There’s a lot of great information out there on SaaS sales compensation plans for AEs, SDRs, AMs, and other front-line sales reps, but what about sales managers and executive leaders?
Building a plan that creates alignment between sales reps, managers, and executive leaders with room to allow leaders at each level to make the moves they need to ensure long-term growth and customer success is key.
We’ve seen a lot of comp plans (good and ineffective) and have worked with enough sales leaders to know what challenges they face when the comp plan they have been given doesn’t align with what is expected of them.
Building on this experience, we are going to cover important things to keep in mind when building comp plans, common mistakes to avoid, how to incentivize the right behavior from leadership, and examples of comp plans for sales managers and executives.
Things to Keep in Mind When Building Comp Plans for Sales Managers and Leaders
Three of the biggest things that we see impact sales team morale are company culture, leadership, and quota/compensation plans. Keep these things in mind when building out compensation plans for your leaders to boost the morale of your leaders AND your reps.
Sales leader expectations
First and foremost, you need to know what your expectations are for a sales leader to ensure that your plan is aligned with your expectations. The three most common scenarios we see in growth-stage companies are a leader brought on to build a team/function from scratch, someone coming in to scale, or someone coming in as a fixer.
Build from scratch
This leader is creating something entirely new, so a typical plan won’t really fit. They’ll likely need some sort of Minimum Base Offering (MBO) to ensure they have time to build it the right way without cutting corners, but still have upside for over-performance.
This leader will likely be stepping into an organization that has a good amount of momentum as well as data to work from. In this case, you will likely be able to use a more traditional comp plan focused on performance with some room to allow for them to scale up foundational teams or functions (RevOps, enablement, etc.) to support a team that is scaling.
This leader has a lot to figure out and likely some larger changes to make. In this case, you’ll definitely want to plan on an MBO for 3-6 months as well as expect a potential dip in revenue performance. If you are bringing them in to fix a team or the entire sales function, you have to give them the space and protection to do it right.
Sure, you’ll start with some sort of revenue target for the year, but your objectives will make it clear how you will get there. In SaaS, it is almost always some sort of combination of customer acquisition, account growth, and retention, but the way this is distributed in your plan impacts the way you set comp plans. Your objectives may include:
- Improving top-line new business growth
- Increasing revenue per customer
- Increasing the number of long term contracts
- Reducing churn / increasing lifetime value (LTV)
- Improving net revenue retention
- Increased renewal rates
Every company has different objectives, and they likely change over time, so it is important to make sure your leaders have comp plans aligned with your top objectives.
Understand how you will recognize revenue
Unless you are building an entire sales organization from scratch, you should already have a good idea of how the company recognizes revenue (MRR, ARR, Annual Contract Value (ACV), Bookings, etc.) and how current rep comp plans are structured.
This is important because even though there are a lot of examples of SaaS comp plans out there, not all of them will fit your company and business model.
In Jason Lemkin’s post about how he developed a plan for his reps at EchoSign, he talks about how they started by copying a plan from Salesforce and it caused them a lot of pain.
So the same goes for you. If you copy Jason’s plan using a sales commission of 25% of ACV for annual deals with incentives for payment up front in a high-volume, low-ACV inside sales model, you might also have a really rough year.
Understand how your company recognizes revenue and what is most important to the business (cash up front, better margins, fast closes, etc.) to make sure your comp plan will work.
Keep it simple
It is essential that you keep things as simple as possible. By overcomplicating things, you run the risk of your sales reps and/or sales leaders not understanding them and if they don’t understand them – well, they are not going to work! It needs to be crystal clear as to what needs to be done for them to be achieved.
It can be tempting to add several levels of tiered commissions with accelerators and decelerators, kickers, incentives, and more, but most of the time, a simple base salary + commission rate does the trick.
Think about timing
We see most SaaS companies operating in one of two ways:
- Monthly quotas, paid monthly
- Quarterly quotas, paid quarterly – most commonly with a monthly draw and a quarterly true up
For a small team, it may seem feasible to pay commissions monthly, but it quickly becomes a lot to calculate exact commissions, so quarterly payouts typically help to keep from putting your RevOps person/team under water.
