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January 3, 2022

There are a lot of articles out there about compensation plans for the lower-level sales reps, but what about managers and executives? Let’s discover the SaaS sales compensation structure.

saas sales compensation structure

It is essential to have a plan that aligns the needs of each level, from managers and executives down to sales reps.

We have seen a lot of SaaS sales compensation structure plans and know what challenges sales leaders face when they are given one that doesn’t align with their expectations.

Learning from my mistakes, here’s what not to do when building a comp plan. First, you need to know the difference between SaaS sales compensation structure types. Next are common errors that should be avoided when designing sales managers’ or executives’ plans.

 

What to know when putting together comp plans?

It is not just the pay that drives morale but also company culture and leadership. When designing SaaS sales compensation structure plans for your leaders, you should keep this in mind to drive a positive work environment and boost productivity.

saas sales compensation structure

Set the bar (and clear expectations)

One of the most important things to do when hiring a sales leader is to make sure that you are on the same page about what they will be doing.

There are three common scenarios in growth-stage companies: bringing someone on for new, building an entire team function from scratch; coming in and scaling up or down your current team so it can handle more business than before; or fixing something because everything has gone wrong.

Start from the ground up.

This leader will have trouble with traditional methods because they start from scratch. They will need a Minimum Base Offering (MBO) that guarantees their base pay and allows extra money if they exceed expectations.

Grow as you go.

The leader that will be taking over this company has a lot of momentum and data to work with. This means they can use a more traditional SaaS sales compensation structure plan focused on performance and allows them to scale up foundational teams or functions.

As my team scaled, the company needed additional support.

Improve and iterate.

This leader needs to go back and reassess their company’s business strategy, but it will likely take some time. They should also expect a dip in revenue performance as they are restructuring.

If you want your new salespeople to be successful, give them the space and protection they need.

 

Know your objectives and the key results you expect

The best way to set comp plans is by having specific objectives. You will start with some revenue targets for the year, but your goal should clarify how you get there. For example, in SaaS (software as a service), this might be achieved through customer acquisition and account growth retention; however, what percentage goes into each objective impacts how much people earn.

Your objectives may include:

  • Improving top-line new business growth
  • Increasing revenue per customer
  • Increasing the number of long term contracts
  • Reducing churn / increasing lifetime value (LTV)
  • Improving net revenue retention
  • Increased renewal rates

Every company has different objectives, and they change over time. Leaders need to have SaaS sales compensation structure plans that align with the organization’s top goals.

 

Tracking revenue is essential since your plan will likely involve commissions.

If you are not starting from scratch, you should know how to recognize revenue and your reps’ commissions. To find the best sales commission plan for your company, you need to consider essential and most relevant.

Jason Lemkin, the founder of EchoSign, talks about how he copied a plan from Salesforce, and it caused him to be too rigid with his reps.

If you follow Jason’s plan and give a 25% commission on ACV for annual deals with incentives to pay upfront, your sales will not be as high this year.

A company’s approach to recognizing revenue is often different than the one they use for paying employees. It pays to find out how your business thinks about this so that you can create a payment plan accordingly.

 

Don’t make things too complex.

Could you keep it simple? The more complicated you make your sales process, the less likely someone will follow and execute those steps because they are too convoluted or unclear.

The simplest commission structure of base salary + commissions works best. It can be tempting to include accelerators, decelerations, kickers, and incentives, but they are not always necessary.

 

Put a timeline together.

There are two ways that we see most SaaS companies operate.

  • Monthly quotas, paid monthly.
  • Quarterly quotas, paid quarterly – most commonly with a monthly draw and an actual quarterly up.

It’s easy to pay commissions monthly, but it becomes a lot of work when more than five people are on your team. It also means that the person who calculates how much each employee should be paid will end up doing twice as many calculations in one month if they’re paying quarterly instead.

