An Initial Sales Rep Comp Plan to Lower Your Stress Level, Increase Cash, and Make Everyone a Lot of Money

Screen Shot 2013-06-20 at 3.32.27 PMI’m not ashamed to admit that when I set up our first SaaS sales comp plan, I had no idea what I was doing.  In my first start-up, yes I sold to the enterprise.  I sold $6m our first year (man, that sounds good looking back on it).  But I did all the sales myself, and stupidly, had no sales comp plan at all 😉

Then at EchoSign I had some good — and painful — learnings.  At first, I just made up a plan.  Then, as we first scaled up a sales team, we ended up literally copying Salesforce’s comp plan.

My uber-learnings from that are that BigCo sales comps plans are great tools — once you are reasonably post-Scale.  Once you are at $20 or $30m ARR or larger, or maybe, once you have 40-50 reps or more, and are adding another 40-50 or more a year … a Typical Bigger Company sales comp plan works well.   It’s tested and proven.

But it didn’t work for me, for us.  Why?

Well a typical BigCo Sales Comp Plan for an experienced inside sales rep works this way:

  • Guaranteed, Competitive Base Salary.  Walk into work, you make $50-$100k, or whatever the guaranteed base is.
  • Commission that is a Relatively Low % of the Deal.  Often, 8-11% of the first year ACV, sometimes less.
  • Relatively High Quota.  You don’t make a lot on each deal, and with a high quota, it’s a big nut to hit.  This can be hard in the early, learning days of a SaaS start-up.
  • Almost Complete Hand-off of Customers to “Others”, Customer Success, Account Manager, etc. the Moment After Sale.  Very little post-sale involvement with customer.  Most upsell handled by others in the org.
  • Lots of Accelerators and Decelerators.  Lots of little programs to incent desired behavior.  Can lead to quarter stuffing, quarter stretching, multi-year deals over quarterly ones, etc. etc.
  • Sense That Sales Reps Shouldn’t Make Too Much or Something is Wrong, and/or the Bar is Too Low.  If they make too much, the quota was too low.  Or the comp plan was too generous.  If someone is doing too well … raise the bar.  Because …
  • In General, Sales Seen as Cost-Center.  A cost of doing sales and business.  Which is certainly true once you get into the Fortune 500.

This sounded OK — not great, but OK — to me.  But it turned out to be a dismal failure for us.  Because here were all the problems a Traditional Sales Comp plan created:

  • Incentives for Mediocre to Stay.  If you’re mediocre and make a decent base, you just stay.  And if the quota is too hard to hit, and you don’t believe you can hit it … you don’t really try …
  • Not Customer-Centric Enough.  All I cared about was the customers.  The problem is if you only pay a rep 8-10% of a deal, and then the rep goes away the second the contact is EchoSigned … it’s too much of a sales factory.  A boiler room.  Yuck.  How can you spend any time on a $5,000 ACV customer if you only make $500?  And, seriously, why would you even follow-up with a smaller potential lead unless you were 90%+ sure it would close in 1-2 calls?  A full demo?  Sorry, I don’t have time, ma’am.
  • Good Ones Didn’t Make Enough.  I saw the mediocre ones making too much — but the good ones didn’t make enough.  I wanted them driving M6 Convertibles and shiny new S5’s if they were killing it.  The top 10-15%.
  • Way Too Confusing.  Accelerators, decelerators, micro-incentives.  I mean, remind me again, why would I do this for another 2%?  And why are you adding decelerators that ‘punish’ activity that still adds ARR?   I couldn’t understand it.  And if I couldn’t get my arms around the plan … how could I champion it?
  • Doesn’t Maximize Revenue or Success Per Lead.  The real uber-problem in a Traditional BigCo Sales Plan is designed to maximize absolute revenue across a large sales team.  Great.  But it isn’t designed to maximize all the leads.  In the early days, every lead is precious.  I wanted every lead followed up on.  Every potential customer fawned over.  And appreciated.  Because especially in the early days — qualified leads are a gift.  Don’t squander them.

So what happened?  Revenue per lead fell by over 50% with the BigCo sales plan.  Ouch.  That was our  Year of Hell.

