Hiring Profile & Hiring Traits

The following is the prioritized experience profile for a SaaS rep:

1. Has sold with target motion (new vs expansion; if new, self sourced vs. SDR sourced vs. inbound vs. PLG vs. …; similar licensing model – ex: seats vs. consumption vs. etc.)
2. Has sold with same deal size/complexity (typically by order of magnitude of ACV – $1K / $10K / $100K / $1M / …)
3. Has sold at a company at the target stage (typically by ARR band – $0 to $1M; $1M to $10M; $10M to $100M; $100M+)
4. Has sold into target industry (this knowledge is harder to impart)
5. Has sold into target product category (easier to teach/learn); this is the same as/similar to having sold into a particular job function/persona; also the same as/similar to having sold ‘need to have’ vs ‘nice-to-have’ products or having sold mature versus emerging, category-creating products.

The following is a list of traits hiring managers look for. However, two caveats. First, many/most of these are hard to test for. Second, there is little to no data showing any of these traits correlates with quota attainment or tenure.

Note: The ICCE (intelligence, character, coachability, experience) framework from PTC/Bladelogic is an abbreviated, priority ordered version of this.

(Not prioritized)

• Conscientiousness / accountability / follow-up
• “Character”: Tenacity / hunger / drive / relentlessness / work ethic / initiative / grit / passion / experience overcoming adversity
• Coachable / Curiosity / learning / growth mindset / inquisitiveness / learning-mindset (w.r.t. clients and the craft of selling)
• Intelligence (“clock-speed”) / thinking on one’s feet / ability to improvise
• Achievement orientation / sets daily/weekly goals
• Assertiveness, Confidence (but not entitled), willingness to take risk; comfort with conflict
• Competitiveness (yet still a team-player or at least not a negative influence on others)
• Discipline (to “run the play”) / consistency / organized
• Empathy / other-awareness / compassion / customer-centricity / passion to serve / relational skills
• Humility / modesty
• Likeability
• Patience / courage / perseverance
• Positivity / optimism
• Responsiveness
• Self-awareness
• Solution-oriented / creative / entrepreneurial
• Communication / storytelling ability

Additional tips:

• When hiring reps, ask for buyer references

AE Interview Questions

To Assess Curiosity

• Tell me about a complex deal that required you to research a company extensively. What was the most surprising thing you learned? How did you use the information to move the deal forward?
• Who was the #1 rep in your last job? What made them so effective?
• Tell me about a time you learned something new outside of work that surprised you. What sparked your curiosity and what did you discover?
• What are you currently reading or listening to that you find interesting? Why does it pique your curiosity?
• Tell me about a time you had to teach yourself a new skill. What resources did you use and what challenges did you face?
• Tell me about your perception of the evolution of sales (prospecting, closing) in the last 3 to 5 years. And was working back then that does not work anymore? And what has been the main learning for you?
• Assess their curiosity applied in real time. Do they ask thoughtful questions? And do they ask follow-up questions to ensure a deeper understanding? If we do a role play – how is their line of questioning?
• What did you do to prepare for this interview? In preparing for this interview, what did you learn about our company? About me?
• Out of everything we could cover, what are you most excited to dig into?
• Take me through a time you royally messed up a deal. What happened? What did you learn that helped you in the future?

AE Ramp Time & Ramp Compensation

TL;DR:  

• 2-4 mos for SDRs and transactional
• 5-8 mos for SMB
• 9-12 mos for MM
• 12-18 mos for ENT

The longer answer…

The truth is that there are no proper benchmarks for B2B sales ramp time One big reason is there is no consensus on what constitutes ‘ramped’ from among:

• Placed on full quota (probably the most common)
• (RECOMMENDED) Time to X% of quota (consider 20% since 100% tough with only 43% of reps hitting or exceeding quota that is a high barrier)
• Completed training/certification
• Time to Xth opp at Stage N
• Time to Xth closed won deal (I do not recommend this because it creates an incentive for reps & managers to close smaller deals)

Without specifying what ‘ramped’ actually means, you’ll find plenty of advice which generally reduces to:

(training time) + [x * (avg sales cycle)] where x is usually 1.0 to 1.5

Based on that logic, ramped probably means the Xth closed won deal or equivalently X% (certainly <= 50%) of quota.

In the end, the best thing for you to do, not unexpectedly, is to define what ramped means at your company and then optimize your internal benchmark.

Here are the options for paying variable compensation during ramp:

• Non-recoverable draw up to 100% of VC target for the period
  I recommend this.
• Recoverable draw up to 100% of VC target for the period
• Lower quota during ramp
  I don’t love this since it inflates your cost of sale. Imagine a rep is on a $200K, 50/50 plan, has a 5x OTE:quota, and a one quarter ramp at 50% quota. During the first quarter, their VC target is therefore $25K and their quota is $125K. If they hit quota, they make $25K in base and $25K in variable on $125K in bookings, or 40% which is much higher than the design rate of 20%. If they exceed quota, things get even more costly, esp. if you have accelerators.
• Full quota but higher base % during ramp
  For example, if fully ramped mix is 50/50, then pay could be 80/20 during ramp.
• Pay on measurable MBOs
  These are metrics other than bookings such as activities or pipeline. I do not recommend this since they are notoriously gameable and hard to administer.
• No special allowance (yes, this is harsh and especially not recommended when sales cycles typically exceed 90 days)

Detailed AE Ramp Plan Example

Annual Quota Period Plan

• Assume the following
  • $240K OTE; 50/50 base/variable
  • $1.2M annual quota for a fully ramped rep (5x)
  • Linear commission (10% rate) to 100% quota attainment. 2x accelerator (20% rate) for reps at full quota
  • Commission paid monthly
  • 3 month ramp with a monthly non-recoverable draw at 100% of the VC target ($10K/mo) dependant on MBO attainment which is binary (all/none). MBOs are usually tied to enablement certifications, activity, and pipeline generation
  • 3 month additional ramp up period at ramped quota of 25%, 50%, and 75%
  • Considered fully ramped as of month 7
  • The fiscal year is the calendar year
• We will start by assuming you hire a new rep on Jan 1. (Later, we can consider what happens if/when they are hired at other times.)
• For Jan/Feb/Mar, the rep earns a non-recoverable draw of $10K as long as they hit their MBOs.  We do not recommend recoverable draws since they are considered punitive and typically unnecessary.
  • During this period, they technically have $0 quota. If they manage to close over $100K during any month in this period, their payout on the overage is 10% unless their cumulative sales since start exceed $1.2M in which case they are eligible for accelerators.
• For Apr/May/Jun
  • Apr: Quota is 25% or $25K.  Hence, up to $25K, they earn $10K * bookings / $25K. This is an effective commission rate of 40%.  For sales above $25K, they earn the standard 10% rate. So, in this instance, if they sell $100K, they earn $17.5K; this is an effective commission rate of 17.5%.If their cumulative sales since start exceed $1.2M, they are eligible for the 2x accelerator on the overage.
  • May: Quota is 50% or $50K. Hence, up to $50K, they earn $10K * bookings / $50K. This is an effective commission rate of 20%.  For sales above $50K, they earn the standard 10% rate. So, in this instance, if they sell $100K, they earn $15K; this is an effective commission rate of 15%.If their cumulative sales since start exceed $1.2M, they are eligible for the 2x accelerator on the overage.
  • June: Quota is 75% or $75K. Hence, up to $75K, they earn $10K * bookings / $75K. This is an effective commission rate of 13.3%.  For sales above $75K, they earn the standard 10% rate. So, in this instance, if they sell $100K, they earn $12.5K; this is an effective commission rate of 12.5%.If their cumulative sales since start exceed $1.2M, they are eligible for the 2x accelerator on the overage.

• For July to December:
  • Their quota for the remainder of the year is $600K. 
  • They earn the standard 10% unless their cumulative sales since start exceed $1.2M in which case the 2x (20% rate) accelerator applies to the overage.

• With non-recoverable draws, there is always some risk of sandbagging.  For instance, the rep could push any deals sourced in mos 1-3 into mos 4-6.  Or, once they hit quota in mos 4 or 5, they could push incremental deals to the subsequent month to earn a higher rate. Don’t worry to much about this for two reasons.  First, have faith that your AEs are good humans.  Second, first line managers will & should be very, very involved in any early deals so they are really controlling the close date.

