Just another practical sales rep comp plan | Hacker News Reader

Just another practical sales rep comp plan

d.glezos.com

53 pointsgtzi36 comments

Why do sales positions tend to have performance-based compensation when many other roles in the same company are flat salary?

Is it simply because the metrics are so obvious (i.e., attribute sales to the salesperson's individual performance), that it's easy compared to other roles?

Is it because sales work is so close to revenue numbers, that more thought has been given to compensation, or it's thought of differently (like CEO comp)?

Is it a belief that the personalities of salespeople in particular are motivated to perform better by the incentive alignment?

Is it because performance-based can be a sweeter deal for high performers, which some historical salespeople managed to secure, and they're not giving it up? (Should SWEs be maneuvering to get "points" on the particular products they worked on, rather than it just being something they can mention when they beg for a promotion?)

Something else?

A little bit of column a, a little bit of column b.

There are industries where sales reps are paid only on commission. The advantage to the company is simple: you don't pay anything to sales reps who don't sell anything. That's where the commission system came from. So, some of this is historical, and, yes the metrics are really obvious. At least the core revenue metric is. But, that's a lagging indicator of performance -- there are endless debates about the leading indicators of sales performance, and none of those are nearly so clear.

Second, most people aren't any good at sales and aren't ever going to be good at sales. The performance distribution is as close to a Pareto distribution as I've ever seen. The sales reps you want -- the ones that bring in 80% of the revenue -- certainly are motivated by "incentive alignment." Actually, they're motivated by being paid enormous sums of money, and they know that if you won't pay them, the competition will.

Third, the sales reps have more leverage than many back-office workers in that their work is very fungible. Or, at least, sales rep believe and act as if they have a lot of leverage. They don't go to school for years or develop deep domain expertise that might not translate to a competitor. They'll happily take their skills elsewhere if they feel there is a better opportunity secure in the knowledge that if you can sell widget a, then you can also sell widget b.

I also think this is weird. These sorts of compensation schemes incentivise short-term revenue at the expense of making the sales that are good for the organisation long term. They encourage an "always be closing" mindset that leads to signing customers that take the organisation on a bad trajectory.

But when I asked an actually really good[1] salesperson about this, they said that it's simply that you can't hire good salespeople on flat compensation because the good ones don't want to subsidise the pay of the less good ones.

So essentially you have to choose between variable comp, which increases the likelihood of short-term focused sales, or fixed comp, which takes to near zero the likelihood of long-term focused sales. Both are bad!

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[1]: By "good" in this case I don't mean "closes a lot of revenue" but "picks customers that are good for the future of the organisation" (and also happens to close a lot of revenue but that's secondary.)

Maybe the more obvious metrics for sales enable the top performers to demonstrate that they are top performers, and therefore demand the high compensation?

A similarly-minded SWE, on the other hand, doesn't have the metrics. Either they're at a FAANG and trying to hit their less-obvious metrics for promotions, or they're instead just packing fresh keywords on their resume, and preparing to refresh Leetcode and job-hop every 18 months, to increase their compensation that way.

(I still don't want to do metrics for engineering; I want engineering thinking and working holistically, as a team -- for the interests of the company, even though leadership won't understand most of the subtle differences of what a great engineering team does for the company. The current SWE careerism grinding mis-alignments will have to end, though, once people acknowledge that we really need SWE not to be, as XKCD said, "our entire field is bad at what we do, and if you rely on us, everyone will die".)

All of the above. To answer the second question - if salespeople aren’t selling, there’s no money to pay salaries. Commission plans are an important factor in cost of revenue.

And yes, certain personalities are 100% attracted to sales because of the high earnings potential and the direct correlation between performance and compensation.

Salespeople don't want to join an org without performance-based compensation. We can ask why, but that brute fact is enough to explain why sales positions tend to have performance-based compensation.

Lots of answers already but the short answer is that sales sucks and people don’t do it without direct and immediate incentives.

So if you want sales you create those incentives.

Class consciousness. Sales guys are in the same caste as the professional managerial class so they get a better deal.

I'm a rep at a big SaaS firm - no one says "OTC", whatever that is. It's OTE. Also, literally no sales org would ever weight an AE's comp more towards base and a VP's comp more towards variable - everyone is on a 50/50 split, and if anything the VP would have more guaranteed comp. No discussion of RSUs or options? Furthermore, I have never in my life seen a plan that withholds the final quintile of variable comp - that sounds horrifying and no experienced, high-quality rep would work at a place like that.

Jason Lemkin's blogposts and videos on sales compensation are way more accurate than this.

Agreed on all points.

> I have never in my life seen a plan that withholds the final quintile of variable comp

They might be on a draw. Otherwise, agreed - highly unusual.