Now, a lot of this drop was due to the fact that we lowered the bar when we added this wave of reps.  Only 1 — just 1 — met the ultimate bar when we hired our True VP of Sales.   So I guess that’s the real story.

But the Mismatched Comp Plan made it all the more confusing and created all the wrong incentives.

So what did I do?  I stepped back.  I said, what are our goals, for getting from $1m to $20m+ in ARR?  I listed them out:

  • Make sure reps are paid a fair, market wage.  The OTE has to be competitive.
  • Make sure the great reps can really make good money.  M6 convertible money, not Panerai watch money.
  • Make sure the bad reps, if we hire any more, cycle out of their own.  No incentives for the mediocre to stay.
  • Make sure the reps are paid to love all the prospects and customers.  To spend the time to make every single customer of >$X,000 in ACV at least a big success period.
  • Not break the bank.  Overall costs have to actually be equal to less than BigCo comp plan.
  • Simplicity.  No more comp plans, for now at least, that anyone can’t intuitively understand.
  • Maintain positive, long-term, win-win customer relationships — as appropriate.  Not every customer should ‘stay’ with a rep.  Not every rep should be involved in chased down invoices.  But reps need to do both where it’s best for the customer and company.
  • Make sales clearly, unarguably, a profit center.  Not a cost center.  This would destress my life in 100 ways and deconfuse things.

OK, so with that, here’s what I came up with.

First, I did an analysis of what inside sales reps at SaaS companies are usually paid.  Usually, all-in, they are taking home about 20%+- of the ACV at the end of the day.  Often, it’s 10% or so (+- 2%) as base … and a matching 10% or so (+- 2%) as bonus.

But it costs the company almost twice that typically.  Why?  The losers suck up a ton of cash.  Because they get large base salaries.  Have too many of them, and your economics are wrecked.

And scaling reps of course is expensive too.

So here’s what I came up with, The Plan:

  • Competitive Base Salary — But You Cover it (Including Benefits) Before Any Bonus.  Whatever you base is each month – $4k, $6k, $10k, whatever … you first have to bring in the revenue to cover it before you get any bonus.  I.e., no commission at all until you pay off your base salary + benefits, or say 125% of that month’s base.  It’s similar to a draw, but not a true draw — your base salary is a salary.  (True draws are not competitive.)
  • But then, Pay 2x as Much in Commission.  You’ll have to figure your own exact model out, but basically for us, I figured if reps paid their base first, and the losers then didn’t suck up a lot of cash — I could push the full 20-22% of ACV straight to the rep as commission.  And even more if 80%+ of them all hit their plan.  It’s what you’d end up paying in the BigCo plan anyway.  So instead of a 10-11% commission, I paid ~25%.  But only once you paid back your base.  (The exact % may vary for you based on your unit economics).
  • One Accelerator:  Cash Up Front.  Paying 25% instead of 10-12%, but only once you pay for your base salary, is itself an inherent accelerator.  The sky is the limit once you’ve paid your base back.  But there was one thing that mattered when I wanted to be cash-flow positive: cash.  So I paid more for cash-up front deals.  Less for the rest (this may not matter for you if you don’t do monthly or quarterly options).  And I paid a partial-to-full commission on any Year 2 cash, upfront.  That cash now was very valuable.
  • Payment Upon Receipt of Cash, Not Contract E-Signing.  Later, once we were past $15m or so, this didn’t matter so much.  But until then, it was my way of aligning interests.  I’ll pay you a lot.  If you perform.  But only once you take care of business and take care of the company.  And get the cash in the door.  Reps hate this.  But if they are going to stay 12+ months … it doesn’t matter.  They’ll see that.  Especially if the top reps are driving M6 convertibles.

It worked great for me.  There were automatic accelerators.  The sky was the limit for the A+ reps.  There was no need to “ratchet up” the plan.  It rewarded the hungry.   We still had quotas, of course.  Our initial annual ACV quotas varied from $380k or so to about $550k, and we continued to refine this over time as we got better at sales.  But quotas just weren’t as important, because the plan created the right incentives to hit these numbers and exceed them — irrespective of what quotas were set.  (Note: this is really an inside sales rep plan.  We can talk more about field sales later.  But the same basic concepts work there too).