• Strive to have reps start on the 1st of the month. If they start mid-month, pay them at pro-rated OTE for the month and then start the 12 month plan on the first of the following month.  For example, if the rep starts on the 11th day of a 31 day month, then their variable comp for the month will be 11/31 * $10K =  $3,458.39

• If they start Feb 1 to July 1, then everything is the same.
  • At one end, if they started Feb 1, then they would simply have a $500K quota tied to $50K of VC for the remaining period after ramp. As before, accelerators would only apply if their cumulative YTD bookings exceed $1.2M.
  • At the other end, if they started July 1, there would be no remaining period since ramp ends Dec 31st. 
  • On Jan 1, they are on a normal fully ramped plan.

• If they start Aug 1 to Dec 1
  • Consider an Aug 1st start
    • Aug/Sept/Oct: Same as first 3 mos of the ANNUAL QUOTA PERIOD PLAN
    • Nov/Dec/Jan: Same as 2nd 3 mos of the ANNUAL QUOTA PERIOD PLAN
    • Their quota for Feb-Dec is $1.1M. If they hit quota during this period, they earn $110K on $1.1M of bookings, or 10%. They continue to earn 10% until they book $1.2M then the 2x accelerator kicks in.
  • Consider Dec 1st start
    • Dec/Jan/Feb: Same as first 3 mos of the ANNUAL QUOTA PERIOD PLAN
    • Mar/Apr/May: Same as first 3 mos of the ANNUAL QUOTA PERIOD PLAN
    • Their quota for Jun-Dec is $700K. If they hit quota during this period, they earn $70K on $700K bookings, or 10%.  They continue to earn 10% until they book $1.2M then the 2x accelerator kicks in.

Semi-Annual Quota Period Plan

What if they were on a semi-annual plan (quota resets mid-year for purposes of accelerator eligibility?  Everything is the same as the ANNUAL QUOTA PERIOD PLAN except:

• For Jan-Jun: If cumulative sales since the start of the quarter exceeds $600K, they are eligible for the 2x accelerator on the overage.
• For 2H (July to Dec): Quota is $600K.  They earn the standard 10% unless their cumulative sales since the start of each quarter exceeds $600K in which case the 2x (20% rate) accelerator applies to the overage.

• Strive to have reps start on the 1st of the month. If they start mid-month, pay them at pro-rated OTE for the month and then start the semi-annual plan on the first of the following month.  For example, if the rep starts on the 11th day of a 31 day month, then their variable comp for the month will be 11/31 * $10K =  $3,458.39

• If they start Feb 1 to July 1, then everything is the same.
  • At one end, if they started Feb 1, then they would simply have a $500K quota tied to $50K of VC for the remaining period after ramp. As before, accelerators would only apply if their cumulative 2H bookings, inclusive of July,  exceed $600K.
  • At the other end, if they started July 1, there would be no remaining period since ramp ends Dec 31st. 
  • On Jan 1, they are on a normal fully ramped plan.

• If they start Aug 1 to Dec 1
  • Consider an Aug 1st start
    • Aug/Sept/Oct: Same as first 3 mos of the ANNUAL QUOTA PERIOD PLAN
    • Nov/Dec/Jan: Same as 2nd 3 mos of the ANNUAL QUOTA PERIOD PLAN
    • Their quota for Feb-Jun is $500K. If they hit quota during this period, they earn $50K on $500K of bookings, or 10%. They continue to earn 10% until they book $600K in 1H, inclusive of Jan, then the 2x accelerator kicks in.
    • By July, they are fully ramped and on the standard semi-annual plan.
  • Consider Dec 1st start
    • Dec/Jan/Feb: Same as first 3 mos of the ANNUAL QUOTA PERIOD PLAN
    • Mar/Apr/May: Same as first 3 mos of the ANNUAL QUOTA PERIOD PLAN
    • Their quota for Jun is $100K. If they hit quota during this period, they earn $10K on $100K bookings, or 10%.  They continue to earn 10% until they book $600K in 1H then the 2x accelerator kicks in.
    • By July, they are fully ramped and on the standard semi-annual plan.

Quarterly Quota Period Plan

What if they were on a quarterly plan (quota resets quarterly for purposes of accelerator eligibility?  Everything is the same as the ANNUAL QUOTA PERIOD PLAN except:

• For Jan/Feb/Mar: If cumulative sales since the start of the quarter exceed $300K, they are eligible for the 2x accelerator on the overage.
• For Apr/May/Jun: If cumulative sales since the start of the quarter exceed $300K, they are eligible for the 2x accelerator on the overage.
• For Q3 (July to Sept) and for Q4 (Oct to Dec): Quota for each quarter is $300K.  They earn the standard 10% unless their cumulative sales since the start of each quarter exceeds $300K in which case the 2x (20% rate) accelerator applies to the overage.

• Strive to have reps start on the 1st of the month. If they start mid-month, pay them at pro-rated OTE for the month and then start the quarterly plan on the first of the following month.  For example, if the rep starts on the 11th day of a 31 day month, then their variable comp for the month will be 11/31 * $10K =  $3,458.39

• If they start Feb 1 to July 1, then everything is the same.
  • At one end, if they started Feb 1, then they would simply have a $200K quota for Aug/Sep. If they hit $200K for Aug/Sept, they earn $20K on $200K bookings, or 10%. As before, accelerators would only apply if their cumulative QTD bookings exceed $300K.
  • At the other end, if they started July 1, there would be no remaining period since ramp ends Dec 31st. 
  • On Jan 1, they are on a normal fully ramped plan.

• If they start Aug 1 to Dec 1
  • Consider an Aug 1st start
    • Aug/Sept/Oct: Same as first 3 mos of the QUARTERLY QUOTA PERIOD PLAN
    • Nov/Dec/Jan: Same as 2nd 3 mos of the QUARTERLY QUOTA PERIOD PLAN
    • Their quota for Feb-Mar is $200K. If they hit $200K for Feb/Mar, they earn $20K on $200K bookings, or 10%. As before, they earn 10% up to $300K booked for the quarter; accelerators would only apply if their cumulative QTD bookings exceed $300K.
    • As of Apr 1, they are on the normal fully ramped plan.
  • Consider Dec 1st start
    • Dec/Jan/Feb: Same as first 3 mos of the QUARTERLY QUOTA PERIOD PLAN
    • Mar/Apr/May: Same as first 3 mos of the QUARTERLY QUOTA PERIOD PLAN
    • Their quota for Jun is $100K. If they hit $100K for Jun, they earn $10K on $100K bookings, or 10%. As before, they earn 10% up to $300K booked in the Jul/Aug/Sep quarter; accelerators would only apply if their cumulative QTD bookings exceed $300K.

Guiding Principles for AE Compensation

1. Ensure the plan aligns with corporate goals. Nearly every plan is gameable – you just want the gaming to be a win-win for the rep and the company.

2. Design the plan to be a simple as possible.

3. Set OTE based on the following factors:
(Note: Expect the top 10% of AEs to earn 2x to 3x the target OTE,)

• The floor is market rate at a given percentile for the type of reps you need in a given market. Paying a higher percentile of market means faster higher velocity and lower attrition.
• The ceiling is the maximum compensation cost of sales your CFO will allow in order to meet the company’s operating expense target. (Note: if your ceiling is below your floor, you have a deeper problem with one or more more product market fit, go-to-market strategy, or pricing.)
• The more complex the sale, the higher the OTE required. Higher OTE leads to a better talent pool and lower regretted turnover.

4. Determine what quota is attainable by at least 50% of reps. (I used to say two-thirds but the current benchmark average is that 42% of reps meet or exceed quota and 66% is too far of a leap for most companies. The target quota:OTE ratio is 5x.

Why is the target quota:OTE multiplier 5x? Because this multiplier must be high enough to ensure that the company achieves its Rule of 40, growth plus efficiency, target. This Google Sheet shows how to calculate your quota/OTE based on your Rule of 40 target and other key SaaS metrics.

5. Set the base/variable pay mix. 50/50 is the norm. (*see figure below)

6. Determine the pay curve & accelerators.

• The simplest payment curve is linear from 0% to 100%. You can add one more level of complexity by having 0.8x below 50% and 1.2x above 50% attainment.
• For attainment over 100%, use a simple accelerator of 1.5x or 2x. You can add one more level of complexity by having 2 accelerators. For instance, 1.5x from 100% to 140% and 2x over 140%. The accelerator should never exceed 1/(% variable). So, for a 50/50 comp plan, do not exceed 2x. For a 60/40 comp plan, do not exceed 2.5x.

