Sales is one of the most vital functions for your company’s success – after all, there’s no use creating an amazing product if nobody buys it.
Because selling is so important, it can also be one of the more intimidating functions to hire for. Further complicating things is that sales compensation and goals are usually structured differently from other roles. Particularly if you don’t have experience building a startup sales team, it can be hard to know where to start.
If you’re about to make your first sales hire and aren’t sure how to set things up, or if you already have a sales team but your current setup isn’t working, this guide is for you. We’ll go through the basics of sales incentives and how to set them up for the results you want, what to look for in your first sales hire, and how to set your sales team up to succeed.
What We’ll Cover
Sales Compensation: How it Works
How to Set Up Sales Incentives
Sales Compensation Plan Basics
Tips for Setting Your Sales Incentives
What to Look for in Your First Sales Hire
How to Set Your Sales Team Up for Success
For most roles, compensation is straightforward: an employee is paid a set salary or hourly wage, maybe with a bonus if certain conditions are met. For the most part, the employee already knows how much money they’ll make in each paycheck when they sign their offer.
Sales compensation is different. For sales reps, their pay is usually tied to performance. Depending on how consistently the rep is closing deals (and how valuable those deals are), their income might vary significantly between pay periods.
There are various reasons why Sales is compensated so differently than other types of roles, but the biggest one is simply that it’s easy to measure sales success.
While your business’s success will depend on the hard work of all your teams, in most roles it’s difficult to tease out exactly how each individual person contributed. For sales reps, on the other hand, it’s quite simple. Your sales deal numbers provide you with exactly how much revenue each rep brought to the company. This lets you reward your team’s best performers, and incentivize the activities that drive the most results.
Getting your sales incentives right is important, because the incentives will be what ultimately give your sales team their direction. The sales compensation plan essentially communicates which activities are most important to the company, which is why it’s important to ensure that your plan emphasizes the right things.
Most sales compensation plans combine a number of different factors to determine how much your team gets paid. Generally, a sales offer includes a base salary and an on-target earnings amount that a rep can earn through meeting performance targets (usually sales quotas).
Let’s take a moment to go over the common elements of a sales compensation plan (Already familiar with these? Go ahead and skip to our tips for setting up sales incentives):
This is your rep’s guaranteed minimum salary, which does not include any additional earnings from commission or other sales incentives.
Example: A sales rep is hired at a base salary of $50,000, with OTE targeted at $100,000. Even if the rep never closes a single sale, they’ll still receive regular paychecks for that $50,000 salary (though their future with the company might be in doubt!).
When a sales rep closes a deal, they’ll usually be paid a percentage of the sale’s total value as commission. That percentage is your rep’s commission rate.
Example: A sales rep has a 15% commission rate, and closes a deal worth $100,000 in revenue. The rep would receive $15,000 as their commission.
This is the additional pay that your rep will receive based on their performance. Usually this comes from commission on sales deals, though some companies may opt for a bonus structure instead.
Example: A rep is hired at a base salary of $90,000, and earns $50,000 in commissions over the year. That $50,000 is variable pay, since it was not guaranteed and instead was earned through closing sales. If the rep had closed more or fewer deals, the variable pay number would change.
This is how much money your sales rep is expected to bring in during a particular time period (monthly, quarterly, yearly, etc). If your startup sells physical goods, this will be a certain amount of revenue for that period. If your startup is a SaaS or other subscription-based business, this amount will probably be expressed in MRR or ARR.
Example: An enterprise sales rep might be assigned a quota of $1M for the upcoming period, based on the company’s forecasts. They would then be responsible for selling enough deals to reach the $1M mark, within the specified timeframe.
This is how much your rep actually brought in, vs. their assigned quota.
Example: A sales rep was assigned a quota of $200,000 for the quarter, and during that quarter they closed $180,000 in revenue. The rep’s quota attainment was 90%. A different rep was assigned a quota of $120,000 and closed $140,000 in revenue; that rep’s quota attainment was roughly 115%.
On-Target Earnings (OTE)
This is the amount your sales rep can expect to earn if they hit their quota. As we’ve seen, your rep’s actual pay might be different depending on performance.
Example: A sales rep is hired at the $50,000 base salary from our first example. Their quota for the year is $600,000, and their commission rate is 10%. If the rep hits their annual quota, they’ll make $60,000 in commission. $50,000 base + $60,000 commission = $110,000 OTE.
To reward their team for going above and beyond, some companies offer further incentives for sales reps who close additional sales after 100% of their quota has been met. This often takes the form of higher commission rate for the rest of the quota period.
Example: A sales rep has a quarterly quota of $100,000 with a 10% commission rate, and their company offers an accelerator of 15% commission on all deals past 100% quota attainment. In Q3, the rep meets their quota, then closes another two deals worth $10,000/each before the quarter ends. The rep then receives $13,000 in variable pay for that quarter – $10,000 for meeting their quota, and $1,500/each for the two accelerator deals.
When you sit down to create your plan, you’ll need to bring all these elements together into a structure that will set both your team and your company up for success.
So how do you create a sales compensation plan with the right incentives for the results you need? Here’s a few tips for getting it right:
It’s always important to get the right person in the right role, but it’s critically important for your first sales hire. This person will help you build one of the most vital functions of your business, which can also make it a bit tricky to find the right fit.
The first hire into sales will need a different skillset than someone joining an already-established sales team. Later hires can follow the team’s playbook; the first hire will have to write it, while still executing to close deals and bring in revenue.
So what are some traits to look for in your first sales hire?
The traits to look for in your first sales hire are really not so different from what you’d look for in the first hire for any function, and that’s actually the mindset we recommend. Hire sales with the same base criteria you would for anyone else: a reasonable person with a good track record, who’s engaged with the company and its mission.
Making the right first hire is a major step towards building a great sales team…but it doesn’t mean you’re done. It’s equally important to set that person (and their eventual team) up for success. Here’s a few things to keep in mind:
Your sales team will be one of the most integral components of your company’s success, so it’s worth taking the time to get it right. By putting together a thoughtful sales incentive plan, making an initial hire with the right skillset to build the function, and providing ongoing support to your sales team, you can set up both your sales reps and your business for success.
Pilot has helped thousands of startups manage their financial back office, and make the right choices for their business. If you’re just starting out, try our guide to what to do after you found a tech startup.
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