And perhaps most importantly as a founder / CEO — I knew exactly what I was paying for sales.  25% of ACV.  No more black holes like in the BigCo Plan.  I didn’t have worry about anything, economically, in sales anymore.  Ever.  And sales quickly, elegantly … became a profit center.  Instead of a cost center.  That was epic.

My stress re: sales comp and cost of sales flew right out the door.

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There are 54 comments

    1. Mohammad Ocean

      ACV = Annual Contract Value
      ARR = Annual Recurring Revenue
      Inside Sales = Primarily remote selling via phone/chat/email with reps located in a corporate office
      Outside Sales = Primarily face-to-face selling with reps visiting a prospect on site

      One thing Jason leaves out is his passion for team rewards. Instead of individual accelerators, whenever EchoSign hit an important milestone everyone was treated to a luxurious offsite event. The picture shown is from one of those trips to Carneros in Napa, CA.

      You don’t get to 18 consecutive record setting quarters in a row by accident. This Saastr guide is pure gold for sales leadership.

  1. Steve Penfold

    Hey Jason, great post. Keeping a sales team motivated is really hard but you did absolutely the right thing by re-aligning the commission plans with the goals of the business at the time. This makes a huge difference and keeps everyone aligned. My experience is that the great reps are actually very interested in helping the business and the founders, whilst the mediocre ones are often more selfish and often ‘work the commission plan’ to get what’s best for them. This helps to spot the superstars.

    1. jasonlkn

      That’s true, especially in the early days. But there are also great reps who are solely in it “for the money” at “a great company”. And that’s OK. They know it takes a village to get there.

  2. Alex Gorbansky

    Jason, great post. We are actually moving to this model for our comp plan and I am looking forward to seeing the results. I run Docurated, a funded and revenue generating SaaS firm disrupting the knowledge/document management space with a solution that takes file/folder based repositories and transforms them into visual, searchable, and intelligence knowledge and collaboration systems. I’ve really enjoyed reading your blog and would welcome the opportunity to connect. I’m at alex@docurated.com and will be in the Bay Area over the next two weeks. Alex

  3. Dave F

    I like it. One question re: “Competitive Base Salary — But You Cover it (Including Benefits) Before Any Bonus” – do you think it’s necessary to generate enough profit to cover salary? Or is revenue good enough? If you run a SaaS business with real COGS (cloud storage and CPU instances, for example) the two can be very different.

    1. jasonlkn

      It will work itself out in Years 2+ as the renewal money comes in. It’s the renewals that allow you to spend this much on sales (and marketing) … but you’ll need to hack it a bit until then …

  4. Ben

    Hi Jason, I recommend your blog to pretty much everyone I meet in the startup community. Thanks for how much you give back.

    One big question on implementing this? Won’t reps “sandbag” deals in order to pile them into the same (potentially future) month if it looks like they’re not going to exceed their cost to the level they’d like in the current month? I don’t want to create an incentive for reps to push deals into the future.

    1. jasonlkn

      No they won’t, not if they are any good.

      For two reasons: first, they’ll always be in the “bonus” once they are scaled if they are any good. Second, their VP Sales will fire them if they aren’t in the bonus. It’s not elective. And third, you do a leaderboard and share performance. No one wants to be last or below the line.

  5. jpwerlin

    HI Jason –

    I too put you on the must read list for anyone in SaaS. Your blog is amazing for SaaS CEOs. Real quick – curious on the ACV metric – how did you factor in month-to-month deals vs. annual deals in the ACV calculation? I get the concept of incentivizing the troops towards annual/multi-year deals and pulling forward cash for them – but for monthlies do you just factor that into ACV and let that revenue accrue towards paying for themselves and getting into bonus? One great benefit would be to align the sales rep’s interest on retention and keeping those monthlies on board so they get credit. As long as the monthly deal stays on as a customer the revenue should go to the responsible rep or not?

    1. jasonlkn

      Overall, I don’t it really matters in the end although it seems to early on …

      But … to answer your question … yes I accounted for it. Basically we paid a 20% all-in (fully burdened cost, including base salary) commission on first year “ACV” on monthlies and basically a 30% all-in (fully burdened cost, including base salary)on annual+ contracts. We then prepaid the commission on the monthlies for a full year upon EchoSigning, and if necessary, did a modest claw back if the account churned before Month 12.

