When I was a new sales manager, compensation planning was one of the biggest gaps in my knowledge. Having not been a sales rep myself, and only a founder who sold, I had never personally had a comp plan.
When I created my first SaaS comp plan, not only did I have no clue to start, but there were also no available benchmarks or industry “rules of thumbs” so I literally just took a stab in the dark and refined our plan as we went along. Luckily for all of us, there are now many benchmarks and reports points we can use to understand industry norms around SaaS sales compensation.
Here is how I approach compensation planning for SaaS sales teams. This is just a starting place from which you can build a plan that works for your organization.
Determine the on-target earnings for your team.
On-target earnings (OTE) (also called total target comp, TTC) are what someone will make if they hit quota. So, your first mission is to determine your OTE for all sales team members—your AEs, SDRs, sales engineers and various support/operations roles. Take these things into consideration:
- Market norms (you can use a resource like salary.com for regional comparisons, and benchmarking data).
- The split between base and commission. As a rule of thumb when you are starting out, design your comp plan to be 50% base and 50% commission. So, for example, if OTE is $150,000 that means the base salary is $75,000 and the commission potential (if quota is hit) is $75,000. You will also want to consider thresholds and accelerators so that as reps hit and exceed quota they can earn more.
- OTE is often roughly based on a total percent of new bookings. For example, if a rep’s quota is $1,000,000, and if they hit quota they will earn $200,000, then they earn about 20% of their total bookings. In terms of norms, I see a lot of variances here depending on the market, company funding level, other benefits, etc. But it’s usually between 10-25% of total bookings. I know that’s a big variance, but it depends on a lot of factors unique to the specific company. For example, 20-25% of bookings are most likely in a well-funded, very hot space. This is challenging for a company that is trying to run lean and profitably, and/or who don’t have large cash reserves but can work if there is strong customer retention, positive revenue churn, and a high customer LTV (lifetime value). Normally though a capital-efficient, lean or bootstrapped business is going to land more in the range of 10-15% of bookings.
- Plan backward from there to see what actual commission rate that works out to be. As a rule of thumb, the commission percent ranges from 5–20% of the contract value, again depending on many factors including margins, target profitability a company may be trying to reach, funding levels, overall customer acquisition costs, etc.
Plan for competition and achievement.
Sales reps thrive on competition and achievement. In addition to base and commission, as part of your department plans, you will want to set incentives and bonus that will be available based on individual and team goal attainment.
I always like to build in accelerators so that reps who hit quota have the opportunity for bigger earnings, and incentives on top of their OTE as well.
Think through all the details.
Of course, planning for commission rates, OTE, and overall costs is your most important mission, but don’t forget the details as well.
- Will all roles have the same comp plan, or will you provide different base or commission rates based on experience level or tenure?
- Plan holistically—it’s not just the AE’s you are compensating with commission. You will need some level of incentives, bonus or commission for roles like sales operations, sales engineers, SDRs, etc. Look at costs across the entire team to ensure you are hitting the right cost of sales targets you (or your boss) have set.
- Be strategic when considering your comp plan because you get what you incentivize. Want longer or non-cancelable contracts? Make the commission higher on those. Want to sell more deals with services attached to them? Pay a higher commission on services. Want to focus on the sheer number of new customers, not contract value? Bonus those who close the most customers in a month/quarter/year. Whatever you incentivize is, without a doubt, what you will get, so consider that carefully.
- If the salesperson isn’t involved in repeat sales, don’t commission those sales. Commission everything the rep personally brings in. If they bring in a 1-year contract worth $10,000, comp them on that. If they bring in a 3-year contract worth $30,000 comp them on that.
- Review it annually. A sales comp plan is never “set it and forget it”. Comp plans are typically reviewed and updated at the end of the fiscal year. You will create documents outlining each person’s annual comp plan, review with them and sign off.
REMEMBER, KEEP IT SIMPLE!
If your comp plan is hard to understand or overly complex it will be a burden on you and your team. Keep it as straightforward and simple as you possibly can.
And remember your number one mission is to create a compensation strategy that motivates and retains your team and rewards achievement. You will get what you incentivize.