How to build a realistic sales comp plan
How to build a realistic sales comp plan
There’s no magic formula to creating realistic sales comp plans; it’s always been a battle between the dreams of investors and realities of customer needs. Salespeople live in this dichotomy and their livelihoods are determined by it; compared to an engineer who misses their deadline misses out on a promotion, a salesperson who misses their quota may not be able to pay their bills.
In recent times, the gap between investor dreams and customer realities has become quite the gaping chasm; according to a SaaStr poll from earlier this year, only 18% of reps are hitting 70% or more of their quota:
The first step in getting to a realistic quota (and comp plan) is to build a realistic forecast for the business based on the current pipeline, the additional pipeline to be sourced from marketing and the additional pipeline to be sourced from sales. For a deep dive on that topic, see my earlier post; How to build a realistic sales forecast.
This post covers the following topics behind coming up with a realistic sales comp plan:
The components of a sales comp plan
How to calculate an attainable quota
How to calculate OTE based on quota
How to allocate OTE between base pay and variable pay
How to handle the ramp up period for a new salesperson
How to choose the right quota period
How to manage exceptions to the comp plan
Common mistakes to avoid
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The components of a sales comp plan
Quota - the booked revenue that a salesperson is expected to close in a given period.
OTE (On target earnings) - the sum of a salesperson’s base salary and variable pay
Base Salary - the share of OTE that is guaranteed.
Variable Pay - the share of OTE that is based on quota attainment. Variable pay can be presented in one of two ways:
Variable pay = Booked revenue x commission rate. This is common in early-stage companies, where its about getting customers in the door.
Variable pay = [Booked revenue / Quota] * [OTE - Base Salary]. This is common in mature companies, where quotas increase independently of OTE.
Accelerator - the increase in commission rate once a salesperson hits their quota in a given period.
How to calculate an attainable quota
Quotas need to be attainable in order to attract and retain good salespeople. “Attainable” doesn’t mean “easy” but it does need to be backed up with a plan that is grounded in reality. Simply adding “stretch” or “go find” to a quota doesn’t accomplish anything other than increase your chances of missing the number, managing down your sales costs and de-motivating your reps.
In theory, a quota is driven by 5 constraints:
# of work hours available for selling.
# of meetings needed per deal (won or lost).
Time spent per meeting, including preparation and follow up.
% of deals won (Win rate).
$ per won deal (ACV).
Here’s an example
Assumptions:
40-hour work week
10 hours per a week spent on internal meetings and breaks (1:1s, all hands, team meetings, training sessions, lunch etc).
20 days a year of time off for public holidays and vacation (10-12 public holidays + 13-15 vacation days).
$10k ACV.
Average of 2 meetings per deal across wins and losses (wins take more meetings, losses take fewer).
90 minutes per meeting (30 minutes of prep + 45 minutes for the meeting itself + 15 minutes for follow up).
20% win rate.
Outputs:
(40 hours/week - 10 hours/week) * (52 weeks - 20 days) = 1440 hours/year or 120 hours/month for selling.
120 hours / 90 minutes per meeting = 80 meetings/month.
86 meetings / 2 meetings per deal = 40 deals/month.
40 deals x 20% win rate = 8 wins/month.
8 wins x $10k ACV = $80k/month or $960k/year quota potential.
Now factor in your market realities
If there aren’t enough inbound leads, sellerss will need to spend time generating their own pipeline, which reduces the work hours available for selling. If a seller needs to spend 8 hours a week on prospecting, the quota potential drops to $58k/month.
If more stakeholders need to be convinced, each deal will require more meetings. If each deal requires 3 meetings instead of 2, the quota potential drops to $57k/month.
If meetings start late and run for 60 minutes instead of 45 minutes, the time per meeting increases to 105 minutes and the quota potential drops to $68k/month
If scheduling becomes a problem as calendars get full, the work hours for selling can’t be 100% utilized. If utilization drops to 80%, quota potential drops to $64k.
If any of the above occur simultaneously, it’s easy to see how the quota potential can drop below 50% of the theoretical value, so you need to do this type of analysis on your business to get to a realistic number.