7. Avoid caps

Capped compensation plans are rare except in very large (> 10,000 person) organizations.

Defining On Target Earnings (OTE)

At first glance, defining OTE seems like unnecessary silliness – it is simply base plus commission at 100% of quota and/or expected bonus.  However, I’d like to address the subtleties for factors beyond base and commission included in the “and/or expected bonus” part. In particular, when is a compensation plan component viewed as additional pay and when is it simply OTE.

While there is no universally accepted definition, I consider the component to be an add-on when amount earned on the component by the median rep is less than 5% of OTE.  For example, imagine a company that has a compensation plan that pays 3% on each additional year of a multi-year contract.  If multi-year deals are very rare, say only 25% of reps even sold  a single multi-year deal, then the median rep would  expect to earn $0 from this plan component.  Hence, this would be an add-on.

On the other hand, if the median rep earns $100K base plus $80K in commission, and $20k on the multi-year bonus,, then I would include the $20K as part of the on target earnings for all reps since the typical rep should expect to make that amount.

Lastly, I would only consider a compensation plan component to be part of OTE when its terms can be concretely spelled out at the start of the plan period.  Language to the effect of “the typical rep can expect to earn $x in SPIFFs to be announced at a later date” would be an add-on and not OTE no matter how large $x were as a percent of total earnings.

AE & AM Compensation Benchmarks

Role (2023)	25th	50th	75th
SMB AE	100K	120K	140K
MM AE	130K	160K	190K
ENT AE	170K	240K	310K
Strat AE	175K	250K	325K
SLED AE	130K	185K	240K
AM1	120K	160K	200K

Role (2024)	25th	50th	75th
SMB AE	110K	130K	150K
MM AE	130K	160K	190K
ENT AE	185K	255K	325K
Strat AE	205K	280K	355K
SLED AE	145K	200K	255K
AM1	125K	165K	205K

Role	25th	50th	75th
SMB/MM AE	153K	196K	257K
ENT/Strategic AE	260K	330K	431K

Equity Option Grants for AEs/AMs

• Many companies restrict option grants to only their best sellers
• As is common practice, use a 4-year vesting schedule with a 25% cliff in year 1 then monthly vesting thereafter
• Consider providing additional equity grants over time. I’ve seen:
  • Additional grants to President’s Club winners
  • Additional grants for every $x in bookings
• The value of the equity grant (gross share value if fully vested) as a percentage of current valuation is as follows:
  • 25th percentile:
    • 1M to 150M: =(0.000205357683782857*(ARR^-0.339182832068768))-0.0000269028117480712
    • Over $150M: 0.001%
  • 50th percentile:
    • 1M to 150M ARR: =(0.000721131933222635*(ARR^-0.310526519685177))-0.000133497469594107
    • Over 150M: 0.002%
  • 75th percentile:
    • 1M to 150M ARR: =(0.00228360602394523*(ARR^-0.933135140497998))+0.0000668399998535756
    • Over 150M: 0.007%
• Here is an AE option value calculator (Google Sheet)

Compensating Pure Account Managers

Several options for compensating pure account managers responsible for net expansion = expansion – churn – downsell. (Google Sheet)

Compensating Hybrid Reps

The simplest compensation plan for hybrid reps, those responsible for hunting new logos and farming existing accounts, is to give them a single quota that combines bookings for new logos and net expansion (expansion – downsell – churn).

The obvious issue with a single quota is that reps will tend to gravitate toward expanding existing accounts. Over time, net ARR will stagnate without new logos to feed the engine. Hence, I recommend the following prioritized options to keep things on track: (note: Many of these can be combined into a single plan though I do urge simplicity in design. In fact, the combination of 1, 2, & 3 is powerful.)

1. Separate new logo & net expansion quotas and commission rates
   For instance, pay 10% on new logo bookings and 5% on net expansion.
2. Gates
   Here, you make something valuable contingent on achieving a certain new logo quota attainment, often 80% to 100%. Most commonly, reps are only eligible for accelerators if they hit the target attainment.
3. Recognition
   Publicly celebrate reps for new logo bookings in kickoffs, QBRs, leaderboards, sales communications, etc.
4. SPIF
   A simple yet effective SPIF is paying $x for each new logo booked subject to eligibility requirements (ex: deal must be above a certain amount).
5. Quota credit multiplier on new logos
   Here, one still has a singe quota but gives more credit, typically 1.5x or 2x, on new logo bookings. I prefer separate quotas and commission rates since it keeps goals more clear.
6. President’s Club eligibility
   This is a variation on the gate theme such that reps must achieve a certain new logo quota attainment to be eligible for President’s Club. Or, as a carrot, rep ‘wins’ upgrades if they make President’s Club such as business class flights or an upgrade to a suite.
7. Contests
   Create a prize for the top rep(s) based on new logo quota attainment. I don’t love this one since I prefer designs that keep all reps motivated at all times.
8. Independent Accelerators
   One can, in theory, pay different accelerators on new logo vs. expansion bookings. To me, this adds complexity with little gain.
9. Promotion eligibility
   Establish a cumulative new logo acquisition amount, dollars or quantity, as a requirement for promotion. This is a quite fine thing to do but somewhat effortful to administer and is not powerful since reps, as humans, put a high ‘discount rate’ on the future benefit.

Compensating Reps At Multi-Product Companies

Options include the following:

1. Single quota that combines bookings for all products
   This is the simplest option and especially suitable for companies: (a) with many products (b) where “prime” AEs are well supported by overlay specialists
2. Separate quotas on one or more products
   For instance, $500K for product 1 and $300K for product 2. In a 50/50 comp plan with a 5x quota:OTE, the rep would a 10% base commission rate on either product but would be eligible for accelerators (assuming no gate; see below) on product 2 at a the different bookings level.
3. Separate commission rates
   For instance, imagine a quota of $400K for product 1 and $400K for product 2. Though the overall variable compensation target might be $80K (a 10% base commission rate), imagine product 1 pays at 12.5% and product 2 pays at 7.5%.
4. Gates
   Here, you make something valuable contingent on achieving amount of sales on one or more products. Most commonly, reps are only eligible for accelerators if they hit the target attainment.
5. Recognition
   Publicly celebrate reps for specific product bookings in kickoffs, QBRs, leaderboards, sales communications, etc.
6. SPIF
   For example, pay an addition $x or y% for bookings of a specific product(s).
7. Quota credit multiplier on specific product(s)
   Here, one still has a singe quota but gives more credit, typically 1.5x or 2x, on specific product bookings. I prefer separate quotas or commission rates since it keeps goals more clear.
8. President’s Club eligibility
   This is a variation on the gate theme such that reps must achieve a certain bookings level for specific product(s) to be eligible for President’s Club. Or, as a carrot, rep ‘wins’ upgrades if they make President’s Club such as business class flights or an upgrade to a suite.
9. Contents
   Create a prize for the top rep(s) based on specific product sales. I don’t love this one since I prefer designs that keep all reps motivated at all times.
10. Independent Accelerators
    One can, in theory, pay different accelerators on different products. To me, this adds complexity with little gain.
    

Compensating Reps for Extra Large Deals

A Guide to Commission Caps for B2B SaaS Account Executives

In B2B SaaS sales, attracting and retaining top Account Executives (AEs) is crucial. A key factor in achieving this is a well-designed commission plan that strongly motivates them to bring in new business while ensuring the company remains profitable. However, large, unexpected deals (often referred to as “Bluebirds” or “Whales”) can disrupt this balance.

While we generally recommend avoiding commission caps, there are situations where they are necessary to protect the company. Here, we explore the pros and cons of various commission cap structures for B2B SaaS AEs and provide real-world examples to illustrate each approach. These are ranked from most to least AE motivating to AEs.

As we consider each option, we will use the example of an AE with the following compensation plan mechanics:

• $120K on-target earnings (OTE)
• Traditional 50%/50% base/variable split — $60K base & $60K variable
• Recommend 5x quota-to-OTE ratio — $600K quota
• Flat commission rate up to 100% attainment — 10% rate)
• 1.5x accelerator for attainment over 100% of quota — 15% rate

For simplicity, we assume the AE closes just two deals – the first, a bluebird, for $2M followed by a second ‘normal’ deal for $100K.

