Revenue Interview Series #3 | Building Your First Sales Commission Plan

A major transition point for VSaaS businesses occurs during the pivot from founder-led sales to AE/BDR-led sales. For many, this is around the $2-5M ARR mark, depending on ticket size & market opportunity. With leverage from a team comes the chance to grow bookings in a way that accelerates topline percentage growth.

When bringing on a first sales executive, a founder needs to prepare for the emotional handoff or letting others tell the story and lead deals, but they must also develop a structure for success: set aquota, assign KPI baselines and develop a corresponding incentive plan to drive performance. This task of building structure is often the first time a founder has experienced the process. 

The “best” compensation plans are transparent, equitable to both business and employee, while attainable with an appropriate degree of difficulty to drive meaningful growth for the business. A delicate balance, but one that is applicable to any style of sales function. To follow are some of Andrew’s thoughts on questions we hear from founders growing somewhere from $1M to even $10M in ARR:

Note: this is geared towards closing roles, rather than the SDR/BDR function (another article) and assumes the founder is managing these reps themselves, without the added luxury of a dedicated sales leader.

1. What is the right mix between base and variable compensation?

The first rep should be anchored to a 50%/50% split between base and commission. If the ACV/ARPU is larger, then this would lean towards base.If a faster, transactional, lower-price SMB motion, then the balance could shift towards commission, given there’s more ability to impact revenue in shorter cycles. The goal is for your first sales hire to be highly motivated to close business but not to do-so outside the confines of a successful handoff to implementation, training and Customer Success functions – moving within the pace of the rest of the business.

2. How often should we pay commission?

We believe quarterly is the right cadence to both measure and compensate sales reps in any mid-market or enterprise B2B scenario. If sales cycles are ~90+ days, a monthly cadence doesn’t allow a sales rep selling complex, mission-critical software to own or influence outcomes given the turnover rate of opportunities. Conversely, paying based on an annual target, or an annual quota misses the opportunity to allow for “resets” against a quarterly number. The Bridge Group consistently shows that roughly 2/3 software sales reps hit quota. If 33% are not going to hit their annual number, giving four opportunities to hit a quarterly goal, and reach 100%+ attainment (through overperformance in a quarter), can help to smooth out performance vs the annual quota.

3. Should I compensate all revenue-types at the same amounts?

The vast majority of variable compensation should be tied to ARR subscription revenue. In a business with healthy retention metrics (100%+ Net Dollar Retention and < 10% gross attrition), you can have confidence that new ARR will pay dividends for many years to come.

4. Should I cap commissions to protect the business from paying too much?

Never! Doing so is asking sales folks to game the system and delay bookings to maximize their own personal income in a way that doesn’t help the company.

5. Do I need to pay a signing bonus?

We prefer instead to structure around a “ramp plan” which serves to 1. smooth out the seller’s transition from their prior commission plan to yours and 2. to monetize and reward the qualitative work required to become successful during your first 90 or 180 days in a new role. A ramp plan can measure and monetizeon-boarding projects like territory plans, demo certifications, or other learning milestones. Likewise, closed revenue during the ramp period should be paid at higher values to not result in lower comp for having recently taken on a new quota.

6. Is it wrong to change compensation plans over time?

On an annual basis, it’s best practice to revisit each element of the compensation formula: variable dollars available to the rep, the total quota assigned, the key KPI’s that are deemed mission-critical to hitting the above, and the territory within which the rep will be assigned. As businesses scale, these variables can become misaligned. It’s important to keep a pulse on each element as the year progresses to have your growing sales team accustomed to annual revisions to the plan. That said, be very careful when changing compensation plans – they require deep trust to generate the behavior you are incentivizing. If you constantly change the game, then people will find interesting ways to maximize their own income in ways that usually doesn’t align with the company’s objectives.

7. OK…so where should quota be set?

On the one hand, setting quota is straightforward, especially when leveraging industry benchmarks and norms.

On the other hand, doing it right – specific to your business – is an iterative and recursive process that depends on having quality data and a numbers-driven approach to not just quota, but the shape and source of your entire funnel and forecast.*

Here are three quick tips:

1. A good recruiter will be able to tell you what the going OTE is for AE’s and BDR’s within your market. Multiply that OTE by 3-5x and you have a fair range.

2. Compare this quota to what you’ve achieved in the past. If it is far above what your existing team have been able to produce, you probably have some troubleshooting to do in areas of lead generation, outbound efforts, qualification, sales process, pricing, product…the list goes on! If you are achieving far higher than what the market expects of salespeople, you likely have something special that suggests the revenue organization should be invested in.

3. Given we all tend to fall victim to over-estimating outcomes and underestimating how long it takes to achieve them, make sure that the sum of your quota carrying reps is greater than your growth forecast. 1.2-1.4x is a safe range to use.

*In a future post, we will cover how to design, measure, build, and optimize an entire sales funnel. Doing so allows you to not only fine tune quota-OTE multiples, but build appropriate team size, generate dependable forecasts, and size capital investments into your business. Without a very sound understanding of the shape, size, and speed of your funnel, we’d argue forecasting and investing in the revenue organization is a fool’s errand. At the same time, you can’t have the data required to build it right until you get out in market and test…but we digress!

The Arcadea Ops team is active with value creation efforts inside our portfolio on these topics: from recruiting and hiring new members of revenue teams, to standing up process for scale inside our businesses. Even if you’re not partnered with Arcadea already today, we’re always happy to find time to discuss these and any other Sales & Marketing ideas with founders. Feel free to reach out here.