Creating an effective compensation package is difficult enough, but the stakes are even higher if it’s for your Vice President (VP) of Sales.
You have to design a comp package that inspires effective teamwork and strategy, drives specific behaviors from the sales managers and reps they oversee, and ultimately delivers on the revenue goals of the business.
Whether you’ve recently hired a VP of Sales, or you’re preparing a job offer, it’s imperative that you nail it the first time around. In this article, we’ll go over common hurdles to building executive sales compensation plans. Then, we’ll give you three different pay structures that incentivize your VP’s best work.
Why Is It so Hard To Build a Comp Package for Your VP of Sales?
Many factors come into play when crafting a VP’s compensation plan, but a CRO or CEO faces two major challenges: balancing business objectives and setting expectations properly. We’ll walk through both these obstacles and their solutions below.
Evolving Business Objectives
In SaaS, objectives and goals consist of critical growth metrics such as increasing the revenue per customer, improving net revenue retention, and improving top-line new business growth.
However, every business has different objectives and they typically evolve as the company grows.
As business objectives evolve, sales objectives should evolve with them. Typical sales objectives may include increasing revenue by X amount, expanding market share by Y amount, or closing X amount of new accounts. For a comp plan to be successful, set the sales goals in stone to create incentives that support them. The VP will have the most opportunity to succeed if the organizational goals are aligned with the sales goals
Sales Leader Expectations
It’s important to set clear expectations for your sales leaders.
If your goal is to scale the business, you already have momentum and data to work from. Bringing in a new VP of Sales means you can use that data to build a comp package that focuses on performance and gives them some headroom to scale up.
If your business is brand new, you need to provide an MBO (minimum base offering), so they can focus on building the sales org as you collect more data on closed-won accounts. If your company is bringing a VP on board to fix a sales function or team, they need to be incentivized differently.
Each scenario demands a different set of expectations.
3 Ways to Structure Your VP of Sales Comp Package
When choosing a VP compensation plan, you have to understand what the business’s needs are at any given time. It depends on the growth stage of your company and your goals.
Here are three ways to structure your VP of Sales comp package.
While this plan is more common in startups that need to drive growth intrinsically linked to performance, it is important to incorporate a number of crucial components.
The on-target earnings (OTE) breakdown for 50/50:25+ looks like this:
- 50% base
- 50% commission
- 25% of all revenue above the total revenue target can go to the leader
If you hire a VP very early on, you need to provide a clear quota for them to hit. When in the startup stage, the VP of Sales has to align to costs and revenue. It’s crucial to ensure that the VP of Sales’ compensation is tied to their performance but not at the expense of the businesses ability to remain a going concern. That’s why, when you provide them with this plan:
- 50% of OTE is paid as their salary, without a guaranteed bonus for X amount of months until the business scales.
- 50% of the OTE is paid as a bonus, with the targets as the overall company revenue number.
- 25% is where you pay X percent on every penny you hit after the plan for the year.*
If you hit your stretch plan, this allows you to put a 25% boost on top of the OTE.
*This is an example of an “accelerator” which can be highly motivating to the Sales leader. However, this can also be quite expensive to the business if the leader succeeds well beyond their stretch plan, so be careful. You may want to build in thresholds where the accelerator begins to be reduced at very high attainment levels (150%+ to goal). This can help to protect the business against an untenable commission check due to unforeseen attainment levels (though positive in nature).
How to Make it Work
For this comp plan to work, you need to provide almost instant gratification. You can pay bonuses out every month, but at the outset, consider policies and goals that match the company’s ARR goals. When you hit a specific sales milestone, the revenue goal should be the same across the board.
This also helps the VP of Sales to work within other areas of revenue other than acquisition, such as client support and success.
The 70/30:Equity structure provides VPs with additional security and economic incentive to sell. From the perspective of the business, it provides greater ability to project potential costs while being able to hire motivated salespeople.
The OTE breakdown for 70/30:Equity looks like this:
- 70% base on a 30% commission
- VP earns stock or cash bonuses for certain milestones beyond the target
It is a popular plan to enable VPs to focus on sales behaviors, such as training new team members, that may otherwise be deprioritized if their compensation plan is heavily weighted towards current revenue growth.
When you compare 70/30:Equity to the industry standard of 60/40, this is a less aggressive ratio, which is worth considering if you’re selling specialized or complex products. What’s more, the stock and cash bonuses are the icing on the cake, which can help your VP “lock in” to the business in many ways.
3. Revenue Growth (Prior Year QTR to Current Year QTR)
Sometimes known as a “year over year” comparison, it allows businesses to gauge if their financial performance is improving or worsening. The benefits of using this comp package for your VP of Sales will enable you to facilitate two different sets of data. They help you mitigate seasonality, which will influence a wide variety of metrics within the business.
From the perspective of the VP, it can be highly motivating.
When structuring the bonus, you address the revenue, net profit results, and the GP for a “apples to apples” comparison. You calculate the bonus payout to the GP for each category over the previous year, which allows you the opportunity to incentivize certain behaviors, and, more importantly, if the company sees no growth during that period, there would be no bonus.
The benefit of using this package is that you can scale it to suit the needs of the business. It means a potentially higher payout for revenue growth vs. gross profit growth vs. net operating growth.
As a bonus for the business, structuring the compensation plan this way can inspire the VP to develop team skills that help the company scale and grow.
Build a Package That Suits Your Business
A VP of Sales is critical to the success of any growing organization. Putting together a meaningful comp package can make all the difference in the world in attracting a strong and effective leader.
At Sales Assembly, we work with various B2B SaaS revenue leaders during various stages and understand how a comp package can significantly impact your growth.