      This seemed to work out fine. It created a modest incentive to go for an annual contract, but not so much not to just do whatever the customer wanted.

  6. Mohammad Ocean

    Also worth mentioning that the land-&-expand nature of most SaaS enterprise means the reps already have incentive to reduce attrition. Good teamwork between sales/client success and a leadership team that makes the critical nature of this relationship obvious is a must. Smart reps that understand “it takes a village” will breeze right through this and do the right thing by their customers; after all it is in their own financial interest.

  7. Neo Zhizhong

    Hi Jason, thank you so much for the insights. I have a question though, how would this model works for a business that has 20-30% profit margin. The fixed cost is high but will progressively lower as it scales above 150% of current size.

  8. Andrew

    Hi Jason,
    This is really interesting, and I’m contemplating how I could roll this out to our sales team. I have 2 questions though.

    The first is about timing. In regards to the “cover your base” concept, was that applied on a monthly basis, quarterly, annual? The issue I could see here would be cashflow for the reps and what happens when someone has a really good month, followed by a poor month, etc.? My initial thoughts are that this has to be broken down monthly to make sense, and align with how frequently you pay out commissions? I could see complaints from a rep who killed it one month, and didn’t get full commissions on 1 or 2 sales the month following? Any recommendations here, particularly for a seasonal business?

    The second question is in regards to multi-year contracts. Our reps sell 3 year contracts with annual billing and are currently used to getting full commissions on the full 3 years (2 upfront and 1 a year later) plus residuals going forward for anything sold on that account. I don’t think this incentivizes the right sales behavior to drive for new ACV each year. Any advice for transitioning from a lower commissions (spread out over time with sales quotas) structure, to a 1 time higher commission structure?

    Really interested in your thoughts.

    Thanks,
    Andrew

  9. Sati Hillyer

    Hi Jason,

    Great post! For the payout, are you taking the commission off the total revenue the rep closed for the month? Or off the net profit?

    For instance, if the rep closes 10K in the month, but their costs are $2500. Is the commission off the $10K or $7500?

    Thanks,
    Sati

      1. Sati Hillyer

        OK, but if I was to do that, I find myself in the negative in certain instances. For instance, if the rep closes $2500 and his costs are $2500 – then adding a 10% commission since he hit base costs puts me at: $2500+$250 = $2750.

        So he brought me $2500, but we paid him $2750.

  10. dfragnito

    Hi, this was just what I was looking for. I have a few questions. Does the AVC quota include recurring revenue for existing customers or only new business, and do you continue to pay a commission on recurring rev and if so for how log?

    1. jasonlkn

      There are many models, but as a default, the simplest is often to pay on all business from a closed customer in Year 1 (including upsells, etc.). And nothing for Year 2 on.

  11. Jbaisch

    Jason this is a great article, How would you handle a situation where you have a solution that has reached it’s end of life and your new solution is in the early stages of development with a release date of 6 months out? The reps are pushed to sell what you have and there is no little to no traction but your pipeline for the new solution is starting to build out, with no revenue expectations until GA. How would you incent sales reps to stay? Also would you change the comp model during the first months of GA?

    1. jasonlkn

      I think in general, when you have a very early stage product, without product-market fit … you have to pay a lot more than this. For example, for our first rep at EchoSign, the first 120 days I paid him 100% of the first year deal amount. After that, it declined to the plan outlined here.

      The % was determined by what I thought it would take to Provide a Living Wage. There’s no point in having reps that can’t make a living wage. So for a short period of time, I paid out 100% of the Year 1 ACV.

  12. Kevin Meakings

    Hi Jason

    Just have a quick question around the onboarding / training fees that we charge and commission payments. Our typical customer might have an ACV of $5000 but we’re also able to charge a one-time fee of $2000 for onboarding / training. I understand your thoughts around compensation as a % of ACV but how would you deal with the one-time fees in that model?

