My go-to Compensation Plan for sales reps and VPs

Creating the right comp plan for salespeople is both an art and a science.

It's a science because it needs to incentivize the right activity and outcomes and align them with the company ones.

It's also an art because it needs to be simple. A comp plan should be straightforward enough to explain over a coffee break. If your finance team is scratching their heads every month trying to figure it out, you've missed the mark. Like they say, keep it simple, stupid! 😉

Simplicity is the ultimate sophistication
— Leonardo da Vinci

Over my career, I've worked with many VP Sales (including this one) and twisted and turned through various comp structures — some simple, others exceptionally complex. From metrics galore to misaligned ones, monthly, quarterly, annual — you name it.

The following is a tried-and-tested playbook I applied and have shared with other entrepreneurs, which works well for salespeople of all levels. It is much more suited to smaller companies than large organizations.

Compensation

Always start with the person's total annual gross compensation. (Note: This is a solid number to use across the company, from hiring discussions to financials, and avoid mixing gross, NET, annual, and monthly salaries at all costs. Always use annual gross comp.)

For people with bonuses or variable compensations, such as sales reps, their total comp is their Base Salary plus the Variable bonus or commission they'll receive when they hit 100% of their quota (let's call this On-Target Commission, or OT-C). So $100k Base + $100k OT-C = $200k gross comp.

A good Base Salary and OT-C ratio is 50:50 for VP Sales, about the same but no more than 60:40 for Account Executives and up to 70:30 for Sales Development Reps.

Quota

Set a quota (or sales target) that's ambitious yet achievable — the kind they can hit 4 out of 5 times. This is important. The quota should be a stretch but not a fantasy. Both you and the person need to have an 80% confidence they can hit it consistently. For enterprise SaaS companies, a good benchmark for sales reps is a quarterly quota about equal to their total annual comp. So, with $200k total comp, their quarter quota would be $200k of new ARR.

Now, run the bottom-up exercise: realistically, how many prospects will they have to work with? If you feel they can realistically close x% of those, with an Average Sales price of $y, can they hit their quota with 80% confidence?

For sales leaders, their quota should be equal to the sum of their reports.

Commission structure

The simplest way is to pay commissions linearly: for every $100 someone brings, you share, let's say, $10 with them.

This is simple but has a catch: it doesn't drive home the importance of actually hitting 100% quota. There's a world of difference for the company between hitting 90% and nailing 100%. In an all-hands meeting, "We hit our goals!" has a very different vibe than "We came very close to our goal". That last 10% might be the extra two Engineers the CTO needs to innovate on that special moonshot project.

One way to push harder to hit those goals is to withhold a chunk of the OT-C, (10%, if you have to, max 20%), and share it as a "kicker" when the sales rep hits the mark. It adds a sweet, hard-hitting incentive to reach those quotas.

For example, for a $200k quarterly sales target and a $25k OT-C, no commission is earned on the first $40k, standard commission up to $200k, and a bonus of $5k is given upon reaching the $200k mark. This method encourages hitting crucial targets.

Commission Rates & Accelerators

The simplest way to calculate commissions is with a rate. In the above example, between $40k and $200k, the sales rep receives a $20k commission, or they have a 20k / (200k-40k) = 12.5% base commission rate.

To encourage reps to push hard to bring as much ARR in the current quarter as possible, there are a few tools:

1. Apply accelerators: Increase the commission rate beyond the quota by 20-30%. Following the above example, anything above $200k ARR would pay 12.5% × 1.2 = 15%. This can be significant: a $70k deal above quota would pay an extra $1,750 in commissions if brought this quarter instead of the next one.
2. Uncapped accelerated rates and commissions. If a salesperson brings in $400k (!!) against a $200k target, they'll receive a whopping $55k commission check this quarter. 💪

A few other modifiers to consider are:

1. Accelerate certain deals, such as multi-year contracts or ones where the customer will give you a case study.
2. Decelerate others (e.g. by 10%), such as monthly deals, ones that require Non-recurring engineering, ones with NET-90 terms, or ones with adverse escape clauses.

All these can be easily modeled in a spreadsheet so you can input the numbers for each person and get the rates easily. Here's a screenshot of one we applied recently to a portfolio company with the above numbers.

All in all, aim for a balance of clear, achievable incentives and straightforward calculation methods.

In a future post, we'll discuss the Dos and Don'ts of rolling out a commission plan like the above. I've seen it play in painful ways 😱 and super smooth ones 😎.