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 the following:
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
Sales quota and compensation calculator
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.