  13. Scott Salkin

    Jason – awesome stuff as always. Question – did you ever hire independent reps or bring on resellers in the initial “getting to traction” stage, or even later? Why/why not? And would you recommend it if you have folks/companies who are interested?

  14. Zach Goldstein

    Jason,

    Great stuff and this is very similar to how we have it set up at Thanx. Question on this section:

    “Whatever you base is each month – $4k, $6k, $10k, whatever … you first have to bring in the revenue to cover it before you get any bonus. I.e., no commission at all until you pay off your base salary + benefits, or say 125% of that month’s base.”

    If the rep makes $120K base (to make the math easy – that would be very high obviously), salary is $10K per month, fully loaded its more the $13K ($156K annualized). Do you start paying the 25% performance piece once the rep has cleared the $156K on the year (e.g. most of the bonus will come in the second half of the year but will be pretty sizable because it will be calculated off recurring revenue from previous months AND new bookings)… or do you re-calculate each month and only pay on overages above $13K in any given month. If its the later, once a rep is ramped with steady MRR from past deals trickling in, wont it be easy for them to stay ahead of the monthly fully-loaded cost (e.g. not work as hard)? Have you seen it done both ways? Is there a reason not to do it one or the other?

    Thanx!

  15. David

    Jason,
    Im not sure if you are still answering this post. Man – I cant tell you how much it helped. We have spent 5 years developing our software. We are just starting to ramp up our sales side. I love everything you said. My only problem – we have a VP of sales currently. He is getting ramped up on our company and learning the industry. I know you said – 20-25% of ACV is what you should pay out. Im assuming I have to pay the VP of Sales as well as the sales team under him. I read through the blog and did not find this questions below:

    I noticed the article is about sales but how does this work with a VP of Sales? The same?

    If the same – What does this pay plan adjust to when we hire salespeople under him. First stage is to focus on pure sales – thats it. Once we hire a salesperson, he now needs to transition into Training, Coaching, Closing, Etc.

    We already have corporate accounts so a customer may install our software in another store. Required no acquisition, the company already has this relationship. Any clue on who you pay on these type of accounts if acquired prior to hiring?

    Jason – Thanks so much for your time. I fear making the wrong move as you mentioned and if I had these small questions answered, I know it would really help. Thanks again!

  16. David

    Jason,

    I just wanted to add – we have an average ACV of $50,000 for first year. Just depends on the options the customer chooses in our SAAS monthly fees.

  17. Roland

    How does this work if you have mainly Monthly plans, and few Annual plans? Do you give the commission and spread it over the course of the ACV, or do you gamble and look at average churn and give an advance on that commission, say 6 months worth * 20%?

    1. jasonlkn

      Generally you just pay the effective annualized commission up front, with a clawback if the customer churns in < 12 months. I’ve generally then also applied a lower commission rate on top of that b/c you don’t get the benefit of cash up front, in addition to other deteriments. But in any event paying upfront with a clawback is simpler than trying to dribble things out every month, usually.

  18. Reader

    Jason,
    What happens if a rep is in bonus and leaves? Do they still get paid commission on deals that have closed and partially paid but not yet fully paid? (ie if the client pays monthly or quarterly)

    Or do they only get paid on cash actually received before their last day?

    1. jasonlkn

      Most only do the latter (i.e., commissions only paid on cash received through your last day), but it’s up to you. In the end, it won’t be that material.

  19. Alex

    Great post!

    So if I’m following your math payout plan would like this:

    Assuming a base of $80,000/yr
    and in turn fully burdened costs of $100,000/yr (125% of base)

    The rep would need to get generate $100,000 in Total ACV before getting paid ANY commision
    After that it’s 25% on all additional ACV

    @ $100,001 Total ACV , $0.25 Commision
    @ $200,000 Total ACV, $25,000 Commision
    @ $500,000 Total ACV, $100,000 Commision
    @ $1,000,000 Total ACV, $225,000 Commision

    Am I following your model correctly here?

      1. Alex

        But if that’s the case, you’re saying that a rep with fully loaded costs of $100k bringing in $500k in ACV is getting paid $200k. That’s 40% of ACV.

