Bursts of Color - Sales Commission 101
This week David Sacks of PayPal, Yammer and Craft Ventures fame published Simple Math to Set Up a Sales Team. I was delighted to see this post, as I've been meaning to write something similar for ages. If you lead a sales team, or are thinking of building one, I suggest you digest this thoroughly and "check your math." Note that while this was written for SaaS business models, the same ratios can apply to other models, so long as you use gross margin in place of revenue for your calculations (e.g., retail revenue is not the same as software revenue).
Cliffs Notes: For Individual Commission Plans
Base Salary = 50% of On Target Earnings (OTE)
New Revenue Quota = 10x Base Salary and 5x OTE
New Revenue assumes all clients pay for 12 months*
Commission = 10% of New Revenue less than Quota
Accelerated Commission = 15% of New Revenue above Quota
New AE Ramp-Up = 4+ months
All AEs on the same plan; avoid special cases
Cliffs Notes: Beyond the Individual AE
Sales Managers can typically handle teams of 10 AEs
Manager Comp = 5% of Team Quota
If sales teams are hitting >70% of Quota, keep hiring
Sub-divide Territories often to ensure new AEs are fed fairly
Separate Renewals; keep most AEs focused on new clients
(*) It's easy to go down a rabbit hole when trying to award commission based on client retention. Inevitably some clients will stay longer than others, but IMO, trying to reward sales reps based on what happens 10 months from now is a fool's errand. Better to just pick a time frame (1 year is natural) and keep things simple.