Sales Compensation Structures for High Growth Startups

Building a Sales Compensation strategy for startups that are starting to experience high growth can be tricky. It took a few tries for us to arrive at a model that we’re using right now. It seems most startups evolve their Sales Compensation Structure (“comp. structure”) as they grow, but it is crucial to get it right.

Note: HubSpot has a great ‘Ultimate Article on Sales Compensation’. That is a great resource to start with. I used some of the content there to set the context for this article. And there’s a lot of my learnings from following Aaron Ross, Steli Efti, Tomasz Tunguz, Jason M. Lemkin, and my team at Profoundis and FullContact.

4 Factors That Influence Your Sales Compensation Structure

  1. Size and runway of the startup: This affects how you pay out commissions, as well as your commission structure orientation.
  2. Product sales cycle: How long is the average sales cycle? If this is long, don’t let your commission structure starve your sales rep’s pay-out.
  3. Pricing Models: Do you do annual contracts, up-front payments or process discounts? Factor those into the comp. structure as well.
  4. Market Economics: Where’s the startup based? In order to be competitive, your compensation package must also reflect what the industry average is.

Types of Sales Compensation Plan Structures

  1. Salary Only: No commissions or bonuses. Usually used when you’re just starting up and have 1–2 salespeople, who are early employees.
  2. Commission Only: Used when you’re trying out sales in a new territory, or working with remote reps. Commission % can be pretty high in these cases. Jason Lemkin has a great article on how they used this to their advantage. More on this below.
  3. Profit-Margins Commissions: Again, this is usually employed by early-stage startups that have a lean course, but still want to reward their early sales folks.
  4. Salary + Bonus: Pay your reps upon successful milestones. Useful when there are a lot of unknown factors, and groundwork is required to establish a sales engine. Bonuses might relate to activities done per quarter, or opportunities created overall etc.
  5. Base Pay + Variable Pay: The standard structure employed by most startups. Reps are paid a basic wage, plus commissions based on the revenue they bring to the company.

Choosing the Best Sales Compensation Structure for YOUR Startup (the When + How)

Starting Up (Salary Only)

When you’re starting off, it’s usually the founders and maybe, a few early employees, that do most of the sales. In such cases, there’s no real need to define a compensation structure. Especially since the startup is still in pre-revenue, and you’re trying to figure out the market. And also, founders and early employees are valued for their faith with equity, sweat-equity or stock options.

Early-Growth (Commissions Only — Draw Against Commissions)

As a startup continues to grow, and you find the need to add more sales power, you’ll come across different roles that need filling;

  1. Business Development Representative (BDR): Reps that do top-of-funnel activities in making sure there are enough sales conversations to start off with. These are people with 0–2 years of sales experience, who are just starting off their careers.
  2. Account Executives (AE): Reps that do the actual closing. These are folks with proven experience in closing deals and selling, with at least 3–5 years of sales experience.

As you start hiring, it might be enough to just start off with a couple of AEs, who will multi-task and accomplish both BDR and AE functions. In such cases, it becomes important to pay the AEs a comfortable Basic Pay, as well as a Commission.

In these cases, it might be useful to start off with an altered model of the Commissions-only structure, called the Draw Against Commissions structure. Here, you draw a rep’s base pay from their expected commissions for the month. If they cross their quota, they get the rest of the commissions. If they don’t hit their quotas, however, you have the option of clawing it back the next month or choosing to let them have the base pay (which is what Lemkin did).

As your revenue increases, it might be worth it to change the model from the Commissions Only, to a form of Profit-Margins Commissions. Up until this stage, the incentives for a rep to stay with the company should be rewarded with ownership of the company, but once you cross this stage, reps will be interested in how much you pay them (Base Pay + Commissions at 100% Quota achievement = On-Target Earnings) their On-Target Earnings (OTE). However, my personal opinion is that you stay away from Profit-Margins based deals. These deals incentivize reps to sell your products at higher margins, and that can become too complex, and ultimately, you lose track of what the actual value of the product is.

Growth-Stage (Base + Bonus/Variable Pay)

This is where your company now starts to have a predictable model of revenue coming in, and you’re ready to scale. At this stage, you would have hired BDRs, and are ready to build a compensation plan that rightly rewards your entire sales team. I recommend a combination of both variable pay, as well as bonuses to inceltivize your team to hit their goals, and play nice with their teammates at the same time.

A suggested model could be where sales reps are rewarded variable pay for hitting their individual quotas and are rewarded with a bonus if their team hits all their quotas. This would incentivize BDRs to help AEs with hitting revenue goals, and the AEs would now be helping the BDRs generate more leads, for achieving this common bonus.

A Bonus-only model is a less-followed approach, where you incentivize the sales team to hit their revenue targets. Upon hitting the quotas for their team, every member of the team gets compensated accordingly. Although this makes teams lose interest after they hit their quotas, as there is a cap on the incentive, so reps are not incentivized to sell further.