1. No Cap

• Recommended Context: This approach is ideal for businesses where bluebird deals are extremely rare and large but not gigantic. [It is hard to define “gigantic” but a ballpark is deals that are 3x AE quota or larger.] This is often the case for companies targeting the Small and Medium Business (SMB) or lower Mid-Market (MM) segments with lower Average Contract Value (ACV), typically well under $100K.
• Pros: This is the most motivational structure for AEs, encouraging them to chase the biggest deals possible. Uncapped commissions creates a culture of striving for excellence and exceeding targets.
• Cons: Large payouts to a single AE can negatively impact the company’s bottom line.
• Example: Here, the AE receives a $60K commission for the first $600K of bookings and another $225K at the 15% accelerated rate for the remaining $1.5M booked. Including the $60K base, their total earnings are $345K, representing a 16% compensation cost of sale (CCOS).

2. Deal/Account Decelerator

• Recommended Context: This approach involves decelerating commission on individual deals or accounts.  If one goes this route, we encourage applying the rule at the account level to discourage reps from gaming the system by merely splitting transactions across multiple opportunities. Deal/account decelerators are suitable for companies in the upper MM and Enterprise (ENT) segments with higher ACV (over $100K), when bluebird deals occur occasionally, and are large but not gigantic.
• Pros: A deal/account decelerator protects company profitability while only slightly impacting AE motivation.
• Cons: AEs might not push as hard for bluebird deals knowing their commission will be decelerated. This can lead to frustration and potentially higher attrition among top performers.
• Example: Imagine a rule where the commission rate is 1x the base commission rate on any bookings for any single account in excess of the AE’s quota.  This is a decelerator since the rep would otherwise earn at the accelerated rate of 1.5x.  The AE receives $60K for the first $600K of deal 1 and $140K for the remaining $1.4M.  Since they have exceeded quota, they earn the full 1.5x accelerated rate on deal 2, or $15K. Including the $60K base, their total earnings are $275K, representing a 13.1% CCOS.

3. Deal/Account Cap

• Recommended Context: Here, we get more restrictive by capping the amount an AE can earn from any single deal or account. As with the deal/account decelerator, we also advise applying this at the account level to prevent gaming. This structure works well when bluebird deals are occasional but can be massive. It’s simpler to implement and understand compared to a deal/account decelerator.
• Pros: Provides a clear maximum payout for the company on a per deal/account level.
• Cons: Increased protection for company profit comes as reduced motivation for AEs. Salespeople might prioritize closing smaller deals to maximize their commission within the cap, neglecting the potential of bluebird deals, especially since the latter are complex and time-consuming.
• Example: Here, assume the commission on any single account is capped at 1x the AE’s on-target earnings.  Hence, the AE receives $60K for the first $600K of deal 1 and the maximum of $60K for the remaining $1.4M.  Since they have exceeded quota, they earn the full 1.5x accelerated rate on deal 2, or $15K. Including the $60K base, their total earnings are $195K, representing a 9.3% CCOS.
• Sample language: Notwithstanding the above, the maximum commission payable for any single account [define account elsewhere] will be capped at [specified amount, e.g., $100,000]. This means that even if [X]% of the contract value exceeds the cap amount, the AE will only receive the capped amount as commission for that particular deal.

4. Overall Commission Decelerator (e.g., Over 200% Attainment)

• Recommended Context: Applying an overall commission decelerator is suitable when bluebird deals occur with some frequency and expected to be large but not gigantic.
• Pros: Offers more protection to the company the prior approaches.
• Cons: Demotivates AEs on every deal exceeding the attainment threshold.
• Example:  Imagine a rule where the commission rate is 1x the base commission rate on any bookings in excess of 2x the AE’s quota.  This is a decelerator since the rep would otherwise earn at the accelerated rate of 1.5x.  The AE receives $60K for the first $600K of deal 1 and $90K for the next $600K.  Now that they have exceeded 2x their variable target, they earn at the decelerated rate of $80K on the remaining $800K of deal 1 and $10K for Deal 2.  Including their $60K base, the AE’s total earnings are $300K, representing a 14.3% CCOS.

5. Quota Increase Upon Deal Closure

• Recommended Context: While we do not recommend this approach in any context, we have seen it so feel a duty to explain it. It is similar to the overall commission decelerator rule but is very complex to understand and to apply.
• Pros: Offer similar protection for company profitability as the commission decelerator rule.
• Cons: Highly demotivating to AEs who will view this as a punishment for their success.
• Example: Consider a rule where any deal in excess of 2x the AE’s quota triggers a quota increase for the balance.  In this instance, Deal 1 triggers a quota increase from $600K to $1.4M since there are $800K of bookings in excess of 2x quota.  The AE receives $140K for the first $1.4M of deal 1 and earns $90K at the accelerated rate of 15% on the remaining $600K.  For deal 2, they earn $15K since they are above the revised quota. Including their $60K base, the AE’s total compensation is $305K, representing a 14.5% CCOS.

6. Overall Commission Cap

• Recommended Context: This is the best approach when bluebird deals are more than occasional and can get gigantic.
• Pros: Provides a clear maximum payout for the company, ensuring the strongest financial predictability.
• Cons: Overall commission caps are widely hated by AEs.  They react by not only avoiding larger deals but also often leave for employers without such caps.
• Example: Here, assume AE commissions are capped at 3x their variable compensation target.  Hence, the AE receives $60K for the first $600K of deal 1 and a capped amount of $120K for the remaining $1.4M.  Since they have reached their full commission cap, they earn $0 on deal 2. Including the $60K base, their total earnings are $240K, representing an 11.4% CCOS.

Conclusion

The reality is that jumbo deals are rarely, if ever, accomplished by lone wolf AEs. Rather, they take a small army that includes sales management, a sales engineer (SE), a sales development representative (SDR), product, finance, legal, C-level executives including the CEO, and others.  For this reason, AEs should have a semi-accepting attitude toward caps on unusual deals.

Oddly, jumbo deals may be less profitable than smaller deals which bolsters the argument for including caps. This is due in part to the aforementioned higher involvement of the extended team.  In addition, jumbo deals often require additional product development and engineering work. Over time this work improves the solution and benefit all customers, but it is costly in the short-to-medium term.

 For alignment and fairness, any caps applied to individual account executives should also apply to the compensation plans of (at-least) first-line sales managers (FLSM). Some organizations may include the cap in the plans of all sales leaders up to and including the CRO.

We have found that sales support professionals have strong emotions around bluebird deals. Specifically, they see their AE “getting rich of the back of theirwork.”  There is some truth to this, especially for SEs. Cap or no cap, consider paying pre-determined spot bonuses for SEs who work bluebird deals and to SDRs who source them.  Rather than a percentage, we recommend paying a dollar amount for deals in excess of a specific booking threshold.

Since commission is often paid well in advance of receiving payment from customers, this can create a cash flow problem for large deals or a huge claw-back problem in the event of cancellation or customer failure to pay. Hence, companies should state that some or all commission on deals over a certain threshold will either be spread out over time (ex: quarterly) or withheld until the customer has paid their invoice(s).

Finally, pay reps according to your commission plan. Failure to do will almost certainly demoralize your sales team and might open your company to legal liability.

Extra large deals are often referred to as bluebird, windfall, or extraordinary sales.

My best advice is that you should pay reps according to your commission plan. Failure to do will almost certainly demoralize your rep and broader sales team and might open legal liability.

This prompts the question of how to construct your compensation plan to control outsized payments either to gain margin or to control cash flow.

Here are a variety of options. Obviously, you want to be crystal clear on the language and apply it fairly across all extra large deals.

• Individual deal/account cap (recommended): Specify that commission on any single deal will not exceed a maximum amount. This can be a dollar value or percentage of variable compensation. Rather than a deal cap, I’d recommend an account cap at the ultimate parent level to prevent reps from gaming the system by splitting large deal across either multiple opportunities or multiple (artificial) subsidiaries/entities.
  
  Example: Notwithstanding the above, the maximum commission payable for any single account [define account elsewhere] will be capped at [specified amount, e.g., $100,000]. This means that even if [X]% of the contract value exceeds the cap amount, the AE will only receive the capped amount as commission for that particular deal.
  
