SAAS Sales Compensation Simplified, Part 2 of 3

A “Step by Step” Compensation Plan Set-Up Process

In my last piece, I covered the importance of ratability as well as the top ten golden rules to follow regarding SAAS compensation. Some thought my plans too generous — the reality is that these plans are set up to reward the overachievers and allows one to hold their sales team to a very high level of performance, something that those salespeople who have worked with/for me will attest I always do. With our rules behind us, let’s get cracking on setting up some actual compensation plans.

The 8 Step Guide to Setting up Your Own Compensation Plans

Along with the content below, I have provided here a compensation modeling template that you can use for your endeavors as you follow along. I recommend opening up the template, looking at the “instructions tab as you read through the content below.

1. Pick Your AE Roles — decide on how many sales roles you have. I detest custom compensation plans for individuals and insist on a consistent approach for a given account executive role — i.e., in general, we should offer the same base, same variable, and same quota. The exception is for when you are hiring for the same role but in an expensive location (i.e., SF) versus less so (i.e., Spokane). For the cheaper locations, you have an opportunity to reduce base, variable, and quota if need be. If you early in your company formation and sales hiring, ask yourself, “Can one type of rep role close most of my business? If so, is my business transactional or is it a longer value-based sell? If not, where would I draw the line between a more junior resource and a more senior resource? Where would I draw the line between an inside sales person (usually in a hub) versus a field-based person? You get the drill. Just define them and what you think the rough market segmentation is for that role. It will change over time, but it’s always good to be clear on your approach each year as salespeople love clarity and major change once a year.

2. Set Your Comp & Quotas — For each role, establish the appropriate base and variable and total on target earnings. Generally, for more junior sales roles, you will tend to have less variable as a percentage of total OTE (i.e., 50% or less) whereas, with senior field reps, they will want to crush their accelerators and want as big a variable as possible (>50%). Do keep note of your quota / total OTE ratios to ensure you are staying above 4x as a guideline. If you find that you cannot, you need to re-examine your overall product market fit — i.e., something is off (your average sales price is too low AND/OR your pipe gen is too low AND/OR your close rate is too low). For the model that I have provided, my ratios hover around five except for the enterprise role.

3. Pick your quota calculation period — As I mentioned in part one of this topic, be wise here. Monthly comp plans for highly transactional short sales cycle deals and annual comp plans for long sales cycle enterprise deals are easy to understand. If you are going to do quarterly, ensure the sales cycle lengths tend to be no more than 90–120 days. In the model provided, I do have a quarterly for a typical mid-market segment.

4. Decide on your measurement components — as you can see in the model, the three components that I care about for SAAS compensation plans are ACV, Cash, and Multi-year.

· ACV is defined as net new contracted annual value for license software (and sometimes premium support) for new or add-on business.

· Cash is defined as ACV / Billing terms where Annual = 1, Quarterly = 4, and Monthly = 12

· Multi-year is defined is the incremental ACV a customer commits to beyond one year at the time of signing. MY can also be calculated as TCV — ACV whereby TCV never includes one-time nonrecurring charges like professional services.

For your sales segments, decide how important those components are for your business while also avoiding overly un-necessary sales friction into your deal cycles. In my pre-defined template, you can see that I have excluded multi-year as a component for the SMB inside sales business. Why? Because smaller customers tend not to want to commit to a multi-year agreement and we want those deals to move quickly. For that inside sales segment, I have split the AE’s variable between hitting their ACV number (70% of the variable) and getting Cash up front (30% of the variable). In the enterprise segment, where customers are used to demanding multi-year agreements and have no issue paying annually, I have included multi-year as a component. As a rule, though, until you are at your first few million in ARR, I would skip multi-year as a component in general as customers regardless of the segment do not tend to make a lengthy commitment to an unproven company/product.

For comparison’s sake, for the early years at salesforce.com, the compensation plans were AC = MY = Cash — which means the split of the variable was roughly 1/3 each. This approach made sense in the early days of SAAS where SFDC was not tapping the huge growth rounds of capital that are available today, and we wanted to secure longer customer commitments. However, understand what that meant to a rep — we were telling them that getting a year’s worth of cash up front and a second-year contractual commitment was as important as winning the deal — which can unfortunately highly motivate the AE to drop price more than needed to ensure they secure the cash and my components. This approach backfired a bit (and why I had to pull a full “house account” tricks) when we moved up-market, and AE’s were closing five year, 4M a year ACV deals, with two years cash upfront :).

5. Decide on your component performance assumptions — this is where you can get into trouble if you do not have enough data to set these correctly. When you first start adding these cash and multi-year assumptions, you should set targets that are achievable but not complete lay-ups. 100% for Cash means you expect to receive annual billing terms on 100% of your deals. 100% for Multi-Year means that you expect to receive one additional year in 100% of your contracts. If you are selling a mainstream SAAS product, generally enterprise customers will agree to a minimum of 2 years, and most customers across segments (except in a very transactional or self-serve SMB business) will agree to annual billing terms. 

To make it fair to your reps, always in my view set the target slightly below what you think is achievable here because 1) you are not trying to put one over on your reps and 2) you are trying to reinforce great behavior from the reps. I promise you that the second these types of plans and assumptions are in place, your reps will go to customers and explain the standard contracts you sign are “three years, annual payment terms.” This “rep empowerment” + a discount calculator that shows a customer how much their price increases for shorter commitments on contract length and billing terms = a very happy place for your head of finance and head of success.

6. Review your Component Quota Amounts — you have now created separate quota buckets for each of the components you have decided to incorporate into your rep’s plan. Every deal they close can contribute to each of the quota buckets for credit depending on the specific deal attributes. For example, if you have decided to compensate based on ACV, MY, and Cash, your sales reps now have three actuals quotas, each of which they can overachieve. It’s a very simple construct they can understand as opposed to some multiplier for cash and or multiyear achievement applied to one base rate (usually tied to ACV).

7. Apply Your Accelerators — for each component (ACV, Cash, Multi-year), apply your accelerators and the shape of your acceleration curve beyond 100%. As you can see in the models I have provided (other than for the very transactional monthly inside sales compensation plan), I have set the curve at 1x payout of the variable for 1x quota achievement and 3x payout for 2x achievement. As you play around with these curves, make sure when you look below on the actual payout percentages that you don’t have percentages that go down as you achieve more. You also do not need as many break-points. If you prefer fewer, just play around with the “payout percentage of variable” input such that payout rates are the same in the model for two or more breakpoints. Regarding the proper accelerators for cash and multi-year, my guidance is until you know better, flatten the curve a bit to avoid dramatically overpaying for over-accomplishment here because you set the target too low. At the bottom of each AE compensation plan sheet, you can see and share with your reps an example of the difference on what a rep can earn on a deal depending on how successful they are in negotiating the deal terms.

8. Decide on your one-time professional services payout rate — as previously mentioned in part one of this piece, until you are on your way, pay your reps for professional services. Pick a rate, somewhere between 3 to 5 % in my view.

That’s it. You have now designed compensation plans that are very similar to the model salesforce.com used for its first ten years or so. To make it even easier, use this word template, copy your achievement tables into it, make it your own, and get cracking. In Part 3, I will try to answer the questions you most likely will have as you work through the design and administration of your new sales compensation plans.