At Transifex, we always did a 50/50 split. But I've noticed it's not atypical at all for small SaaS firms, who are starting to sell, to weigh an AE's comp towards Base. Especially for more junior people. I've noticed the same for profitable, organically-grown firms that are not as aggressive as well-funded startups.

Regarding the term On-Target Commission, what is the term you've seen used? Because OTE means "Commission at 100% + Base Salary".

Perhaps I’m just not in sales and haven’t seen how complicated it gets. But they start the article with keep it simple and end up with a stepwise function with two different slopes and an excel spreadsheet to calculate it.

The example given here is still incredibly simple compared to the quota/commission structures at major companies. Negotiate an enterprise deal with a multinational, and now you need to allocate quotas to a sales team split across several countries, work out how to handle subcontractors and partners, bonus incentives for what corporate is trying to push today, account for change requests and maintenance and support and ongoing consumption and upgrades, etc etc.

I’ve been at companies where managers had to book hour long meetings to explain changing comp structures — with internal presentations. They had to explain what target is, how target is calculated, how revenue is attributed, what the performance bonus is, things like additional performance incentives past target, special incentives for individual products… they can get much worse

I worked in tech sales (sales engineering) for quite a while, both as an individual contributor and as a manager. It isn't unusual for plans to be way more complicated than what is described in the article, and for sales reps (and managers) to not really understand their comp plan. It is also common for them to shoot themselves in the foot by structuring a deal in such a way that they lose a lot of money because they didn't take the time to understand the comp plan. It is also true that they don't take the time to understand the plan because they think it will change every year (it probably will) and that every change is designed to screw them out of commission dollars (probably also true.)

Also, the comp plan described in this article is absolutely terrible. Reps on 60/40 quotas. Having the sales VPs more levered than the reps. Not having a linear base commission rate to 100% of plan (you make sure you get to the company revenue goal by a) setting a realistic goal and b) incentivizing the reps to get past 100% of plan, not by penalizing them until they hit plan.

I have a tiny bit of sales experience, certainly less than you. My understanding is that these things end up so complicated for two reasons.

In part it can be a reflection of the real-world complexities of an organisation’s financial incentives. It’s easy, especially not being in the sales org and looking in at it from outside, to expect things to be as simple as “more revenue == better”. But then typically businesses of a certain size will have more nuanced incentives. It’s less expensive to sell service x over y in some opaque hard-to-quantify way. Direction has come from upstairs to push more of product z to keep a supplier happy. Blah blah.

But it’s just as much poor system design from whoever is devising the comp structure. It’ll suffer from the same issues as the income tax system in many jurisdictions. Layers and layers of tweaks to incentivise behaviour x or y for opaque reasons until you end up with a kludge of…bleh.

And this is all setting aside comp structures that actively seek to banboozle sellers into losing out, by way of insane complexity. Reminds me of buying a used car.

What you've written about is mostly it. The other aspect is that setting fair quotas (individually, and at the district level) is really, really, hard but managing sales expense is extremely important. The two concepts are inextricably linked[0]. There's a huge amount of information hiding (mostly on the part of the sales reps,) and companies will compensate by putting limits in the comp plan that attempt to prevent windfall situations. Usually, there is a specific windfall clause that is straightforward enough: past a certain commission or quota attainment or transaction size threshold, the company reserves the right to review the circumstances of a particular deal and decide how to pay commission on it outside the usual terms of the comp plan. But beyond that, there will frequently be rules about what counts as new business vs renewals (which generally are paid at vastly different rates,) or even if certain transactions will be paid at all (where this occurs, it is usually limited to large transactions the company knows about, but that weren't forecast for the current fiscal year and therefore not part of the rep's quota.)

0 - while every tech company in recorded history puts their top performers on display at their annual sales meeting and boasts about how these people all exceeded plan by x% and just bought a new lakehouse or something, privately, the sales leadership gets raked over the coals due to over performance. I once received a top district award in front of the whole company, then not 30 minutes later got chewed out along with my colleagues over how many people overachieved and how much extra it cost the company, etc.

Every salesperson I've met can use Google and is acutely aware of how the next deal affects their compensation.

As others here have noted, the challenge with paying salespeople to close the deal is that you create perverse incentives. In enterprise software sales, the salesperson has every incentive to make impossible-to-keep promises about what the software can do. After closing the deal, the salesperson hands over to an implementation team, who try and fail to make the software do what the salesperson promised it would. The result is a failed implementation and an unhappy customer. I have often thought it would make sense to pay salespeople for a successful implementation of software, not just for the initial sale. I’ve never seen that done though. Would be curious to hear if anyone has successfully dealt with this challenge.