• Deferred commission payment: Since commission is often paid well in advance of receiving payment from customers, this can create a cash flow problem for large deals. Hence, companies may state that commission on deals over a certain threshold will be spread out over time (ex: quarterly).
• Overall commission cap: While I don’t recommend capping commissions, this is one solution. 3x target variable compensation is high enough that reps will not be too frustrated by its existence since few if any ever reach that level.
• Decelerator: Quota credit for any individual deal will not exceed $1M. Above $1M, commission will be paid at a maximum of x%.

Compensating Reps for Mid-Contract Upgrades

Imagine a reps sells 12-month, 12 user deal for $120K on Jan 1, Year 1. At the 6 month mark, on July 1, Year 1, the customer adds 4 users another $40K ARR. This could be contracted in the following ways:

• Best (but uncommon): Do an early renewal – aka cancel/rewrite
  • Contract End Date: The end date for the contract is now June 30, Year 2.
  • ARR: ARR is now $160K.
  • Billing: The client is billed $40K for the expansion as well as another $60K for the 6-mo extension of the original 12 user contract.
  • AE quota credit: The AE receives $40K in quota credit since ARR expanded from $120K to $160K.
• Good (most common): Do a co-terminus expansion
  • Contract End Date: Dec 31, Year 1 since we co-term the expansion with the original contract
  • ARR: ARR is now $160K
  • Billing: The client is billed $20K for the expansion since it is pro-rated.
  • AE quota credit: Technically, the AE booked another $40K ARR. There are three options:
    • Best: Give the AE quota credit for the full $40K. Optionally, include a clawback provision in their compensation plan to recover the commission on the ‘extra’ $20K in credit should the client not renew.
    • Good: Give the AE credit for the full $40K but withhold the commission on $20K until the renewal. This requires complex tracking that may not be worth it and adds additional complications if the AE leaves before the renewal date (in which case the safest legal option is to pay out this deferred commission).
    • Not recommended: Give the AE quota credit for $20K now and $20K at the renewal. This is extremely difficult to track and execute.
• Not recommended: Allow the upgrade to have a non co-terminus end date
  • Contract End Date: The original contract still ends Dec 31, Year 1. The upgrade renews June 30, Year 2.
  • ARR: ARR is now $160K
  • Billing: The client is billed $40K for the expansion.
  • AE quota credit: AE receives $40K in quota credit.

I mentioned that the clawback provision should be optional in the case of the co-terminus expansion where the company gives the rep full quota credit. The clawback protects the company but comes at the cost of some potentially unnecessary anxiety for the AE. This begs the question of just how much risk the company actually faces.

My take is very little in percentage terms which is what matters to the CFO. Imagine the rep earns 10% on annual bookings as is typical in a 50/50 plan with 5x quota:OTE. In this scenario, the rep gets an extra $2K ‘advance’ payment on the deal for the $20K that is not billed and might or might not renew. This $2K amounts to 5% of the $40K ARR or 10% of the actual billings.

If the company has 15% churn, then they can expect to claw back $300 which is 0.75% of the ARR and 1.5% of the billings. Moreover, customers who upgrade mid-contract are far more likely to renew so the percentage impact is likely to be less than 1%.

Extra large contract can indeed impose high risk so a good option is to have a clawback or hold-back provision for deals over a certain threshold.

The timing of the upgrade is another important complication to consider. If an upgrade occurs early in the contract term, then there is much less at risk to the company versus one occurring near the end. As with special treatment for jumbo deals, companies often have special treatment for upgrades in, say, the last 3 months of an existing contract. Here is the early renewal is by far the best option all around – for the vendor, the AE, and even the customer since contracting is expensive on all sides so better to do it once. Alternatively, this is when a clawback or hold-back would be suitable too.

One may be tempted to give zero quota credit on a late-contract, co-term upgrade and instead pay the AE a flat rate. For instance, 10% on the billed amount of the upgrade. If the 4 users were added with 2 months remaining on the contract, the billed amount would be $6.6K and the rep would get $660. I do not recommend this approach since it not only adds administrative complexity but also discourages reps who want/need quota credit to earn accelerators, President’s Club attendance, etc. Instead, give the rep full quota credit for the $40K ARR but put in a hold-back. Here, a hold-back (future gain) is better since it is less painful than a claw-back (future loss).

Compensating Reps for Late Renewals

Reps usually receive quota credit for net new bookings inclusive of new logos and net expansion (expansion – downgrades – churn). Things can get a little bit complicated for late renewals (aka boomerangs, win-backs, or reacquired customers.)

Here, I define a late renewal as a contract with a lapse in recognized revenue. I am this precise to ignore two situations. First, instances where vendors continue service as an act of goodwill; in other words, service status is irrelevant. Second, instances where a late renewal is back-dated to the on-time renewal date such that there is no lapse in revenue recognition. Incidentally, these two situations tend to occur simultaneously.

Companies typically define a time window during which a reacquired customer is treated as a late renewal rather than a new logo. A typical window is 180 days (6 mos). Bookings after the window are treated as new logos. And, organizations do make exceptions which should be documented for consistent treatment in the future.

For late renewals inside the window, normal net expansion quota credit rules typically apply. Companies rarely, if ever, reduce net expansion quota credit for late renewals.

Quarterly Quota Plans

Here are the advantages & disadvantages of moving to higher frequency quota plans, such as from annual to semi-annual or quarterly:

• Advantages of higher frequency
  • Creates a higher sense of urgency & motivation with AEs and across the organization
  • Allows for quicker adjustments which is helpful when attainment is uncertain or in dynamic markets
  • Tends to improve strategic planning
  • Encourages top reps to maintain effort (and not coast after strong quarters)
  • Typically more suitable for products with shorter sales cycles
• Disadvantages of higher frequency
  • Increases administrative complexity
    • Adjusting for seasonality
    • Managing quota deployment workflow
  • Can lead to deal manipulation. For example, if a rep has little/no hope of reaching accelerators in one period, then they may delay the deal to the start of the next period (aka ‘sandbagging’)
  • Can lead to higher commissions paid
    The gist here is that a rep could earn accelerators in early quarters and under-perform in later quarters which results in higher commissions than if the AE were on a longer frequency plan.
  • Can impact the prospect/customer experience as AEs get more ‘salesy’
  • Can increase AE stress & attrition

The following Google Sheet provides examples of how to implement quarterly quota plans:

Commission Splits

(Coming soon…)

Compensating Reps During & After Maternity & Paternity Leave

(Since this is a complex topic, please consult with an attorney in your local jurisdiction to ensure your compensation plan is legal for any type of leave.)

Reps must be paid for any deals they closed prior to going on leave.  That is the easy part.

FMLA 825.215(c)(2) says that, somewhat surprisingly, you do not legally need to pay commissions when someone is on leave unless you would pay another person who is out on leave for a non-FMLA reason. In other words, as long as you are equally “harsh” or equally “kind” you are legally OK.  There is a bit of a grey zone which is deals the AE worked on that close when he/she is on leave.

I have yet to see a standard for how to compensate reps during maternity/paternity leave so I’ve enumerated options below. The decision on how to pay reps on leave is as much a legal one as it is one that drives employee retention.

(ranked by ‘rep-friendliness’ and fairness)

• Pay x% of average attainment of the prior y months (ex: x = 100%, y = 12 months)
• Pay a fixed x% of VC (typically 50% to 100%)
  (While friendly, I’ve ranked this option 2nd since it disadvantages strong reps who have delivered > 100% of quota)
• Have their manager work the rep’s territory and pay the rep x% of commissions (usually 100%)
• Spread the rep’s territory across one more more colleagues and split commission (from 50%/50% to fully double comp’ing at 100%/100%)
• Pay the rep x% of opps that were open when they went on leave. The percentage may vary by opportunity stage. For instance, Stage 4+ opps pay out at 100%, Stage 3 at 50%, and Stages 1-2 at 0%.
  (A potential issue with this is that VC will drift toward 0 over time which may be a feature or a bug of this approach.)
• Do not pay the rep VC
  (Though harsh, this is the most common approach to my knowledge.)

Reflecting on these options, the most generous would be a hybrid of the first two – pay reps the greater of 100% of VC or their average attainment in the last 12 months.

In addition to setting policy for compensating reps during leave, one must be mindful of legality and fairness when re-integrating reps once they return to work.  For reps on monthly or quarterly quotas, consider applying ramp quotas (and possibly draws) that are similar to your compensation plan for new hires or at least spanning as long as your average sales cycle. For reps on annual quotas, companies typically pro-rate quotas for the reps’ time away (unless they received at least 100% of quota credit via the options described above).