Timing is also an important factor when calculating hiring plans and time to ramp. If a sales leader has a comp plan that has their quota ramping differently than when they are allowed to hire and ramp new reps for their team, it’s going to be rough.
5 Core Elements of a Sales Comp Plan that Incentivizes Leaders at Every Level
When we think about what really good compensation plans look like for an entire sales organization, including sales managers and leaders, there are five core elements that always rise to the top.
1. Start with a plan that includes proper buffers
The foundation of your compensation model needs to be a revenue target that has some buffer added above the company revenue plan.
Start with the company revenue target for the year and then work from furthest out adding 5% for sales reps, 3% for sales managers, 1% for the VP. You may choose to use different percentages, but the goal is to find a balance between it being attainable for sales reps and not depending on 95% quota attainment from the entire team to be able to hit the plan.
For example, if the company plan is to do $5M in new business for the year, the totals for each level would look like this.
- New business sales reps quotas will add up to $5.25M (Plan + 5% buffer)
- New business sales managers quotas will add up to $5.15M (Plan + 3% buffer)
- New business directors/VP quotas will add up to $5.05M (Plan + 1% buffer)
2. Alignment between leaders & reps
Reps and leaders should have compensation plans built on the same KPIs and metrics so that they are running in the same direction.
It is critical for leaders to have a plan that mirrors the team they are leading, with a little more protection in their base salary. This ensures that everyone is working towards the same goals and leaders are empowered to support and coach their team without feeling like they have two disparate goals to hit: their personal goal and the team’s goals.
3. Big upside
No one really gets into sales or sales leadership because they want to be mediocre and make the bare minimum, so make sure your managers and leaders have plans with a lot of upside.
If your VP of Sales has a comp plan aligned with the right business objectives, why would you cap their growth? Give them incentives tied to revenue milestones above their on-target earnings (OTE) because if they hit them, it can be transformative for your business.
4. Give them the room they need to do it right
The higher the sales leadership role, the further they are from directly impacting monthly performance and the more work they have to do to make the big changes necessary to build and scale the team.
You want your sales managers to have a little more protection in their base than reps so that they don’t feel trapped by their quota and will make the right personnel changes, spend more time coaching, etc. For Directors and above, the same thing is necessary to give them the room they need to do things in a way that is best for long-term success.
For example, if you start with your sales reps OTE consisting of 50% base salary & 50% commission, the front-line managers should have an OTE that is 60% base, 40% commission. From there, Director-level and up can share the same OTE ratio of 70% base, 30% commission.
5. Be clear on measurement
Make sure that sales managers and leaders have a clear understanding of how their performance and the performance of their team will be measured.
This isn’t just about keeping it simple. The better your sales managers & sales leaders understand the metrics, the more they know where to focus their efforts to influence outcomes. The more they know how to influence outcomes, the more incentivized they will be to hit and exceed targets.
Avoid These Comp Plan Mistakes
Poorly designed compensation plans in a SaaS company can hinder your growth and performance, so it is vital to ensure that you are not making mistakes when creating a plan for your team.
Here are some crucial mistakes we see that you should watch out for.
Not including a buffer between quota & plan
The number one issue we see with comp plans is that there is not a proper buffer (or no buffer at all) between the company’s revenue plan for the year and quota.
It doesn’t matter if you are a 10 person sales team or a 1,000 person sales team, you should be building your quotas and comp plans on a number higher than your revenue plan for the year.
Not having the right distribution across teams
New business, growth, and retention will play a part in getting you to your target for the year. Missing quota with one team but exceeding quota with another team can still get you to your overall target, but having the wrong distribution still has consequences.
It’s really tough for morale if your distribution of quota was so off that the new business team is fighting tooth and nail to hit 90% while watching their peers in Customer Success all hitting 200% and doing President’s Club in the Bahamas.
It can be hard to get the distribution of quota right without a lot of historical data so don’t aim for perfection. Things like headcount, how many people are ramping, rolling out new products or territories will all impact this, so get as close as you can and use the data you gather to better inform future plans.
Recycling the same plan
The purpose of a sales compensation plan is to incentivize the sales team to improve on the performance of the previous year.