Building the Compensation Plan

We’ve covered the whats, the whys, the whens of Sales Compensation Structures. When I started up, there was no one to help me understand those three Ws, and I merely jumped into building a plan, refining it, throwing it out and starting again. But once it’s clear what kind of plan you’re going for, building out the compensation plan becomes much easier.

I’m going to focus only on Compensation Structure at the Growth-Stage since the others are highly dependent on your startup, sales cycle, market etc, and can be highly variable.

Let’s start by calculating OTE.

  • OTE for an AE is calculated as one-fourth or one-fifth of their quota.
  • So, if an AE’s quota is $500,000, then their OTE should be $100,000.
  • The split up is usually 50:50 or 60:40 between Base Pay and Variable Pay.
  • OTE for a BDR gets a bit trickier. Aaron Ross says the simplest way to calculate OTE for a BDR is as follows;
  • A Base Pay that should be enough to pay the bills.
  • A commission targeted at 50% of their base, which means the split up is around 70:30 (Base Pay: Variable Pay).

Now that we’ve calculated OTEs, let’s figure out how the variable pay is calculated. In this model, I’m going to assume that for every AE that you hire, you’ll have 2 BDRs to help generate leads and opportunities for them. I’m also going to assume the 50:50 and 70:30 breakdowns of OTE for AEs and BDRs respectively.

AE Variable Pay Calculations

If the quota for an AE is $500,000, then their OTE should be $100,000 annual. Going by the 50:50 rule, that means $50,000 base pay, and an additional $50,000 as variable pay. This means that for every $1 that the rep brings in, they earn $0.10.

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In a SaaS business, it becomes a bit more complex. To hit $500,000 annual quota, a rep must close ~$41,667 in Monthly Recurring Revenue (MRR). Going by the same logic, this means that for every $1 a rep brings in MRR, they earn $1.20. If you value Cash In-Hand, and want to incentivize a rep to close deals where customers pay upfront, you could also increase the dollar-value per deal closed, depending on types of payment.

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BDR Variable Pay Calculations

Assuming 2 BDRs working with an AE, that means each BDR will be responsible for generating leads that will eventually convert to 50% of an AE’s quota. So, in this case, it is $250,000 per each BDR. Also, another important thing to note is that BDRs often have to do a lot of the grunt-work in getting a prospect ready to sell to, which means hitting a certain number of dials, emails every day. So, a BDR’s compensation should also reward them for the outcomes of their activities, as well as the revenue that they bring to the company.

For a BDR, let’s assume that $40,000 would be a comfortable Base Pay. Which means, we can set the Variable Pay at $20,000 (70:30). Keeping in mind to reward BDRs for their results, their compensation would be broken down into;

  • 50% for bringing in the required number of qualified opportunities.
  • 50% for revenue won from their accounts.

This means that for a BDR, the variable pay will be based on the number of Qualified Opportunities (Oppty) they bring, as well as the revenue closed from those oppties. Here’s what that looks like.

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*If you’re a SaaS business, check out this FREE Google Sheet I made to find out how many qualified opportunities are required for you to generate your required revenue.

If you note here, the commissions earned by a BDR does not change if a customer opts to pay monthly, annual or semi-annually. This is because adding that element just increases the complexity, and also because getting a customer to pay upfront is done by the AE alone.

Closing Notes + Takeaways

  1. Multi-year contracts: The opinion out there is mixed for multi-year contracts. Some companies pay a bonus if their reps close a multi-year contract, while others do nothing. In my opinion, multi-year contracts can sometimes prevent you from increasing prices for your customers, so if the payment method is cash up-front, there is an incentive to pay your reps a handsome bonus. However, if the payment method is monthly (in a SaaS business), I wouldn’t recommend anything.
  2. When to pay commissions: This is generally dependent on the health and financials of your company. If you can afford to, you can pay your reps their commissions in the month that a deal is signed. However, a good practice is to pay them when the money (or the first payment) hits the bank. This will ensure that the reps will follow-through with customers that haven’t yet paid.
  3. Claw-backs: What happens when a customer cancels a contract or stops their payments? This is handled case-by-case, but in our case, if a customer cancels their contract before 6 months (for whatever reason), we claw back the commissions from the reps in the next month.
  4. Performer Awards: A lot of BigCo sales organisations have awards and recognition programs for their star sales performers. In my opinion, rewarding your reps with a great compensation package, believing in the product they’re selling, and a great environment to grow should be the only incentives for your reps.
  5. Accelerators or Decelerators: Tomasz Tunguz has a great article on the benefits of having one. But I’ve always opted to have a standard compensation plan, without capping. Be careful with adding in metrics that can sometimes get too confusing to track or follow.

I want to end this by asking you to choose the plan that best fits your stage, your customers and your sales cycle. And don’t worry if you don’t get it right, but keep working at it. If you have a plan you’re working on, and would like me to take a look, reach out to me on Twitter at @ashwin_7 and I’d be happy to help you out!