Dear SaaStr: How Should I Build Our First Sales Comp Plan?
Creating a sales commission plan is critical for motivating your team and aligning their incentives with your company’s goals.
Here’s how to approach it, step by step, along with some best practices:
1. Start with the Basics: Commission Structure
- Base + Commission: Most SaaS companies pay a modeset base salary plus commission. This keeps reps motivated while ensuring they can pay their bills. Avoid commission-only structures—they rarely work in SaaS because reps tend to drift away if they don’t see immediate results.
- ACV-Based Commission: Pay commissions on the Annual Contract Value (ACV) of the deal. For example, if a rep closes a $5,000 annual deal, they get a percentage of that ACV as commission. This is standard in SaaS and aligns incentives with long-term revenue. This can start off higher in the very beginning, but at scale is generally around 7%-10% of the deal.
2. Set the Right Commission Rate
- Early on, you might need to pay higher commissions (e.g., 10%-15% of ACV or even more) to attract good reps and compensate for the risk of working at a startup.
- As you scale, you can lower the rate slightly (e.g., 7%-10%) but balance it with higher deal volumes.
- For monthly subscriptions, calculate commissions based on the first 12 months of revenue. For example, if a customer pays $100/month, the rep earns commission on $1,200 (12 x $100). You can and likely should all clawbacks here. They won’t make a big difference in the end, but they’ll align incentives.
3. Incentivize Retention
- If churn is an issue, consider tying part of the commission to retention. For example:
- Pay 80% of the commission upfront when the deal closes.
- Pay the remaining 20% after the customer stays for 3-6 months.
- This encourages reps to sell to the right customers, not just anyone who will sign a contract.
4. Reward Upsells and Expansions
- Don’t just focus on new deals. Reward reps for growing existing accounts. For example:
- Pay as high or even a higher commission (e.g., 15%-20%) in the early days on upsells or expansions since these are often more profitable and easier to close.
- This also helps drive Net Revenue Retention (NRR), which is critical for B2B growth.
5. Avoid Overcomplicating the Plan
- Keep the commission plan simple and easy to understand. If reps can’t calculate their earnings quickly, they’ll lose motivation.
- Example: “You earn 10% of ACV for every new deal, with 80% paid upfront and 20% after 6 months.”
6. Set Clear Quotas
- Give reps clear, achievable quotas based on your revenue goals. For example:
- If your goal is adding +$1m ARR this year, and you have 2 reps, each rep’s quota might be $500K in new ACV.
- Make sure quotas are realistic but challenging enough to push performance.
- Rough quotas of $500k for SMB, $700k for mid-market, and $1m for enterprise are fairly common and good rough guidelines.
7. Incentivize Teamwork
- Consider a small team bonus to encourage collaboration. For example, if the team hits 120% of the quarterly goal, everyone gets an extra 5% commission.
8. Review and Adjust Regularly
- As your business evolves, revisit the commission plan every 6-12 months. Early-stage startups often need to tweak plans as they learn more about their sales cycles and customer behavior.
Example Plan for Your Context:
- Base Salary: $80K/year (adjust based on your market and budget).
- Commission: 10% of ACV for new deals.
- Retention Bonus: 20% of the commission is paid after 6 months if the customer stays.
- Upsell Bonus: 15% of ACV for upsells or expansions.
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