roles, a Sales Development Rep may be 65 base / 35 variable.
An account manager might carry a hybrid quota of existing customers plus new customers. And maybe it’s 55% or 60% base.
If you are a people manager of account executives you will still be close to 50/50, but measured against a more forgiving plan (more on that below)
Source: ICONIQ - Split by Position
The atomic unit of any sales org is the Account Executive. And at most software companies they are looking at 50/50 base variable.
For example: Take a $100K base salary which is guaranteed. So if you hit right on your quota / plan / target you would expect another $100K.
Source: ICONIQ - Split for Account Execs
Ratio
So what should a rep’s quota be relative to their pay? That, my friends, is the million dollar question.
The ratio of Quota to OTE will depend on your business model.
Is it an enterprise business with a heavy install base dependent on a land and expand motion?
Or is it a high velocity, product led growth business with a heavy digital component?
Answering these questions should inform your LTV to CAC, which informs how much you are willing to pay based on the expectation of future cash flows from a customer
Now that digital and product lead growth are playing a different role in how companies sell, the lines between product and GTM are blurring.
With that said…
The standard ratio between “on target earnings” and quota is somewhere between 4 and 6 to 1.
A 5 to 1 ratio of $100K base, $100K variable ($200K OTE) would call for $1M quota.
Sometimes you’ll hear it called a 10x base ratio (same math, just not using commission).
Early on you can rationalize 3x… that’s what that VC cold hard cash is for!
You can’t sustain that forever, so you are knowingly using venture dollars to get the wheel in motion.
However, you have to check this ratio against the rest of your operating model. And that includes looking at your sales pod structure.
Should the ratio go up?
No, you hire more reps…why?
Early on a rep’s territory is massive
As the company succeeds you take their accounts away and give it to someone else, but you need to give them more product to sell
One guy originally covered East SMB
In four years four guys split East SMB
But you give them 4x more products for them to sell their respective handful of accounts
Net net, the Comp model should work regardless of the role at 4 to 1 or 5 to 1.
Baselining achievement
What percent of reps make quota on a regular basis?
Usually in the mid 40’s, but in tougher economics times, it’s in the mid 30’s.
That is not ideal.
Believe it or not you can still have low 30’s and still hit the topline for the business.
But it degrades culture over time and people start to leave.
A good org will have 60% achieving quota.
100% is not what you want - that’s too low
Here’s a hypothetical “healthy” distribution of ten reps, from talking to Ryan Walsh, CEO of RepVue (link to pod at bottom):
1 rep totally crushing it (like 200%)
1 rep ahead of plan (like 120%)
4 reps hovering between 85% and 95%
2 reps hovering between 75% and 85%
2 below 75%
Either ramping or being managed out
Marc Benioff of Salesforce recently said that 90% of the company’s sales dollars come from 50% of the reps. While this might not be the ideal outcome, and probably burns through a ton of reps each year, there is a clear power law at play.
Accelerators
Typical accelerators kick in at 100%.
These should be linked to your core metric. You reward someone for getting above and beyond their quota faster.
Backend Loaded or Consistent?
It depends on what the sales cycle looks like and the complexity of the sale.
If your business model has back ended enterprise deals with +180 day sales cycles, you probably want it to be on an annual level.
If you have more of an MRR business with shorter sales cycles and you strive to drive linearity, you can look at a quarterly type of accelerator.
*Disclaimer*: Be careful what you perpetuate
Do you self perpetuate the seasonality with accelerators?
Are you incentivizing both customers and reps to wait until the last moment?
Is this how you trained your customers to act?
Keep an eye on your fully loaded commission rates
When you are over your annual number and check all the other boxes, the highest loaded commission percentage can creep up to 25%.
Rule of thumb: Typically speaking, if someone does 2x their number they should make 3x their OTE.
Paying sales managers
You want your sales managers to be measured on the same goals as your reps.
If you measure them on only two of the three goals (e.g., Cash, Years, but not ACV) you can drive perverse incentives.