One also needs to consider the impact to the rep’s manager (and potentially upper level leaders). The most common approach here is to make no adjustment for two reasons.  First, it is part of a manager’s job responsibility to cover for reps on leave (at least within reason).  Second, most organization over-allocate quota at the rep level by 5% to 20% (or more) to provide a buffer for employee leave and attrition.

Finally, there is the question about what do with opportunities for accounts in the returning rep’s territory that are being worked by reps who have been covering for them (if applicable). The first consideration is when to return opportunities to the rep – immediately, after a fixed number of months, or not at all. Independent of the first consideration, the company must also determine how to split commission for the returning rep and the covering rep. The approach is best for the prospect and also generous to the reps is to fully double comp at 100%/100%.

The second consideration is which opportunities to return. One may be tempted to move early-stage opps back to the returning rep and keep late-stage opps with the covering rep. This feels way too ‘game-able’ to me and not particularly prospect-friendly. I recommend moving all accounts and opps back to the returning rep while having the reps work on the open opps jointly under the split policy in effect during the leave period. I’d also remove the covering rep from any opps where there has not been a prospect meeting in the last x weeks (x ~= 2).

Compensating Reps for Multi-Year Deals (incl. Ramp Deals)

If Multi-Year Deals are the Minority of Contracts

If most contracts are one-year deals, then the most common approach for paying on multi-year deals with no-opt outs is as follows:

(Note: If a multi-year deal has an opt-out then no additional bonus should be paid)

• Quota:  Set quota based on what the median rep can be expected to close. Let’s assume that is $1M ARR.
• OTE: In SaaS, the recommended best practice for quota:OTE is 5x. So, a rep with a $1M ARR quota would have an OTE of $200K traditionally split 50/50.
• Quota credit: When a rep signs a multi-year deal, you have two options.
  • The most common to only provide quota credit based on year 1 ARR. 
  • The alternative is to give quota credit based on the average ARR across the multiple years of the contract. The advantage of using average ARR is this aligns AE incentives with those of the buyer such that the AE will not artificially front-load the contract.
• SPIF/Bonus: For multi-year contracts, pay a bonus of 10% to 50% of the personal commission rate (PCR) on 1 year deals. The higher the gross retention rate on one year contracts, the lower the bonus rate since the company should not pay for what is already most likely to happen. If the PCR is 10% ($100K variable comp / $1M quota), the AE signs a 3-year deal, and the multi-year bonus is 20% of the PCR, then s/he would receive 10% on year 1 ARR, 2% on the year 2 ARR, and 2% on the year 3 ARR (2% = 20% x 10%). Occasionally, companies will pay a progressively lower rate on successive out-years but I do not recommend this as it adds unnecessary complexity.
• When to pay reps: Generally, reps are paid in full based on the booking date (the date the contract is signed). This is as opposed to holding back commission until invoice (usually at the start of each year) or cash receipt.  The usual claw-backs for non-payment/cancellation apply with the recognition that some AEs may be gone the out years.  Rather than holding back commission, simply factor the attrition and contract default rate into the multi-year bonus rate; this is a big reason why the rate is typically 10% to 50% of the PCR.

If Multi-Year Deals are the Majority of Contracts

If most contracts are multi-year, no-opt deals, then I recommend the following:

• Quota:  Set quota based on what the median rep can be expected to close. Let’s assume they close $2.145M in total recurring revenue (TRR) with all deals spanning 3-years. Hence, the average ARR booked is $715K. Either of these amounts can be used as quota though I recommend TRR.
• OTE: Let’s say the company was willing to pay 4.67% of TRR (the equivalent of 10% on year 1, 2% on year 2, and 2% on year 3). Thus the variable on-target variable commission would be $100K. Assuming a 50/50 plan, OTE would be $200K.
• Quota credit: You have two options:
  • If quota is TRR based (as recommended), then quota credit is 100% of TRR. This is especially convenient if reps can book deals with a mix of durations. Some companies may put a decelerator (multiple of less than 1x) on shorter term contracts to discourage those deals.
  • If quota is ARR based, then quota credit is typically based on average ARR (rather than year 1 ARR). This approach makes things tricky if reps are able to book deals with varying durations. For instance, if a 3 year deal pays out at 14% on average ARR assuming a 3 year deal, then the payout on a 2 year deal could either be:
    • 9.3% = TRR rate * 2 / 3 = 14% * 2 / 3 [or lower to discourage shorter term deals]; you might choose this if you have moderate to high churn on 1-year deals
    • 12% = implied 10% on year 1 and 2% on year 2 [or lower to discourage shorter term deals]; you might choose this if you have very low churn on 1-year deals
• When to pay reps: Generally, reps are paid in full based on the booking date (the date the contract is signed). This is as opposed to holding back commission until invoice (usually at the start of each year) or cash receipt.  The usual claw-backs for non-payment/cancellation apply with the recognition that some AEs may be gone the out years.  Rather than holding back commission, simply factor the attrition and contract default rate quota credit rate.

Compensating Reps for Non-Recurring Revenue

In SaaS, the most common forms or non-recurring revenue are implementation fees and professional services. (Note: I am avoiding using NRR as an abbreviation for non-recurring revenue since I reserve the acronym for net retention rate.)

If a company does not assign non-recurring revenue quotas to reps, then the company should expect reps to aggressively discount services in order to maximize ARR quota credit. This actually aligns with the company’s best interest since a larger dollar amount will be carried through to the next renewal.

That being said, if the company expects to break even or turn a profit on services, then they should assign non-recurring revenue quotas to reps and/or enforce strict rules to prevent excessive discounting. Non-recurring revenue quotas should (almost always) be separate from annual recurring revenue (ARR) quotas esp. since the commission rate on non-recurring revenue is typically 50% or less of the personal commission rate on ARR as gross margins on services are almost always lower than those on software. One instance where one could combine ARR and non-recurring revenue targets is if the non-recurring piece is a non-negotiable, fixed amount or percentage of every deal; in that case, it will be easier to manage a single quota.

Finally, if reps have non-recurring revenue quotas, then the commission earned on them should count toward OTE. This is common if (nearly) every deal includes an implementation fee.

Compensating Reps for Channel Partner Sourced Deals

Conventionally, reps are paid a reduced commission for partner-sourced deals. But the question is, “Reduced by how much?”

Unfortunately, there is no single answer. If a company does not do a large enough volume of deals to have pure channel/partner account managers (CAMs/PAMs), then reps typically receive 50% of their normal commission rate. For this reason, conventional reps eschew channel deals unless the deals are delivered on a silver platter.

Companies that are fully or heavily focused on selling through the channel typically have dedicated CAMs. CAMs tend to have larger quotas, lower commission rates, and/or a on-target variable compensation amount given that channel partners take between 10% and 40% of bookings based on their involvement.

Compensating Channel Account Managers (CAMs)

The base/variable split for CAMs generally ranges from 60/40 for companies with established partner programs to 70/30 for those with emerging programs.

Typical variable compensation metrics for CAMs:

• Bookings sourced
• Pipeline sourced
• # deals sourced
• Bookings influenced
• Pipeline influenced
• # of deals influenced
• Bookings to resellers
• New channel partners signed/onboarded/activated

Commission rates are usually higher on sourced vs. influenced.

Location	Median OTE ($K) Typical Split (60/40)
Austin	165
New York	182
San Francisco	193

Compensating Reps for usage-based or consumption-based pricing models

My recommended compensation approach for companies with usage-based pricing (UBP) models is as follows:

• retire quota for minimum annual commitments when the deal is first signed
• retire additional quota if/when the minimum commitment is exceeded.

Furthermore, resist the temptation to pay separate commission rates on revenues from upfront commitments or usage overages. Paying a higher rate on minimum annual commitments, for example, misaligns AE and client incentives. It can also lead to longer sales cycles and lower win rates.

There was a time when companies would retire quota based on projected spend (aka ‘run rate’) then adjust over time using claw-backs and increases. However, this practice has become uncommon due to administrative complexity. Instead, companies mostly pay on billed consumption.

Quota-setting can be particularly complicated in UBP environments, especially for younger companies with less data. In that instance, you might want to deviate from the usual 50/50 comp plan and/or have more frequent comp plan revisions (quarterly or even monthly). Or, perish the thought, cap commissions albeit at a very high multiple OTE (like 4x).

