Figuring out how to properly compensate your salespeople is one of the toughest challenges when building a scalable SaaS sales process. In this episode of LTV, Kyle lays out the cold, hard numbers and provides a roadmap for structuring quotas and commissions for SaaS sales reps.
Few things inspire as much conversation among startup founders as how to set quotas and commissions for your sales team. It can be tricky to figure out if you’ve never done it before.
I’ve employed salespeople now for three years, and over time we’ve gotten closer to figuring it out, although like any process it will always adapt and evolve as the company grows.
To begin, let’s get a few things straight:
- I’m assuming that you have a sales team or are looking to build one,
- You sell a SaaS product to mid-to-large sized customers, anywhere from a few thousand dollars in annual contract value to six figures and up.
- If you sell a low-price product to small customers, you probably shouldn’t have a sales team, although you may want one if you’re testing out a larger pricing tier with bigger customers. For a more detailed look at selling to larger customers, check out my post on moving up-market.
With that out of the way let’s look at a few things:
How do you compensate them?
Most salespeople are paid a base salary, plus commission. The commission is a percentage of the revenue they bring in each month. A common percentage is 10% of gross sales, but it can be more or less depending on what you sell.
The salary you pay them, plus the commission you pay them (assuming they’re hitting quota) is what’s known as On-Target Earnings, or OTE. It’s a shorter way to refer to your sales comp because it factors in salary and commission. For example, your sales reps might make $50K as a base, and if they hit their targets, another $50K in commission, so their OTE would be $100K.
How do you determine quota?
There’s no easy answer, but keep in mind a standard practice is you want your quota carrying sales reps to generate 5x their OTE. If your account executives make $100K, they need to close $500K/year. In enterprise sales, a seasoned rep could make $500K per year but generate $2.5M in revenue.
What happens if reps don’t hit quota?
If you have a new and unproven sales process, don’t punish reps too harshly for missing quota. As your process matures and you know for a fact that most of your reps can hit their quotas or exceed them consistently, you’ll want to gradually make the punishment for missing quota harsher.
You can have a lower commission percentage for any revenue below quota. As soon as quota is reached in that month, the percentage jumps up to your standard commission rate.
How to handle commissions on recurring revenue
There’s often a lot of confusion on how to commission recurring revenue. If your sales rep closes a monthly customer do you commission them on the first month? The whole year? The life of the customer?
Monthly deals are going to add a lot of complexity to your sales comp plan. They’re riskier, because a monthly customer is at a higher churn risk than ones committed to paying annually.
If possible, I recommend putting rules in place for your sales team, so they know that closing deals that don’t fit your criteria won’t be counted in their numbers.
For example, they only get commissioned to sell annual deals of a certain size. Say, anything above $5K ACV. Anything less than that they don’t get a commission for because it doesn’t factor into their quota.
They’ll only get commissioned on the first year, not ongoing renewals. You’re incentivising them to hunt for new customers.
Also, if the customer cancels within the first year the commission gets clawed back. This gives them incentive to only close good fit customers who they feel confident can be successful, and avoids end of month scrambles to close bad fit customers just to hit quota.
What about expansion revenue (ie: upsells)?
Problems arise when you commission reps on upselling existing customers. Sure, it can work in the short-term and help boost your MRR, but it should be a means to an end, not a long-term strategy.
It’s complex to track and report on. For example, if a sales rep upsells a $5K customer on a new $7K/year plan, you shouldn’t pay them a commission on that entire deal, so now you’ve got to break out the expansion revenue differently. It can be a headache to manage.
Also it takes time and focus away from closing new customers.
Your customer success team is there to onboard new customers, and handle renewals. Ultimately they get rewarded for retaining the customers your sales team worked so hard to acquire, and they also get rewarded for expanding the revenue from those customers over time.
I recommend an entirely different comp model for your customer success team. One that aligns with the farmer mindset, not the hunter mindset of sales. The way we do it at Proposify is that our CSMs are bonused out quarterly. The bonus is a percentage of how much ARR they manage, or book value, and the percentage will be higher the lower their Net MRR churn.
In other words, the more accounts they oversee — the book value — and the lower their churn, which factors in expansion revenue, the more they make.
They’re incentivized to grow their book value while keeping the churn in the negatives (ie: expansion). I’ve written in detail on how our customer success team manages churn, check it out for a look into the tactics and strategies we employ at Proposify.
The only exception is if a sales rep closes what they know to be a land and expand deal. For example, a deal where the customer will buy a relatively small amount of seats, and if onboarding goes well, they’ll roll into a much larger seat deal.
In these cases, the sales rep and the CSM will split commission, since the rep will need to come back in when it’s time to expand but the big upsell is based on how successful the rollout went.
But otherwise, reps are only commissioned on the initial annual deal. Naturally, this puts some pressure on them to maximize their deals and land the biggest deal possible. However, they also know that the bigger the deal, the harder it is to close.
A common misconception is that reps make a commission on every sale. That’s true, but it’s not like you send out a 10% commission check every time a rep closes a deal. In practice, you’ll pay out commission at the beginning of every month, usually coinciding with the regular payroll. The amount they get will depend on how much they closed last month. If their total sales for last month was $50K and they get 10%, they’ll get an extra $5K added to their pay that week, minus deductions.
Accelerators are a way to encourage reps to exceed quota. Let’s say your quota is $50K/rep/month.
If your rep exceeds quota and closes $60K, they can get a much higher percentage on any revenue above quota, say, 20% on that extra $10K they closed.
Ah spiffs. What sales rep doesn’t like them?
Don’t know what they are?
Spiffs are bonuses above and beyond their commission.
Sales reps by their nature, are competitive people. They like to win.
Spiffs are rewards for hitting certain targets and they can be large or small. They can be cash, some other kind of prize like gift cards, swag, or tickets to local events.
For example, we pay $500 cash on top of quota if a rep closes a deal from a cold call (ie not an inbound lead).
If the rep hits their quarterly stretch target they get an all expenses paid trip for two anywhere they want ($10K max).
If the entire sales team hits the end of year stretch target they all get to fly away for a few days to celebrate in another city.
What about non-quota carrying reps?
As strange as it may sound, not every sales rep on your team is necessarily involved in closing deals. Some are there to help prospect and qualify leads for your closers. They need to be compensated with commission, too.
In general, I try to avoid comping on behaviours, like number of phone calls made or emails sent. It’s too easy to game and doesn’t directly translate to revenue. For our SDRs who qualify, they are allowed to close small deals that aren’t big enough to go to an AE, and get commissioned on them, and they also get a blended commission on the number of opportunities they send through to the AEs.
Provide a career path
You want to create a path for your junior reps to move into bigger and better roles on your team based on performance.
Most sales organizations have a clearly defined chart with increases in quota and commissions as soon as they hit certain milestones.
So new and inexperienced salespeople will start out as SDRs and BDRs, but if they prove themselves they can get promoted to an AE.
The AE role itself may have several tiers. If a Tier One AE consistently exceeds quota, they’ll move up. Their OTE increases as they do so, but so does their quota.
Enjoyed this article? I’d appreciate you giving it some claps. Also if you’re an entrepreneur, check out my book, Free Trials (& Tribulations): How To Build A Business While Getting Punched In The Mouth available on Amazon.