by Jesse Javna
As anyone who has built a sales team has experienced, determining a compensation plan that sufficiently motivates and rewards sales people can be tricky. Where should the base salary start and what’s a fair commission rate? Should you set high sales quotas that are so challenging that only a few can achieve? Or low ones that are easy for all to achieve? Or maybe split the difference? With SaaS (Software-as-a-Service) sales it's easy to get bogged down with the nitty gritty and consider types of sales, subscription revenue, and varying contract lengths, but for simplicity’s sake and thepurpose of this article, we’ll take a step back and only look at quotas andOTEs (On-Target-Earnings) and how the Quota-to-OTE ratio is tied to performance.
Before building a compensation plan, it’s good to understand the standard commission rate rules that are used so often by hiring managers that they are now considered rule of thumb. We’ve learned a lot of lessons over the years, but I’ll summarize them here for brevity.
1. The 50/50 split rule refers to a salesperson’s earnings being comprised of 2 equal parts: base salary and commission, the total of which makes up OTE.
2. The 5x rule is the ratio between Quota and OTE and is determined by dividing an AEs total yearly quota by OTE. This ratio should ideally be between 4 and 6, hence the 5x name, however, note that alower multiple will result in a higher commission.
3. The standard commission rate for saas sales is10%. We get this number when you follow the50/50 split and when a rep’s Quota-to-OTE ratio is 5x.
Not all compensation plans will split as evenly or cleanlyas the rules stated above, but these rules are commonly practiced and accepted,and a good starting point in figuring out what works for you and your team.
The next item to take into consideration is where to set anAEs quota? What’s considered high, medium and low? Is there a correlationbetween quota level and performance? Will a higher quota drive higher performanceversus a medium or lower one? Does it matter?
According to reports based on member data from the softwaresales industry, the answer is “Not really”. When surveyed, AEs from the varyingsegments (Low Quota: <$750k; Medium Quota: $750k-$1.25M; High Quota:>1.25M) performed within 21 points of each other in Quota Capacity Achieved,and within 8 points of each other in Hitting Quota and Beating Plan. Meaning:the quota level had little to no impact on performance.
However, what is more indicative and has significantcorrelation to performance is the Quota-to-OTE ratio. When looking at QuotaCapacity, AEs with <4x Quota-to-OTE ratio achieved 100% of Quota Capacitycompared to the 87.6% achieved by 4-6x ratios, and 73.7% achieved by AEs with>6x ratios. Meaning: AEs with lower Quota-to-OTE ratios perform better than AEswith higher ratios.
So, as you decide on a commission plan that best fits your saas company and sales team, use the 50/50 split and 5x rules as a starting point, but also consider the Quota-to-OTE ratio and how you want to motivate your AEs. Data shows higher commissions drive performance.