        Maybe there’s a piece missing here. When you say “you first have to bring in the revenue to cover [your costs] before you get any bonus.”, are they covering it with revenue OR the 25% commision they would have made on that revenue. Your math seems to indicate it’s that latter but your post the former.

        Here’s the math if they’re covering their costs with their would-be commission’s:

        Assuming a base of $80,000/yr
        and in turn fully burdened costs of $100,000/yr (125% of base)

        The rep would need to get generate $400,000 in Total ACV before getting paid ANY commision
        After that it’s 25% on all additional ACV

        @ $100,001 Total ACV , $0 Commision ($100k fully loaded total comp)
        @ $200,000 Total ACV, $0 Commision ($100k fully loaded total comp)
        @ $500,000 Total ACV, $25,000 Commision ($125k fully loaded total comp)
        @ $700,000 Total ACV, $75,000 Commision ($175k fully loaded total comp)
        @ $1,000,000 Total ACV, $150,000 Commision ($250k fully loaded total comp)

        Thanks in advance for helping me work this out.

  20. Alex

    How did you calculate your fully burdened costs that the rep had to clear before getting paid commissions?

    Base Salary + Health Care + Taxes?

    Portion of Sales Manager? Sales Engineer?

  21. Ken O'Connor

    Jason,
    A very interesting article. As you learned it takes a lot to create an effective sales compensation program. At one time, I worked with a very innovative person who was Chairman of one of the largest electronic distributors in North America. We were discussing compensation plans and he said that one first has to be able to measure “IT” before you could compensate for “IT”. The “IT” in his mind was whatever he deemed to be the most important issue that he was trying to influence. With over 80 branches it wasn’t always the same issue. While sales increase may be a priority at one branch customer retention may be the issue at another branch. If can accurately measure the “IT” and I tie a large portion of the employees compensation to reaching that goal, I don’t know have to stay awake nights worrying about it. The employee will either find a way to fix the “IT”, or he will leave on his own. For an extreme example, assume that making sure that a phone was always answered on fewer than 3 rings If I can accurately measure that and then tie a large portion of the employees compensationto it, the goal will be reached. The key is being fair and being accurate.

  22. Sensei

    Very helpful. One question: How would you adjust this plan if the average contract size is $70,000 and the sales cycle is 4-8 months? It gets difficult at the monthly level when the cycles are this long.

    Thanks.

    1. Jason Lemkin

      Doesn’t really matter. You keep paying the base though until they close the deals. They just get into bonus until they’ve hit the # for all the cumulative, preceding months.

  23. McCord

    Hi Jason! I’m a big fan of yours and we share some mutual friends at EVP. My question is simple if you have a Junior SalesPerson who gets say 50K base salary and you are targeting the 25% of total ACV then is it correct to say that the Junior Salesperson would not get commission until they hit 200K in total ACV they created as an individual? If so – do you have any tips (besides starting them at a lower base) to allow for them to be consistently incentivized? We want to have a strong sales culture here while ensuring performance / 4X+ return on expenses. Please advise and thank you kindly! – Michael

    1. Jason Lemkin

      No, if you want to do 25% (which is a bit high, but prob OK) … if their base salary is 50k, say multiply it by 1.3 to get fully burdened cost … then divide by 12 months. So the first $5,500 in deals each month she closes, she gets no commission at all (to cover her base, burdened salary). After that, it’s the full 25% (or whatever % you pick).

    1. Jason Lemkin

      Yes, or at least, we had the leaderboard that everyone can calculate commissions from all set up in a global-access dashboard.

  24. Alex

    Hi Jason,

    Fair to say that all of us appreciate your insight.

    Although this may sound elementary he is a question. So if you are not paying commissions on renewals, what happens in year 2? Does the Sales Rep then goe back to base salary until he or she again hits the commission trigger point?

    1. Jason Lemkin

      You don’t pay sales reps commissions upon renewals, ever. Or at least, very rarely. That’s not what sales does. Sales is for closers. But … if they close 2-3 years up front, especially if you get the cash upfront, you can pay a full commission on those years in that case.

  25. kamispace

    Mohammad – I’m new to the sales biz dev side of things. Any good resources to read up on to negotiate a good deal when starting a new job? Specifically in a Saas startup environment.

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