The timing of hiring also matters when calculating the time it will take to ramp up new reps. If a sales leader has an incentive plan that doesn’t line up with their timeline for recruiting and training, they will have trouble.

 

5 Core Elements of a Sales Comp Plan that Incentivizes Leaders at Every Level

Five key elements will be present in a good SaaS sales compensation structure plan.

saas sales compensation structure

1. Start with a plan that includes proper buffers

To be successful, your SaaS sales compensation structure model needs to include a revenue target well above the company’s plan.

Start with the company revenue target for the year and then work from furthest out, adding 5% for sales reps, 3% of base pay, and commission structure to each level. You may choose different percentages but make sure that you find a balance between it being attainable by your employees while not depending on 95% quota attainment across all levels to hit the plan.

In my experience, a company needs to set goals for the year and divide those into different levels. For example, if we want $5M in new business by December 31st of this year, then that would be divided as follows: $2 million from reps with less than one-year tenure 1 million from reps with 1–3 years’ tenure

2. Alignment between leaders & reps

Reps and leaders should have the same goals to motivate what’s best for their team.

Leaders should have a plan similar to the team they are leading. Click To Tweet

The leader’s base salary needs to be higher than those of their subordinates not to feel torn between personal goals and their employees.

3. Big upside

Everyone in sales or leadership wants to be successful and make the most money possible, so when you are designing your management plan for these people, there must be a lot of potential upsides.

The VP of Sales has a comp plan aligned with the right business objectives. This means they should be motivated by incentives for exceeding revenue milestones, not just on-target earnings (OTE). If this person hits these goals, it can enormously impact your company.

4. Give them the room they need to do it right

The higher up the sales leader, the more removed they are from monthly performance and thus have to do a lot of work in order tongues that help them grow their team.

To motivate my sales managers, offer them more mobility in their base pay than the reps. This will make sure that they don’t feel trapped by quotas and can spend time coaching employees without having too much of an impact on their quota paychecks. To ensure high-level directors have enough room for creativity. Also, give them higher salaries with less commission.

For example, if you start with your sales reps earning 50% base salary and 50% commission, the front-line managers should make 60% of their income from a steady paycheck. Director-level employees can also have an OTE that is 70%-30%.

5. Be unmistakable on measuEnsure

Ensure that the sales managers and leaders are clear on how they will be measured.

When managers and leaders better understand the metrics, they can focus on what matters most.

The more people know how to influence the outcome of a sale, the better they will be at hitting and exceeding their targets.

 

Avoid These Comp Plan Mistakes

When creating a SaaS sales compensation structure plan for your SaaS company, you must ensure that you are not making mistakes. Mistakes can hinder the growth and performance of the business.

saas sales compensation structure

Here are some things to watch out for when hiring a salesperson.

Not including a buffer between quota & plan 

One of the most common mistakes that we see in sales comp plans is a lack of buffer between how much money should be made and what an individual’s quota needs to look like.

You should set your quotas and commission plans on a number higher than the amount of revenue you plan to generate for the year.

Not having the proper distribution across teams.

If you are trying to hit your goal for the year, new business, growth, and retention must play a part in this. Missing quota with one team but exceeding it with another can still get you there; however, if the wrong people get all of these benefits, they will not be adequately incentivized.

It’s tough for morale when you have a sales team that is tooth and nail to hit their quota while watching the Customer Success reps all hitting 200% or more of their percentages.

Getting the quota distribution right can be difficult without a lot of historical data, so don’t worry about being perfect. Things like headcount or new product rollouts will impact you, and you should try to get as close as possible with your first attempt.

Recycling the same plan 

SaaS sales compensation structure plans are used to incentivize sales teams by rewarding them for surpassing the previous year’s goals.

It is essential to review your strategy every year because the world has changed. Your company, team, and product have all undergone changes, so it might not be a good idea to keep using last year’s plan.

We recommend that you look at the parts of your comp plan that did work and see how they can be improved while also looking for ways to strengthen the features.

