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How do you compensate your SaaS sales reps? On today’s episode of LTV, I’m talking cold hard numbers. How do you structure your quotas and commission for people on your sales team? Let’s dig in. 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 over 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- or 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 tiers with bigger customers. For more on that, actually check out another video that I made on moving up-market. So, with all 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 that 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 total sales comp per rep because it factors in salary and commission. For example, if your sales reps makes $50K as a base salary, and if they hit their targets they could bring in another $50K in commission, so their OTE would be $100K. How do you determine quota? There’s no really way to easy answer this, 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 revenue. 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 sales 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 by your sales rep in that month, the percentage jumps up to your whatever your standard commission rate is. Here’s how to handle commissions on recurring revenue. That gets asked a lot and there’s often a lot of confusion specifically as it relates to SaaS around recurring revenue. If your sales rep closes a monthly customer, for example, do you commission them just on the first month? Do you commission them on the whole year on the monthly fee? What about the lifetime value of the customer, do you commision them on that? Here’s the thing. 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 risk of churn than ones committed to paying an annual fee. 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. Let’s say, they only get commissioned to sell annual deals of a certain size. So anything from, say, $5K ACV or up is only what gets allowed. Anything less than that they don’t get a commission on, or it doesn't get factored into their quota. They’ll only get commissioned on the first year, not ongoing renewals. You really want to be incentivising them to hunt for new customers. Also, if the customer cancels within the first year the commission should get clawed back. This gives them incentive to only close good fit customers who they feel confident can be successful using your product, and avoids all that end of month scrambles trying to deals, even if they’re bad fit, just to hit quota. So what about expansion revenue? Problems arise when you commission reps on upselling existing customers. Sure, it can work in the short-term and it can help boost your MRR, but it should be a means to an end, not a long-term strategy. It’s really 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 full commission on that entire deal because they only upsold them for $2K. So now you’ve got to break out the expansion revenue differently which can be a headache to manage. Also it takes time and focus away from closing new customers which is really what you want your salespeople to be doing. Your Customer Success team is there to onboard new customers. They’re there to handle renewals and 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 that customer success has, not the hunter mindset that salespeople have. The way we do it at Proposify is that our CSMs are bonused out quarterly. The bonus is a percentage of how much ARR, or annual recurring revenue, they manage. In other words, their book value. So the percentage will be higher the lower their Net MRR churn. Now I know that sounds confusing, so let’s put it in another way. The more accounts your CSMs oversee — their book value — and the lower their churn, which factors in expansion revenue — the more money they’ll make. They're incentivized to grow their book value while keeping the churn in the negatives. Hope that makes sense. 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 in the beginning, and if onboarding goes well, they’ll roll into a much larger seat deal. In these cases, we’ll allow the sales rep and the CSM to work on that together and split the commission, since the rep is needed to close that larger deal, but also the CSM was needed to successfully roll out the product or that customer and make sure that the rollout goes well. But other than that, reps are only commissioned on the initial annual deal. Naturally, this puts some pressure on them to maximize their deal size and land the biggest deal possible. But they have to balance that knowing that the bigger the deal, the harder it is to close, and the longer it will take. Alright, so let’s take a look at the comp structure. A common misconception is that sales reps make a commission on every sale they bring in. That’s kinda true, but not exactly. The way it works is, you put a 10% commission, or whatever percentage commission you’re talking about, and that is for their overall quota. So whenever a rep closes a deal that counts toward their revenue. n practice, you’re gonna pay that commission out on a monthly basis 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 a 10% commission, they’ll get an extra $5K on their next pay check that week, of course minus deductions. Alright, let’s talk about accelerators. Accelerators are a way to encourage reps to exceed quota. So let’s say your quota is that $50K per month that every rep needs to close. If they exceed quota and close $60K, you want to be able to give them a much higher percentage on any revenue that they closed. So let’s say you pay them 20% on anything above quota, well that $10K they closed, they’ll get 20% on that extra $10K. So spiffs. What sales rep doesn’t like spiffs? If you don’t know what they are, spiffs are bonuses above and beyond their commission. Sales reps by their nature, are competitive people. They really 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 have a spiff where we’ll pay $500 cash on top of quota if a rep closes a deal from a cold call, so they didn’t get that lead inbound, they went out and hunted them themselves. Here’s another spiff: if the rep hits their quarterly stretch target they get an all expenses paid trip for 2, to anywhere they want with a $10K Max. That’s a really good spiff but they have to hit a big number to get that. If the entire sales team hits the end of year stretch target they all get to fly away for a few days to another city. Now, what about your non-quota carrying reps? It might sound strange, but not every sales rep on your team necessarily closes deals and revenue. Some are there to help prospect or qualify leads for your closers. So they need to commissioned 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 that system and doesn’t directly translate to revenue. For our SDRs, our sales development reps, those are the people that qualify, they are allowed to close small deals under a certain size that aren’t big enough to go to an AE, and get commissioned on those deals plus a blended comp on the number of opportunities they send through to the salespeople. Finally, you want to provide a career path for your sales reps. You want to provide an incentive for your junior reps to move into bigger and better roles on your team based on their 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 doing the cold calling or the qualifying, but if they prove themselves they move up into and AE, or account executive role. The AE role itself is broken into several tiers, so that has the tier 1 AE exceeds quota consistently they move up into the next tier, where they get a higher commission percentage but also a higher quota. So, I hope this episode cleared up some confusion around sales comp and I hope you can use it to get started as you build out your sales team. I’ve provided a free guide you can use for sales comp which is linked to in the description below. Please share and leave a comment if you like this, and I’ll see you next time. This episode of Lifetime Value is brought to you by Proposify. 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