Picture this: your startup just hired its first sales team. They hit the ground running, built a big sales pipeline, and the wins are starting to roll in. They’re closing deals. They’re hitting quota. They’re celebrating wins, high-fives and fist bumps all around.
Sounds like the dream, right? But unless you’re wearing rose-tinted glasses, you probably know it rarely happens like this.
A lot has to go right when you build a sales team. You need the right product. The right message. The right list and the right CRM. Most importantly though?
You need the right sales reps. And they need to be motivated.
That’s why getting your startup’s sales compensation plan right is so important. The right compensation plan does wonders for your startup’s sales team. It attracts talented reps. It incentivizes them to perform. Best of all, it enables an infectious team culture that energizes your company.
So how do you design the best sales compensation plan for your startup?
We’re glad you asked!
Over the years we’ve helped dozens of early stage startups build sales compensation plans. We created a handy, easy-to-use template to make the process easy, and today we’re going to show you how to use it.
We’re going to show you step-by-step how to create a great comp plan with our template. We’ll provide helpful tips and insights along the way, then finish by showing you a couple different examples of startup sales compensation plans. By the end of this article, our goal is for you to be well on your way to designing a comp plan your sales team (and you) will love.
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3 Crucial Goals for Your Startup Sales Compensation Plan
First, let’s get clear on what we’re trying to achieve. Not all comp plans are created equal. A good one should achieve the following 3 goals:
1. Motivate Performance
How do you motivate your sales reps to perform well? This question comes up again and again in my work with startups. And it’s an important one.
How you pay your sales reps can make a big difference in the results you get. The right comp plan that incentivizes the right behaviors can do wonders. Your high-achieving reps will be constantly pushing themselves to exceed your revenue targets in pursuit of a big payout. And when they get it? Everyone else on the team gets fired up and tries to do the same.
On the flip side, if your comp plan is filled with unattainable quotas and incentivizes behaviors that aren’t conducive to a good sales process, you’ll end up with very unhappy, unmotivated reps.
2. Retain Employees
This is a big one. First and foremost, your compensation plan needs to be fair. It needs to give reps a certain level of security, because as a startup, you’re likely to have many changes to your go-to-market that could affect a rep’s compensation through no fault of their own.
Secondly, your compensation plan has a big impact on the culture of your sales organization. For instance, with a good comp plan, everyone’s making money (especially you). Your reps are crushing quota. They’re getting big payouts. They’re working hard to hit team objectives, and having a blast celebrating each other’s wins. Who wouldn’t want to be a part of that?
On the flip side, a bad comp plan might instead incentivize a self-interested, cutthroat culture where every rep is looking out for themselves. Everyone’s heard of those “churn-and-burn” type sales environments. They run on testosterone and caffeine. They’re filled with Wolf of Wallstreet cliches, and the environment can be very toxic. Not the best if you want your employees to stick around.
3. Be Profitable
This doesn’t get talked about enough. The number one problem that I’ve found in startup sales comp plans is that the cost-per-sale (total $$ spent in sales commissions or other sales costs to close each deal) is way too high. Essentially, they’re paying their reps way too much relative to revenue the company gets from each deal.
This is a big deal for startups because it’ll take you longer to turn a profit (your payback period). Which means that you’ll be burning your runway a lot faster.
Take, for instance, a FinTech SaaS startup we worked with. When we reviewed their compensation plan, we found they were paying about the same amount to their sales development reps (SDRs) as to their account executives (AEs), which is never a good practice. This added 6 months to their payback period – a 50% increase – which was a big hit to their runway. It could’ve seriously jeopardized their ability to make it to their next round.
The lesson here? Your sales compensation plan needs to make financial sense for your startup.
Now that we know what a good comp plan needs to do, let’s dig into exactly how to make one!
How to Design a Sales Compensation Plan for Your Startup
We’ve broken this process down into 4 easy-to-follow steps. We’ll illustrate by using the template for a fictional EdTech SaaS company looking to hire their first sales development representative (SDR).
Step 1 – Set Your Baselines
For our first step, we’ll need to plug a few numbers into the spreadsheet:
- Revenue Goal: how much revenue do you need the whole team to close in one quarter? The best way to set this number is to look at your historical data – even if you don’t have a lot. If as a founder you spent 20% of your time on sales and brought in $50,000 in revenue per quarter, your might then set your revenue goal at $250,000 per quarter for 1 rep, since they’ll be spending 100% of their time selling.
- Close Rate: of the qualified sales opportunities that entered your pipeline, what % of them were you able to close?
- Annual Contract Value (ACV): on average, how much revenue do each of your customers bring in every year.
Do everything you can to make these numbers as accurate as possible, but don’t sweat it if they’re not perfect. These numbers will be the underlying assumptions our comp plan is based on, but it’s totally normal for them to change over time. The important thing is we’re not shooting in the dark.