It is easy to assume that a pay and commission structure would be enough when hiring salespeople. However, it is not the case.

Not using industry benchmarks. 

Up-to-date and reliable data is the key to success in SaaS sales compensation structure plans. Click To Tweet

It would help not base your SaaS sales compensation on a given structure plan on what you think employees are worth. Instead, use other companies and research to determine how much they pay for a similar position.

Glassdoor, PayScale, and Indeed are great resources for salary information.

Creating misalignment between leaders & their team 

One of the worst things you can do as a sales leader is to give reps on your team a different comp plan than what they’re used to.

“Managers and leaders should be incentivized in the same way as other employees because it can lead to challenges within the team. It is almost always better to make sure that all incentives are tied back into hitting quotas.”

Not focusing on the correct sales behaviors. 

When you are trying to align your SaaS sales compensation plan with company objectives, the two things must go hand in hand. When they don’t work together effectively, this can create problems.

To motivate salespeople, you have to work with your compensation team and design a plan that will help drive the desired behavior. This means going back and looking at objectives, so you can see what behaviors are needed for them to be achieved.

 

B2B SaaS Sales Leader Compensation Plan Examples by Role

One of the hardest things to do is put together an effective SaaS sales compensation plan, especially if you have never done one before or it has not been a successful endeavor. However, we can look at some good examples for inspiration to make your next comp plan more effective.

Keep in mind that these are only guidelines, and you should make adjustments for your company’s needs.

VP of Sales / Chief Revenue Officer

The VP of Sales or CRO is a critical executive position. They have the responsibility to manage and motivate all salespeople.

The role of the VPCRO is a strategic one that includes recruiting and managing people, improving processes and systems, and working across all areas in an organization. The position will require constant collaboration with leaders in product & engineering, marketing, finance to give their team the best features for new deals or renewals.

The different responsibilities of the VPCRO role dictate how they are compensated. The two most common types we see are where their compensation plan consists either mostly or entirely of bonuses.

50/50:25+

This new commission plan has a 50% base and 50% commissions. If the salesperson exceeds their revenue target, they will receive 25%.

This approach is more common in early-stage companies because they need to motivate their employees with lower base pay since the founder will work closely and directly with them.

70/30:Equity

This commission structure is much more successful because it offers a good base salary, commissions, and incentives for hitting milestones like sales goals.

In the post-series B phase, a company must focus on long-term goals and less on long-term monthly quotas.

Sales Director

These Directors are spending more time on strategic initiatives with the VPCRO while also focusing on recruiting and training. They spend less time working directly with teams they lead because these individuals have a broader perspective of company-wide efforts.

There are two main paths for Sales Directors. One group works hands-on, and the other leads with strategic leadership.

  • OTE = 60% base, 40% commission
  • OTE = 70% base, 30% commission

Some companies incentivize the Director to build systems to help their reps get closer to quota, not just rely on a few star employees. This way, everyone has an opportunity for success and can be more motivated.

Sales Manager

Sales Managers are on the front lines, working with Account Executives and coaching them. They hire people for their team, train those new hires in what they need to know about selling our product or service before getting started, review performance reports from Gong (a program that tracks reps’ progress), make sure forecasting is accurate – all of this plus anything else an average regular manager does.

It is essential to have a sales compensation plan that acknowledges this and rewards them for their performance.

One of the more common comp plans for a Sales Manager is:

  • OTE = 60% base, 40% commission

When companies are more willing to risk their money, they may offer cash bonuses for team performance or accelerators for exceeding OTE.


 

In Sum

As a company that works with B2B SaaS companies across various stages of growth, we know firsthand how important it is to have the right compensation plan.

Make sure that your company’s goals are aligned with the job plan objectives build in buffers to prevent any unforeseen issues from arising, allow for leaders to make decisions on their own and, stay as simple as possible. Finally, remember to reward those who have made a difference.

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