Back in the day, premium comp for some software sales execs made simple and easy sense.  Traditional software had 90% gross margins, and the classic enterprise sales reps, the best ones, could close a million or more dollars a year.  Paying them 20% all-in on what they closed was easy, a 5:1 ratio.  Close a million, make $200k.  Close two million, make $400k.  More or less.

But the math got tougher as we moved to $400k-$600k quotas, and it got tougher again as OTE expectations went up.  When reps want a $160k+ OTE for hitting say, a $400k attainment, really, that’s only possible when fueled with a lot of venture capital.  It doesn’t make economic sense on its own.  And it gets even harder when you throw a big SDR team and a rev ops team into the mix.

So things got a bit broken with SaaS sales exec comp in the run-up to 2020 … and then it got really broken in the crazy times of late 2020 and 2021.  When VC rounds exploded in size, and multiple unicorns were born a day.

Everything just diverged from economics that really made sense:

  • Fintech companies and pseudo-SaaS companies with low gross margins still had to pay the same or similar commissions as high-margin SaaS companies to stay competitive.  This wrecks the unit economics.  SaaS companies and fintechs and pseudo-SaaS companies could end up paying out more than the entire year’s margin in the commission check.
  • General competition for AEs drove OTEs up about 20%.  Not a bad thing per se, but it also put a lot of pressure on business models.  But where does that 20% magically come from?  Either higher quotas, lower attainment, or for a while, even more venture capital.
  • Folks that increased quotas to compensate for sales comp inflation and lower margins ended up, in many cases, with low attainment.  Then ultimately, no one is happy.  Many SaaS companies just agreed to higher OTEs, but packaged them with higher quotas as well.  Net comp didn’t go up all that much, but more AEs missed quota, were stressed, and a spiral ensued.
  • Sales reps in low NRR and high churn environments got paid almost the same as enterprise reps.  This makes no sense.  If you sell to SMBs and have 70% revenue retention over the year, you just can’t pay the same as enterprise reps that close 140% NRR deals.  But during the go-go times, CEOs often felt pressure to pay up here.
  • Startups that just accepted compressed ROI on sales commissions ended up pretty stressed in 2022.  If sales reps ended up costing 35%-40% of what they closed, all-in, instead of 20%, that might have been OK after a big unicorn round.  For a little while.  But eventually, the math has to pencil out.  A sales comp plan where 35%+ of the deal goes to sales can drive your burn rate up dramatically.  Truly dramatically.

Ultimately, so much AE and SDR comp math from the 2019-2021 era just doesn’t end up making sense once there’s a bit less venture capital in the system.

  • In the end, lower gross margin startups can’t pay as much per deal as higher-margin ones.  They can pretend they can if they have a ton of VC capital, but if 50% or more of the deal is eaten up in costs, you can’t really pay the reps all of the margin.
  • And in the end, at least at scale, sales reps really can’t take home much more than 25% of the ACVs they close.  For a little while, it’s OK.  But it all breaks at scale much higher than that.
  • Sales reps can jump from gig to gig if they want, but they will succeed the most where they understand the profitability of their sales comp plans.  At least, try to understand the mechanics here, and how the company makes margin and money.
  • Sales reps should be wary of comp plans that look too good to be true.  Do your diligence, and find a place you can hit 100%+ of quota, feel good, and close at least 3x-4x of what you take home.

It’s a slow reckoning in some cases.  Growth-at-all-costs combined with a lot of venture capital can create some crazy sales comp plans and incentives — for a while.

Now, don’t get me wrong.  If you are growing at an insane rate and have super high NRR/NDR (125%+)  and have high gross margins and have access to lots of VC capital, “overpaying” reps (as a % of what they close) can and often does still make sense.  It can still be a great investment, to pay out a huge amount of the total ACV — if it fuels epic growth paired with epic NRR.  If you can fuel it with VC capital — for a while.

But the reckoning sort of has to come for everyone.  You’re seeing plenty of it in industries under some pressure.

And to sales reps reading this, that are shopping around for the highest OTE and the best deal — I’m not saying don’t do that.  I’m all about empowerment.  I am saying you should understand the math that comes with that highest OTE.  First, find out how many AEs really hit that OTE.  Second, make sure that quota is attainable.  And third (and so few reps do this), understand the math.  If the company is just paying out way too much in comp to the sales team per deal (including SDRs, rev ops, etc.). Well, then understand it probably won’t last.  It may not even last until the next sales comp plan comes out.

Sales reps that want to make more, ultimately have to close more.  At least, unless there is a ton of venture capital funding the gap. And even there, it doesn’t last. Everyone, eventually, has to get to better margins and then cash flow positive.

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