Once you have the numbers, plug them into the spreadsheet under “ORG GOALS”:
For the example in this screenshot, they were looking to hire their first SDR to hit a quarterly revenue goal of $300,000. They had a historical close rate of 30%, which meant they needed to generate $1,000,000 in pipeline. At an ACV of $15,000, this meant they needed to book 67 demos in order for the team to hit its revenue target.
Okay, so now we’re clear on the numbers needed to hit our target. Next, we need to figure out the best way to incentivize our reps to hit these numbers.
Step 2 – Determine Your Compensation Setup
This step breaks down into 3 sub-steps.
Step 2.1 - Set Your Team’s On-Target Earnings (OTE)
OTE is your sales rep’s base salary plus how much you project them to make in performance incentives or sales commissions. It’s your rep’s total expected compensation.
As with any job position, getting this right is crucial. If your OTE is too low, you’ll fail to attract quality salespeople. Your startup will only get as far as your people take it, so we can’t have that.
Setting a good OTE really comes down to 2 things:
- Your Annual Recurring Revenue (ARR) Quota: for most startups, the sales team will largely be measured and compensated based on how well they hit Annual Recurring Revenue (ARR) goals. This is the revenue target you set in step 1.
- Market OTE Expectations: the expectations of salespeople will largely depend on the market. If you’re hiring in Silicon Valley and competing with Salesforce or Oracle, top performers will expect a top dollar OTE, whereas in Austin, TX, you’ll be able to get away with a lot less.
The trick is aligning OTE with market expectations. If you’re looking to hire reps in a market where the expectation is higher than the OTE you can afford to pay, then you may need to make it up in options or get creative (perhaps hiring more junior reps and investing in a robust training program).
Startup Sales Comp Plan Example: On-Target Earnings (OTE)
For the company in our example, they’re hiring SDRs at a satellite office in Salt Lake City, UT, so they set their OTE at $75,000.
Step 2.2 - Decide What % of OTE Should Be Base Compensation vs. Variable
For startups, we recommend base compensation be 60% – 70% of OTE for both SDRs and AEs. The reason why is that as a startup, you likely don’t have enough clean sales data to make accurate projections. Since these projections determine how you set up your ARR targets, your reps could miss their OTE through no fault of their own, which can lead to them becoming jaded and unmotivated.
Further, variables completely out of their control might hurt their ability to set meetings or close deals. Let me give you an example…
At a FinTech startup I worked at, leadership decided to abruptly change our target market. The SDR team went from calling on every vertical to just one. With such a small segment, there were not enough leads for the whole team – the SDR team quickly exhausted their list. On top of that, all of the warm leads they’d been scheduled to follow up with suddenly became useless because they were in the wrong industry.
Meeting generation tanked. It was real bad. The SDR team’s SAO totals dropped by 80%, and didn’t recover for nearly 2 months. Fortunately, we paid 60% of their compensation through salary, so the financial impact wasn’t critical. The team’s morale was shot, but they were still able to pay rent and put food on the table. If our compensation mix had been heavier on variable comp though, that might’ve put them in a bad financial situation. And we might’ve lost a few reps.
If you’re an early stage startup just starting your sales function from the ground up, go with 70% base. If you’ve been around longer and can more accurately project performance, feel free to go heavier on the variable comp. But never under any circumstances go lower than 50%. Your salespeople will appreciate the security of fixed income, and be a whole lot more satisfied with the job.
Startup Sales Comp Plan Example: Base vs. Variable Compensation
In our example, the startup was hiring their first SDR, didn’t have lots of historical data, and was still experimenting to find product-market fit, so we set their split to 30% variable and 70% base.
Step 3 – Create Your Variable Compensation Structure
Variable compensation is crucial to the success of your comp plan. Also called a commission plan, this is where much of your comp plan’s motivational power comes from.
If you're looking to build a model that's tried and true, download our sample plan as an initial model you can modify to fit the needs of your team.
Setting this up can get complicated, but we’ve broken it down into 2 substeps:
Step 3.1 - Incentivize the Right Behaviors
Having a motivated sales team is great, but if they’re not motivated to do the right things - the things that are most conducive to your company’s growth - then it’s really not worth much. In fact, it may be harmful.
Let’s say, for example, your compensation plan ties 50% of the SDR team’s compensation to demos booked. “Great,” you say. “The more demos they book, the more sales we’ll get.” Pretty sound reasoning, right?
Well here’s the thing. Since so much of their compensation is tied to booking demos, they’re going to book demos.
At any cost.
Meaning if they have an unqualified prospect on the line who really isn’t a good fit, but seems interested anyways, what are they going to do? They’re going to book the meeting. Even if the AE stands no chance of closing them.
In this case, the SDR will be getting their payout, which increases your cost-per-sale, all the while the AE wastes time chasing a prospect that’ll never close. Not a good scenario.
