How to Structure a B2B SaaS Sales Compensation Plan

A Sales Rep is often paid differently than other employees: they typically earn a relatively low base salary supplemented with commissions. This comp plan aligns the company's and the sales rep's interests to earn the biggest pay off for both the company and rep.

Regardless of the comp plan you set for an individual sales rep, it is crucial to have it in writing and then have a system in place for tracking bookings and assigning commissions. When the time comes for a liquidity event, you will need to be able to show commissions paid out over the past two years. Now is the time to put in place a process to account for these commissions and save yourself headache in the future.

The impact: Compensation is a powerful tool to motivate your sales reps. ROI, from the company's perspective, is huge when additional compensation motivates improved sales productivity.

The goal: Create a sales comp plan and then establish a system for tracking it.

How can Golden Section Assist?

Background

A word on motivating incentives: According to the Harvard Business Review(https://hbr.org/2012/07/motivating-salespeople-what-really-works), there are different classes of performers on the sales team -- Stars, Core Performers, or Laggards. Members from each cohort respond differently to different aspects of comp plans.

• Stars are intrinsically motivated to pass any target, but will stop working when a ceiling on compensation is imposed. Specifically, they can be motivated by:
• Removing ceilings on commissions
• Creating overachievement commissions
• Creating contests with multiple winners. HBR references a study that found that when there are multiple prizes, Stars perceive that Core Performers have a chance to win a prize and are therefore motivated to work harder than they would if there was only a single prize.
• Core Performers, the middle children, get the least attention. It is worthwhile, though, to work to motivate Core Performers; they are, after all, typically the largest cohort in the sales team. They are also the people closest to the Star category and so can most easily be incentivized to cross the boundary. Specifically, they can be motivated by:
• Providing multi-tier targets and compensation. For example, the bottom tier target can be set to the median value of the company's historical sales attainment. The middle tier target can be set to the top quartile and the top tier target set to the top 10% of attainment.
• Offer gifts other than cash for lower-level target prizes in company- wide competitions. Core Performers expect Stars to take home the top cash prizes, but if non-cash, substantial prizes are offered for the lower-level targets they remain motivated to compete for them.
• Laggards need the competition and accountability of metrics and individual guidance to make their quota. Specifically, they can be motivated by:
• Providing shorter-term, pace-setting goals such as quarterly bonuses
• Creating a naturally competitive, yet friendly environment
• Using carefully designed benchmarks to set expectations

Steps

1. Using the template provided, set the range in base salary that your company is willing to pay. Considerations:
   • The base needs to be low enough to not satisfy a Sales Rep. You want him to be motivated to meet his target deal value and earn the commissions associated with that.
   • The base needs to be affordable to your company.
   • The base needs to provide a good starting point for the Sales Rep to reach her desired income. In other words, the entire package needs to be believable for the Sales Rep.
2. Set the target value of annual contracts closed, or quota, for the Sales Rep.
3. Set commission rates. We advocate for a tiered commission structure to encourage over-target sales.
4. Codification: At your next round of funding, potential investors will look at your sales compensation plans and actuals. To prepare for that, put in place a system to codify and track the following:
   • Actual commissions paid out
   • Actual commissions compared to industry benchmarks
   • A log tracking how the commission structure has changed over time. This information can be used to prove how your sales process is driving results. You can show the productivity of your sales organization and how you have used levers to maximize

Best Practices for compensation:

1. The person receiving bookings should also be compiling commissions.
2. Never pay commission more than once. For example, if a Sales Rep upsells an account in the future, he only receives commission on the delta. He does not receive commission on the entire new value of the contract.
3. Never pay out a commission before payment on that contract is received; commissions should be strictly post-client payment. This expectation reduces time a contract spends in AR, is cleaner, and prevents any need for clawback terms.
4. Be generous on the fringe to encourage the results your company wants. For example, set a minimum contract value to qualify for a commission.
5. Don't pay out commissions for unqualified deals (ie deals that have not passed the Qualifying Calculation Worksheet in the sales process). These deals are an inefficient use of company resources to begin with, and often increase churn and burn up time. You don't want Sales Reps inflating their quota and commissions with contracts that don't lead to quality revenue and happy customers.

Additionally, you can consider refusing commissions on contracts that are not tracked appropriately in the CRM or who have not been approved by a supervisor.

1. Don't sign any customer contracts that allow client drawback. This preserves your revenue and it also prevents any headaches with clawing back a Sales Rep's commission.