With that in mind, would you want to reuse the same plan as last year? Your company, your team, the product, the market…everything has changed. You don’t have to start from scratch every year, but a copy/paste approach with the primary revenue goal changed may not be a great way to go.
We recommend that you look at the elements of the comp plan that did work and look at how you can build upon that success, and examine which parts did not work, and why that may have been.
Reuse the elements that worked, make adjustments to reflect how your company has changed, revisit distribution across teams, and make it work for you.
Not using industry benchmarks
The most successful SaaS compensation plans are based on up-to-date and reliable data.
Instead of basing your compensation plan on what you think your employees should be paid you should be looking at what peers in the industry are doing and what is typical for SaaS companies at your stage.
Creating misalignment between leaders & their team
When sales leaders are given a comp plan focused on one thing but the reps on their team have a totally different comp plan, you are guaranteeing tension and friction.
It can be tempting to want to create a totally different plan for managers and leaders, or to add several other kickers or incentives for hitting other metrics, but this almost always leads to challenges within the team and ultimately, missed quotas.
Not focusing on the correct sales behaviors
We mentioned above how it is important that your SaaS compensation plan is aligned with your company objectives. When the two things are misaligned and have no real bearing on one another, they are not going to work effectively.
Instead, work with your compensation team to ensure that the comp plans drive the sales behavior that you desire, and this means going back to and looking closely at the objectives that you hope to achieve.
B2B SaaS Sales Leader Compensation Plan Examples by Role
It can be a challenge to put together an effective SaaS sales compensation plan if you have never done one before or have created them but they have never quite had the effect that you hoped for. Let us take a look at some good examples of sales comp plans for various job roles and titles that you can use for inspiration. Remember; these are only guidelines and you should tailor these to the exact requirements of your business and your sales reps.
VP of Sales / Chief Revenue Officer
Your VP of Sales or CRO is the executive leader, so they have a huge responsibility.
The role involves strategic planning, recruiting and managing people, improving processes and systems, and working across the organization. In B2B SaaS companies, the VP/CRO will be working closely with the leaders in product & engineering, marketing, and finance to give their team the best features, assets, and funding to win new deals and secure renewals.
The extent of the executive responsibilities for the role tends to be the biggest factor in determining how the VP/CRO comp plan is established. The two most common ways we see this structured are:
In this plan, the OTE consists of 50% base, 50% commission and then the leader can earn 25% of all revenue brought in above the total revenue target.
This plan tends to be more common in early-stage companies that need more tied to performance with a lower base, since the leader is much more in the trenches and helping drive growth.
In this plan, the OTE consists of 70% base, 30% commission and then the leader can earn stock/equity grants or cash bonuses for certain milestones beyond target.
This is more common with companies post-series B where the leader has more executive duties, a large organization to manage, and the company needs them to be focused on multi-year strategic goals vs hitting quota each month.
The Director(s) beneath the VP/CRO are typically working closely with the front-line managers, but also spending time supporting strategic initiatives with the VP/CRO. They are focusing on more reporting, sales process, recruiting, and training for the teams they lead, while also much more involved on deals, performance plans, and coaching.
Due to this blend of strategic leadership and ‘in the trenches’, we typically see Sales Directors following one of two plans:
- OTE = 60% base, 40% commission
- OTE = 70% base, 30% commission
Some companies add additional payouts for a certain percentage of their team hitting quota or other similar achievements that are on top of the standard plan and more importantly, incentivize the Director to build systems to lift the entire team and not just depend on a few star reps to get them to goal.
A Sales Manager is on the front lines, working directly with the Account Executives on their team. They hire, train, and coach their reps, sit in on calls, review performance in Gong, report on performance and forecasting, plus everything else a normal people manager does. It is important, therefore, to have a sales compensation plan that recognizes this and rewards them for their performance.
With the Sales Manager role, we most often see this person with a comp plan that is:
- OTE = 60% base, 40% commission
Similar to the Director, there may be cash bonus incentives for team performance or accelerators for exceeding OTE to create more upside.
At Sales Assembly, we work with B2B SaaS revenue leaders across various stages of growth and know firsthand how much a compensation plan can impact the experience for sales leaders.
Take the time to align your plans to company objectives, build in buffers, give leaders room to do what they need to do, keep it simple, and make it rewarding.