Incentivizing SDRs on just meetings is the number one mistake I run into when it comes to sales compensation plans for startups. To avoid this, let’s consider a few decisions you’ll want to make around your sales team’s behavior:
How Qualified Do Your Prospects Need to Be?
If you’re selling complex data enrichment software into the enterprise, you probably want to make sure that the prospect has the budget, authority, and need for your solution before dedicating valuable sales resources to pursue them. So in this case, you’ll want to incentivize your SDR at least 80% on sales accepted opportunities (SAOs), which are basically when the AE verifies that the prospect is a legitimate sales opportunity with a high likelihood of closing. Incentivizing SDRs on SAOs keeps their focus on quality.
On the other hand, you might sell low-priced bookkeeping software to small businesses. In this case, incentivizing meetings at all costs probably makes sense.
For most of our clients, we recommend they compensate SDRs 70% on SAOs, 20% on meetings booked, and 10% on closed deals. The reason for this is we want to prioritize quality meetings first, above all else. But can be weeks of lag between an SDR booking a meeting and an AE marking it as an SAO. So the 20% for meetings booked gives them instant gratification for booking the meeting without being so much that it incentivizes them to book bad meetings.
So what about the remaining 10% on closed deals? We’ll talk about that next.
Do You Want to Give SDRs a Path to Promotion?
SDRs are not the ones closing deals. And if they’re incentivized on SAOs, which have a high likelihood of closing, what good does it do to tie 10% of their compensation to closed deals? Isn’t closing the deal squarely on the shoulders of the AE?
Great questions. If you incentivize SDRs on closed deals, they’re going to be excited the AE closes the deal. This fosters unity between the SDR and AE teams, but even further, it also encourages the SDR to follow the opportunity through the sales process. As they’re watching it go from one stage to the next, reading the AE’s meeting notes in the CRM, they learn a lot about how to sell your solution. In our experience, the SDRs that follow opportunities from SAO through close tend to have a lot more success when they get promoted to AE.
So if upward career progression and employee retention are important, a little compensation on closed deals is a good thing to add to the mix.
Do You Want AEs Involved in Booking Renewals?
This one’s a big debate. Exactly who should be responsible for driving renewals? If your business operates on annual contracts, someone will need to follow up with clients who are approaching their contract’s expiration date to prevent them from churning.
For some companies, this would be the responsibility of the customer success team. If you have a high-touch implementation process where your CX reps form an ongoing relationship with the client, having the CX rep handle renewals is probably the way to go.
Conversely, if there is no relationship formed with your CX rep during or after onboarding, having the AE handle renewals makes sense.
Startup Sales Comp Plan Example: Incentivizing Behaviors
The commission structure in this example is for an SDR. We’ve set 30% of their compensation to come from demos booked (again, for that instant gratification), and 70% to come from SAOs. Again, we do recommend considering 10% on closed deals for SDRs, but for the sake of simplicity we kept this example to two metrics.
Step 3.2 - Add Accelerators
These are multipliers that increase the rep’s payout as they reach different levels of quota attainment. Essentially, these are incredibly powerful incentives that can motivate your reps to exceed quota. In some good months, this can lead to really big payouts for your top performers, which gets the entire team excited and motivated to do the same.
Generally speaking, this is something you’d really only do with SDRs or AEs on a fixed comp plan. For AEs on a % based compensation plan, you could change their commission rate at different levels of quota attainment. The reason I don’t like this is because one big deal could completely blow up an AE’s compensation for the quarter, even if they got lucky and didn’t necessarily perform better.
Startup Sales Comp Plan Example: Accelerators
In our example, the commission rate multiplier adjusts the per-demo or per-SAO payout when the SDR is below quota, and conversely increases their commission rate when they’re above quota. This gives you a little financial protection from bad performance, while also incentivizing the SDR to blow their quota out of the water.
Step 4 – Make Sure It’s Profitable
Okay, so all your data is in. Our template should now be calculating the following things for each quota attainment tier in your comp plan:
- Earned Compensation for each variable (demos and SAOs in our example)
- Total Compensation (OTE + Bonus)
- Rep Cost of Pipeline (Total Compensation divided by Pipeline)
- Rep Cost of Sales (Total Compensation Divided by Revenue)
It’s that last number that I’d like to focus on. Basically, that’s looking at how much of the ARR booked you’re paying to the rep. If this number is too high - especially at 100% quota attainment - that means your CAC payback period is going to be a lot longer and you’re going to burn through your runway a lot faster.
If this number is too high - especially at 100% quota attainment - that means your CAC payback period is going to be a lot longer and you’re going to burn through your runway a lot faster.
Your sales team’s compensation plan is not the only factor in motivating them. In fact, my experience has shown that it may not even be the biggest one. But there’s no denying that it’s important. Nailing your compensation plan out the gate can go a long way towards attracting the right reps, motivating them to perform, and encouraging them to stick around. And when you’re back is against the wall and you’re trying to get the most out of your runway, this can make all the difference.
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