Dear SaaStr: How Are VP of Sales Commissions Normally Structured?
VP of Sales commissions in B2B are typically structured around a 50/50 On-Target Earnings (OTE) model.
This means 50% of their total compensation is a base salary, and the other 50% is variable, tied to hitting specific revenue or ARR targets. Here’s how it usually breaks down:
-
Base Salary (50% of OTE):
This is the guaranteed portion of their compensation. For example, if the OTE is $300K, the base salary would be $150K. -
Variable Compensation (50% of OTE):
This is tied to performance, usually based on achieving the company’s ARR or revenue goals. For example, if the OTE is $300K, the variable portion would also be $150K, and it’s earned by hitting the agreed-upon targets. -
Upside for Overperformance (often another 25%).
Great VPs of Sales often expect uncapped commissions. If they exceed the targets, they should earn significantly more. For instance, if they hit 120% of the ARR goal, they might earn an additional 20-25% of their OTE. This is critical to attract top-tier talent—they want to know they’ll be rewarded for crushing it. -
Monthly or Quarterly Payouts:
While the goals might be annual, payouts are often done monthly or quarterly. This ensures the VP gets paid promptly for their performance, which builds trust and keeps them motivated. For example, if they’re on track to hit their annual target, they’d receive a portion of their variable comp each month or quarter. -
Draws (Sometimes):
Early-stage startups might offer a guaranteed draw for the first 3-6 months, essentially front-loading some of the variable comp while the VP builds their pipeline. However, this is less common for experienced VPs who are confident in their ability to deliver quickly. -
Equity:
Beyond cash comp, VPs of Sales often negotiate for equity, especially in earlier-stage startups. This can range from 0.5% to 2%+ of the company, depending on the stage and their experience.
The key is alignment. The comp plan should incentivize the VP to hit the company’s overall revenue goals, not just net new bookings. For example, at Adobe Sign / EchoSign, we aligned the VP of Sales’ comp with the company’s total ARR goal, including churn and upsells, to ensure they worked cross-functionally with customer success and other teams. But aligning just on new bookings sometimes can be cleaner.
If you’re structuring a plan, make sure it’s achievable but challenging, and don’t cap the upside.
A great VP of Sales will pay for themselves many times over if they’re properly motivated. Are you building a comp plan for a new hire, or trying to benchmark against others? Let me know, and I can help refine this further.