Quota setting can also be complicated in situations where clients might have ‘explosive’ growth. I’ve worked with a company that knows a certain percentage of customers will experience that within a particular time window (18-36 mos). They actually apply probabilities to determine per-rep quotas based on their specific accounts. This is a very rare sort of a plan but appropriate in that context.

Finally, there is the question of how long reps can/should hold accounts / benefit from increases in usage. In SMB and lower MM, that tends to be 12 mos. In upper MM & ENT, the holding period tends to be indefinite – or at least until accounts are moved. Of course, as with non-UBP compensation, only pay reps on incremental bookings. Moreover, pay reps for expansion even if customers use self-service upgrade options; this avoids inefficient attribution analysis and loads of frustration on all sides; it also has no real financial impact since OTE is the same but quota is higher.

Also see the section on this page on monthly recurring revenue (MRR).

Compensating Reps on Monthly Recurring Revenue (MRR)

For portions of your business that operate with month-to-month contracts, common in PLG, I recommend paying reps on net MRR (new business + expansion – downgrades – churn) for all accounts in their name. To avoid the risk of having negative amounts necessitating claw-backs, I further recommend imposing a ~90 day delay at least on new business; so, rather than including new business in the prior month in the net MRR calculation, include ‘new business from 3 mos ago that has not cancelled for non-payment or churned.’

Assuming reps are even partly responsible for expansion, count upgrades even if the customer used a self-service option. This avoids unnecessary and often impossible attribution analysis. This washes out in the end since it means the company merely sets a higher quota. OTE is unchanged.

As with any other type of sales compensation plan, set quota such that 50% to 75% of reps will meet or exceed quota in any given month. One should also verify that the net ARR (net MRR x 12) exceeds 4x OTE. Otherwise, one has more fundamental issues with customer acquisition costs such that the business may not be profitable.

Recoverable & Non-Recoverable Draws

A draw is an advance payment against future commissions to ensure a minimum commission per payment period. With a recoverable draw, payments in excess of commissions earned are carried forward to the next performance measurement period. With a non-recoverable draw, payments in excess of commissions earned are not carried forward (i.e. forgiven) once the current performance measurement period is over.

Recoverable Draw

In the table below, the AE has a draw of $5,000 for each of the first 3 months of Q1 then $0 in the subsequent months. Importantly, this example uses a quarterly draw measurement period and a monthly payment period.

In Q1 M1, the rep earns commissions in excess of the draw and is paid the full 8,000. In Q1 M2, the rep only earns commissions of 3,000 and therefore needs to ‘borrow’ 2,000 to be paid the 5,000 minimum. In Q1 M3, the company can recover a maximum of 1,000 of the 2.000 balance and still pay the 5,000 minimum.

A new draw measurement period begins Q2 M1. Since this is a recoverable draw, the balance at the end of Q1 carries forward into Q2. Hence, in Q2 M1, the rep pays back the remaining 1,000 and is paid 6,000 of the 7,000 commission earned.

Qtr-Month	Draw	Commissions Earned	Staring Draw Balance	Draw Repaid	End Draw Balance	Commissions Paid
Q1 M1	5,000	8,000	0	0		8,000
Q1 M2	5,000	3,000	0	0	(2,000)	5,000
Q1 M3	5,000	6,000	(2,000)	1,000	(1,000)	5,000
Q2 M1	0	7,000	(1,000)	1,000	0	6,000
Q2 M2	0	5,000	0	0	0	5,000

Non-Recoverable Draw with Quarterly Draw Measurement Period

With a non-recoverable draw, the company does not carry the draw balance forward into the next draw measurement period. Hence, the balance at the end of Q1 M3 is zeroed at the start of Q2 M1.

Qtr-Month	Draw	Commissions Earned	Staring Draw Balance	Draw Repaid	End Draw Balance	Commissions Paid
Q1 M1	5,000	8,000	0	0	0	8,000
Q1 M2	5,000	3,000	0	0	(2,000)	5,000
Q1 M3	5,000	6,000	(2,000)	1,000	(1,000)	5,000
Q2 M1	0	7,000	0	0	0	7,000
Q2 M2	0	5,000	0	0	0	5,000

Non-Recoverable Draw with Monthly Draw Measurement Period

With a monthly draw measurement period, a non-recoverable draw is simply a minimum commission payment guarantee. Here, any ending draw balance is zeroed at the beginning of each subsequent month.

Qtr-Month	Draw	Commissions Earned	Staring Draw Balance	Draw Repaid	End Draw Balance	Commissions Paid
Q1 M1	5,000	8,000	0	0	0	8,000
Q1 M2	5,000	3,000	0	0	(2,000)	5,000
Q1 M3	5,000	6,000	0	0	0	6,000
Q2 M1	0	7,000	0	0	0	7,000
Q2 M2	0	5,000	0	0	0	5,000

Compensating Elite Sellers

For purposes of this section, elite sellers are those responsible for managing mega-deals of $1M, $10M, or even $100M plus. Consequently, these reps routinely have quotas of $10M+.

• Expect a much higher OTE to compensate these reps for their elite skill. If enterprise SaaS reps command OTEs of $300-$400K, these reps are often at $500-$600K and can earn $1M+ per year.
• Whereas Enterprise SaaS reps are generally on 50/50 base/variable plans, these reps skew more toward base with a mix of at least 60/40. It is also a bit more common for elite sellers to have part of their compensation tied to MBOs. Since every large deal involves many resources and receives close scrutiny, even deal progression MBOs are highly measureable.
• Elite reps may have a 2 year quota measurement period. For example, rather than $10M per year with performance-to-quota for accelerator purposes reset each year, they have a $20M quota with performance to quota only reset every 2 years.
• Since deals can be highly variable and OTEs are already so high, elite sellers are somewhat less likely to have accelerators.
• While I generally frown on compensation caps or decelerators at high attainment, comp plans for elite sellers most likely include one or the other. This is especially true when comp plans include MBOs since reps gain downside protection by giving up extreme upside.
• To the extent that there is accounts receivable payment risk or solution delivery risk, organizations may withhold some or all of the rep’s commission until cash is received.

Compensating Reps & Managers During New Market Entry

This also applies to building compensation plans for the first rep(s) hired by a company.

The following are guidelines for compensating reps when entering a new market – geography, industry, size segment, or product. These best practices also apply to early stage startups. One key guiding principle here ‘stacking the deck’ to eliminate sales execution as a potential root cause of failure.

• Pilot with at least 2 strong existing reps. These sellers must be all-in on the new market; if they are still able to work their current territories, they will not dedicate adequate focus to the initiative.
• Rather than hire a leader for the new segment, have the initial reps report to the highest possible sales leader who has bandwidth, (at least some) expertise in the new market, experience with this type of cold start, and motivation to support them. As an alternative, one could have a player-coach manager but only if you expect the person to manage fewer than 4 (1-3) AEs for the foreseeable future. Give the player-coach a quota of either 25% or 50% that of a fully dedicated AE.  The advantage to this is that being in the weeds will help them build & document a repeatable sales process. Unlike for AEs, I’d cap the VC payment for this piece since you don’t want them gravitating to full AE and not building, hiring, coaching, etc.
• Regardless of the compensation plan you put in place, update the plan with high frequency – mostly commonly every quarter but monthly is not out of the question.
• One could pay a higher base salary percentage than the typical 50/50 plan. I don’t love this approach, however, since eventually resetting to 50/50 means reps will take a hit to their base salary which will feel like a punishment and will consequently increase attrition.
• Since there is so much risk and uncertainty both for the company and the reps, tie some or all variable compensation in any period to MBOs. MBOs should be objectively measurable and challenging to game. The classic MBO for sales is the # of new logos landed. In the early quarters, some MBOs may be tied to projects which are more binary. Another viable early MBO is the number of discovery meetings with suitable persona at target accounts; I prefer this to the number of opportunities or the dollar value of pipeline since actual meetings are less gameable. MBOs are often banded and don’t have accelerators. For instance:
  • 0-5 new logos: 0% of the VC associated with this MBO
  • 6-10: 25%
  • 11-15: 50%
  • 16-20: 75%
  • 21+: 100%
• If it is too early/hard to define MBOs in the first quarter or two, then you can give the AE or VP a draw which amounts to guaranteed comp. With a draw, you can set a very high quota:OTE ratio (ex: 8x-12x) since the individual will still be very happy with the guaranteed ‘floor’ compensation. As you learn more about your business, you can adjust the quota:OTE ratio to a suitable level and remove the draw.
• Another option is to tie rep compensation to overall company performance. This should be a temporary last resort since it divorces the seller’s skill and effort from their incentive compensation.
• Though non-traditional, you could give reps and leaders parallel plans. Basically, pay out the greater of the standard quota-based plan which does have accelerators or the MBO plan which does not.
• After your company is established in the new market, typically 12-18 months, move to a standard quota plan
• For a new segment (or a first rep), keep things simple on the payment curve; in other words, pay linearly through 100% quota attainment, no decelerators. If there is extreme uncertainty in quota attainment, then one can similarly eschew accelerators above 100%.