I can’t stress this enough - you want your sales managers to have goals that are a summation of their team’s goals. I’ve seen companies get too cute and try to give sales managers derivative goals from those of their team. It never seems to jive in real life.
What you can (and should) do is give people managers some cushion. It will fall somewhere between the board financial plan and the company’s fully deployed operating plan.
For example, if there is a 20% uplift between the two plans, the sales manager may get a 10% break to guard against attrition, big deal risk, and seasonality.
“For a sales manager, usually I take the sum of the ramped quota of their reps and apply a discount of 10 percent as a minimum. The idea is that you are setting your financial plan (and associated expenses) to something less than 80% of assigned quota and your sales management team’s number should be somewhere between the finance number and the fully assigned ramped street quota of your team.”
-Ryan Walsh, CEO and Founder of RepVue
Comp Components at Salesforce in the early days
Cash: Is it annual upfront? Are you getting paid quarterly? Monthly?
Years: Is it a one year deal? Two year? Three year?
ACV: What is the annuity? What is the Annual Contract Value?
In the early days, ACV = Multi Year = Cash. If you closed a $100K deal, you would have 3 different quota buckets. And you would be rewarded with as much commission for getting cash up front and for getting a year of multi year as you would for actually closing the deal.
This obviously needs to change as you go upmarket and a Bank of America has plenty of cash and wants to pay for five years. That would blow the doors off. Typically companies shift to calling these “Named Accounts” or “House Accounts” which need to be treated differently due to their shape and size. But that’s OK, because the reps who cover these also get a higher base and OTE target.
Here’s a quote from Brett Queener, the first Sales Ops leader at Salesforce back in the day:
For comparison’s sake, for the early years at salesforce.com, the compensation plans were AC = MY = Cash — which means the split of the variable was roughly 1/3 each. This approach made sense in the early days of SAAS where SFDC was not tapping the huge growth rounds of capital that are available today, and we wanted to secure longer customer commitments.
However, understand what that meant to a rep — we were telling them that getting a year’s worth of cash up front and a second-year contractual commitment was as important as winning the deal — which can unfortunately highly motivate the AE to drop price more than needed to ensure they secure the cash and my components. This approach backfired a bit (and why I had to pull a full “house account” tricks) when we moved up-market, and AE’s were closing five year, $4M a year ACV deals, with two years cash upfront).
What counts?
Be very specific around creating this rule and make it crystal clear to reps. For a signed deal to count within a specific month, the contract / order form must be signed in that month and the order start date must also be within that month (or within [x[ days). I’ve worked places where the start date was 15 days as well as 30 days. You can pick.
But the shorter the better so you don’t throw off your revenue recognition or commission payout.
Both revenue recognition and commission are triggered when you send an invoice (signed order = booking and quota retirement for the period; invoice sent = commission payout and revenue recognition).
If a rep gets a booking signed that starts in six months, that’s great, but it’s a “pre-booking”. In other words, it doesn’t turn into a pumpkin (or booking) until that future month. Play no games.
Comp Plan Flaws
Comp plans usually fail not because they are too aggressive, but because they are too complicated.
If you make a comp plan with five parts and weightings, you create confusion and you create a lack of clarity around where to spend time and be intentional about it when you are the rep.
It’s easy to say you want some astronomical growth on a number, but you have to think about it actually landing in a rep’s hand - what will they think if this is so far out of reality
“We want you to not only hit this, but strive to exceed this so you can participate in the upside.”
You need to make it as simple as possible and clearly aligned to the strategy.
Simplicity and ease of understanding of what is going to move the needle and how do they feel a part of the success and participate in that financially.
Relevant Listening:
Thank you to the President’s Club members below who helped inform this series:
Brett Queener, Founding Partner of Bonfire VC (and early Salesforce)
Ethan Schechter, VP of Sales at Snyk
Ryan Walsh, Founder of RepVue
Sid Kumar, SVP of RevOps atHubSpot
Binge This
Tune in next week when we’ll go deep on SPIFFS. If you listen really closely, I can hear a couple of CFO’s cursing me already.
