Sales compensation is more of an art than a science, with a system that balances risk and reward. I sat down with Ryan Azus, former CRO at Zoom and sales leader at RingCentral and Cisco WebEx, and a small group of founders in the vertical AI space to discuss what a well-run sales comp program looks like and what founders can do to help their sales teams succeed.
Alex Niehenke: When should startups start their annual sales compensation planning, and who (i.e., what functions) is typically involved in the process?
Ryan Azus: You want to start your annual sales compensation planning early, ideally in early Q3 to allow time for ideation, but also to ensure whatever is decided can be efficiently measured and ideally automated. Finance typically determines the schedule, often based on when future board meetings are scheduled. But you shouldn’t let Finance drive the process completely. Instead, the Finance team and the Head of Sales should work together to craft the plan, with input from HR / People Ops and RevOps and oversight from the CEO. Broadly speaking, it is the CEO’s job to set the general tone for the compensation culture, including the types of profiles you want to hire and the general competitiveness of your company’s compensation schemes.
How should one compensate reps for early-stage risk at a younger startup?
Commission rates can be meaningfully higher, and compensation more generous, at early-stage companies. You should compensate reps for the risk of selling a new, unproven product, whether or not you are an early-stage company. Typically, reps are given both more generous commission rates and more generous base salaries. Over time, commission rates and base salaries can be ramped down, but that is a multi-year process. Changing them radically from one year to the next will result in painful attrition—no one wants to get paid less. Additionally, you should consider the size of the organization you are selling to. Enterprise reps, who may need more ramp time and training to truly master a new product, may necessitate draws and other cushions.
If you don’t want to set these higher compensation schemes in stone (i.e., if you don’t want to make them the “new normal” because you expect to ramp them down over time), use a short-term SPIF, promotion, or boost. Use them strategically, and not too frequently, or they will become the new normal and your reps will expect them.
What do the core elements of a well-run boost program look like?
It sounds obvious, but you need to structure your boost in a way that incentivizes the right sorts of behavior. For example, is your goal to close business earlier in the year? If so, you’ll want to include a linearity bonus to incentivize that behavior. (If you do go that direction, you don’t want anybody to know about it before it starts; otherwise, reps may hold deals in order to take advantage of it.) Alternatively, is your goal to close multi-year business? If so, include a multi-year kicker (we generally recommend doing this anyway).
Additionally, think about how you can use less expensive, gamified mechanisms to encourage the right types of behavior across your entire team. For example, instead of giving a smaller bonus to every rep that meets a given target, you can hold a raffle for a single, larger item across all reps and allocate the raffle tickets based on the number or dollar amount of eligible deals each rep closed. This way, while each rep feels invested in the outcome, the best reps are given a greater chance of winning.
How do you design sales compensation plans for GTM motions that target only a few very large accounts (i.e., logistics companies) with long sales cycles?
In this scenario, you can consider implementing an MBO sales plan that compensates reps for hitting certain milestones before they have already actually booked revenue. Additionally, you will typically want your reps’ base/incentive split to be closer to 70/30 than the usual 50/50 if it’s an extremely long process or more business development centric.
How should I think about setting appropriate accelerators?
The important thing to recognize is that accelerators are only comprehensible in the context of your quotas, and really in the context of your plan and culture as a whole. If, for example, your quotas are fairly easy to meet, then you should probably be more conservative with your initial accelerators once someone passes 100% (and vice versa). We suggest bringing back accelerators for extreme performance (300-400% etc) but do caution against reducing your accelerators below 100% (or putting caps on variable compensation). You always want to incentivize your reps to close business today rather than tomorrow.
What does a “good” quota-to-compensation ratio look like?
The general rule of thumb in a high margin B2B SaaS company is as follows: a 3x ratio is ok but likely burning cash (implying that you should work on increasing rep productivity before increasing their compensation), a 4x ratio is great (implying that, assuming you can keep them just as productive, you should hire more reps), and a 5x ratio is world class and you should accelerate expansion. Note that if your spending is outside of norms in marketing to drive those ratios that you would want higher ratios.
In my experience, sales productivity usually drops when organizations move from 5 reps to 10 reps. Why is that?
The reasons for this are probably numerous and nebulous, but we typically see two related phenomena occurring at this stage. First, founders tend to become less involved in the sales process, and therefore their impact on deal success is reduced. Second, startups tend to try to start selling to new segments where, oftentimes, the product-market fit is not as strong.
How do you structure sales compensation plans when your product is billed based on usage rather than a seat-based subscription?
There is no one right way to do this, but you can consider implementing a two-step compensation scheme. Under this scheme, reps are first compensated at the time of the booking based on the minimum commitment stipulated in the deal. Thereafter, at the end of each quarter, a customer’s total usage is tallied and the rep is compensated for that usage in a backwards-looking fashion.
You might also consider moving some of your existing customers from hunters (reps focused on acquiring new logos) to farmers (those focused exclusively on growing relationships with, and usage at, existing customers). If you go this direction, the best practice is to give each hunter rep the option to retain a small number of their existing accounts so they don’t feel like they are being stripped of all of their hard-won relationships and have no reason to not bring a deal now versus wait for something bigger in time.
What are common pitfalls you see when it comes to sales compensation?
The first is underresourcing their sales team. Many companies fail to budget and account appropriately for the resources it takes to enable their reps’ success. If you are hiring an enterprise rep, the true cost far exceeds that person’s base and bonus. The full cost includes the management and enablement teams that allow the rep to be successful, as well as the SE(s), BDR(s), CSM(s), and marketing spend that support their efforts.
The second is not focusing enough on rep segmentation as you grow. Segmentation is the key to keeping your reps focused and making sure you are getting the most out of their varied experiences and skillsets and also allows you to hire reps at different compensation levels relative to the experience needed to sell to that customer segment.