Compensating Reps During When Demand is Soft

Demand could be soft due to macroeconomic (downturn, recession, etc.) or microeconomic (superior competition, brand damage, etc.) conditions. Since productivity and tenure are highly correlated and since one cannot predict the timing of a turn-around, most leaders have a floor to how much they are willing to reduce capacity (headcount).

In this situation, here are some ways to retain top reps in challenging times. Keep in mind that you still want to pay for performance.

(prioritized though not mutually exclusive)

• Communicate repeatedly that any compensation plan changes are temporary
• Move to higher frequency plan resets which could be 2x per year (for large ENT), quarterly (for MM), or monthly (for SMB).
• Place a multiplier on the base commission rate – This could be on the entire payout curve or it could ‘kick-in’ a certain threshold of attainment
• Reduce quota (aka quota relief) – Though reps love it, it can be financially dangerous for companies since a lower quota means both a higher commission and a lower threshold for accelerators.
• SPIF MBOs – Pay for measurable achievement of leading indictors or other key outcomes. Examples include PoCs completed (assuming someone other than the rep or their manager controls this), new logos signed, etc.
• Increase accelerators – This one is not very effective since the point is that reps are very far from target quota to begin with
• Award stock options or RSUs for every $x in bookings – This is rare and tends to not be particularly motivating to AEs since the payout is distant & uncertain.
• Give a non-recoverable draw – We don’t recommend this since it is not paying for performance. This is the same as paying a ‘retention bonus.’

I have not listed non-monetary / intrinsically motivational ‘incentives’ like recognition programs since they are unlikely to help retain top reps (and you should be doing them anyway).

Sales Incentives (SPIFFs)

Some considerations:

• Generally avoid SPIFFs for selected products, even new products.
  • Reps should position & sell what prospects want/need.
    • If your company is in a regulated industry, SPIFs may result in costly penalties from class-action lawsuits or regulatory discipline.
    • Selling products/services that customers do not need can lead to churn of the overall contract
  • SPIFs increase the complexity of the compensation system
  • SPIFs create unproductive in-fighting amongst product managers
  • AEs become ‘addicted’ to SPIFs which makes them hard to change/remove
  • SPIFs add administrative burden (though this is the least of the issues)
• Do not allow deals with discounts below a certain threshold to be eligible for SPIFF credit
• If unable to offer SPIFFs, product managers in multi-product companies will find other ways to get disproportionate rep attention. To control for this, funnel all messaging through a sales communication function so reps can maximize engaged selling time.

Some ideas:

• 102 Sales Incentive Ideas
• Cash-based
  • Pay higher rate on deals with lower discounts
  • Annual up-front billing
  • Auto-renewal; x% automatic price increase at renewal
  • Faster payment terms (ex: net 30)
  • Commission rate multiplier for a period of time
  • Quota credit multiplier for a period of time
  • Deals before date (ex: 10 deals before 20th of the month gets $3K)
  • Larger accelerator for a period of time
  • Pay for pipeline generating activities that have a strong link to bookings
    Ex: $x for every PoC/PoV completed. With SPIFFs on activities, make sure there is a strong degree of ‘control’ that is outside of the AEs hands. For instance, the PoC/PoV must (a) meet well defined qualification criteria and (b) be approved by an internal 3rd party such as Sales Engineering
• Physical Gifts
  • Apple gadgets
  • Premium swag
• Experiential
  • Activity with CRO and/or CxOs (ex: Top Golf; go-kart racing; dinner; etc.)
  • 5-star dinner for rep and their plus one
  • Free trip for rep and their plus one
  • Team outing (if a team-based SPIFF)
  • 1st class upgrade on next business flight
  • Upgrade to suite at next SKO

Determining the Maximum Accelerator

To determine the maximum accelerator (aka multiplier) that should be paid on attainment above quota, start with the assumption that the multiplier (m) times the base commission rate (r) should not exceed the target compensation cost of sales (CCOS).

By definition, CCOS equal on-target-earnings (OTE) divided by Quota. Hence,

Also by definition, the r equals the variable compensation amount (V) divided by Quota. Note that V is in currency units and is not a percentage. Hence,

Finally, solving for m, the maximum accelerator multiplier,

Setting AE Meeting & Activity Targets

Please reference the following spreadsheet to set daily / weekly / monthly / quarterly / yearly meeting & activity targets for AEs.

AE Activity Planning Revenue Funnel Math (Google Sheet – make a copy to modify)

Seller Time Study

Based on research from Alexander Group:

• Prospecting
  • Generate & evaluate leads
• Planning
  • Account planning
  • Opportunity planning
  • Call planning (benchmark 12%)
• Engaged Selling (benchmark 24%)
  • Build relationships (benchmark 15%)
  • Quantify opportunties
  • Develop and propose solutions (benchmark 9%)
• Sales Completion
  • Back office
  • Order entry
  • Implementation support
  • Customer service
• Other
  • Admin
    • Cross-functional alignment
    • Internal (sales team) meetings / CRM / etc.
  • Travel
  • Training
  • Other

From a 2018 study by Ken Krogue & Gabe Larson @ Kustomer: (n=721)

Performance Improvement Plans (PiPs) for AEs

How long should it take to evaluate the first of a new hire AE? My rule of thumb is ramp time + 1x (to 1.5x) your average sales cycle. In the interim, measure progress by setting minimum activity (and effectiveness) standards.

Sales Recruiting & Recruiting Agencies

A full time recruiter can hire 12 to 15 Enterprise AEs per quarter.

B2B Sales Recruiting Agencies

(*) = recommended

• (*) Adam Miller
• (*) Aphex Recruitment (UK/EMEA)
• Aspireship (SDs)
• (*) Artisinal Talent (premium; CRO/CxO focused)
• (*) Avenue Talent Partners (Amy Volas; focused on VP+ of sales & CS at $1M to $25M ARR companies)
• (*) Chasm Partners (healthcare specific)
• ClosedWon Talent (Jake Citrano; enterprise/strategic sellers, technical sellers (SEs & SAs), and channel sellers in the SaaS)
• (*) Commodore Partners
• (*) Daversa Partners (Gary Constance – esp. CRO hiring)
• Kindred Partners
• (*) Pursuit Sales Solutions
• (*) RJR Partners – Shannon McCarty
• (*) Sales Talent Agency
• (*) Savage Partners (John Hagan – esp. CRO hiring)
• (*) Swing (Annie Wenzel & Jessica Kaplin)
• (*) SV Academy (SDRs; diversity focused)
• (*) True Search (Christian Boccuzi; Steph Paris; Ben Patterson)
• Ventes (Mexico)

Sales Compensation Consultants

(*) = recommended

• Alexander Group (dominant vendor since purely revenue function focused; tends to be for larger enterprises; pricey)
• Cygnal Group (Donya Rose; sales comp. focused)
• OpenSymmetry (SPM consulting incl. comp. consulting & administration)
• Pave (comp benchmarking platform, not consultant)
• SalesGlobe
• Simon Kucher (best known for pricing consulting)
• Total Reward Solutions
• ZS Associates

Sales Hiring Assessments

Since intelligence is highly correlated with job performance, I recommend critical thinking assessment. I have not found other (non-cognitive; personality) assessments to be valuable in hiring salespeople.

(*) = recommended

• (*) Criteria Cognitive Aptitude Test – (CCAT)
• Objective Management Group (OMB)
• SalesDrive
• Sales Effectiveness and Improvement Analysis (SEIA)
• (*) Wonderlic Cognitive Ability Test

Pending:

• Job description
• Comp plan template
• compensation for PLG and/or usage-based services

Footnotes

¹ AM segment split not available