No. Decelerators and deals that pay $0 are demotivating and unnecessary. You can achieve the same net effect by properly setting OTE and quota without the demotivation.

To start, no decelerator should take the commission to $0, period. :)

Most companies don't do decelerators but require reps to get permission from their manager for anything out of the ordinary. Examples are deals that require non-trivial engineering time, annual deals with quarterly payments, or 3-year deals that allow the customer to exit at year one. If you want to avoid that permission step, I can't think of many ways to do it without decelerators -- but maybe others can.

I've only been in low stakes sales roles (outside of personal projects) so this comes from someone with very little "professional" sales experience:

The good: setting a target comp that is realistic and explained (e.g. "I expect you to hit $200K 4/5 times with this plan.")

The bad: plans with complicated rules (x% up to $Y in sales with a kicker + incentives for certain deal structures) can be demotivating and incentivize the wrong sales behaviors

The ugly: some high-intensity salespeople might thrive on the chaotic and unpredictable nature of comp structures. I don't love the idea of hijacking the "gambling/variable reward" centers of the brain to get what you want out of your people. Be fair and simple.

A plan that is x% up to $y in sales with an accelerator structure is a pretty simple plan. The x% up to $y sales thing is just a side effect of having a structure where you pay people based on attainment against a quota. If someone is supposed to make, say, $200k at plan, and is a sales rep on a 50/50 plan, then their base commission rate, the percentage they get paid for every dollar of sales, is $100,000 divided by their quota. By definition.

The only simpler plan I've ever heard of is just a straight percentage of gross margin, but then the commission management scams move away from the comp plan and into expenses that eat into gross margin...

I'm surprised here. I thought there was software to manage this stuff? Software like Anaplan or Xactly or some SAP/Oracle/Salesforce product? The sales models provided in the article seem too simplistic.

Build a product that sells itself and thus there is no need to have a compensation plan, sales people, a VP of sales, and a sales organization.

Reinvest the millions of dollars per month in sales org and reinvest in engineering.

> Build a product that sells itself

This is such an insane naive take, that it's actually surprising to see it posted here.

We're on a VentureCapital backed message board dedicated to startup, company growth, obsessed with valuations and $$$MONEY$$$, and one of the users thinks this is remotely true.

Companies are not built on technical merit alone. The perfect product and perfect product market fit, with 0 sales or marketing message is going nowhere.

If you have no connection to your customers, your understanding of their pain points will be 0, your relationships with them will be 0, their trust in you as a group of people will be 0.

Are there examples of it? maybe a rapid consumer growth where your 'sales force' is word of mouth among customers, then maybe it can happen, don't bank on your company being able to do that though.

And in B2B it's an entirely different game, no amount of viral word of mouth is going to make decision makers jump to the competition, those switching/churns are won through hard pitches and a coherent product and sales strategy.

Atlassian, famously, got to very significant revenue before hiring Sales. But even they, eventually, got to a size and complexity where Sales was required. https://www.bloomberg.com/news/articles/2016-05-18/this-5-bi...

The Bloomberg article makes the point that this could be a trend. It was not. I know of no other B-to-B Enterprise Software product which got close to that kind of revenue without hiring Sales.

There are several examples of successful companies who tried this model, and then moved to a Sales model - usually at $30 or $50 million. https://www.saastr.com/eventually-everyone-has-a-sales-team/.

Of course, there's no easy way of knowing how many companies tried this model and failed. But I don't think it was successful too often, because I hardly ever see this model any longer.

Stripe is a product that sold itself. I think they still manage it.

Webflow and Shopify are also some products that just sell themselves. WordPress too.

each of those have a pretty prominent 'contact sales' link on the landing pages and pricing pages, so I have to heavily disagree, they all employ a sales forces.

For certain apps it might seem like they sell themselves for small users or individuals, but as soon as the customer is 'enterprise' the route is virtually always 'contact sales' like on Stripe and Webflow's landing page, on shopify's pricing page the larger tiers are also 'contact sales'.

There's still a difference between having an account manager at a company, in charge of implementation and support, and an active sales force that goes out of its way to sell stuff, lie to prospects, wine and dine them, etc. Stripe, Webflow, Shopify, etc. have the former - they don't really have to sell themselves.

Enterprise needs a different "sales" channel, because most enterprises are bulky, cumbersome sloths who need handholding. At the same time, there isn't anything in particular that's stopping enterprise users from using these products on a lower tier - I've used Zapier before with blessing and no issues, on the company card, at my old job at a megafund (where we had strict restrictions on a lot of software otherwise). No questions asked.

It's not insane nor naive.

I get the importance of hitting targets and all, but it seems like horseshit to me that the employee earns no commission between 0-20% of the target, and at 99% of target is at only 80% commission.

Maybe someone with more of a sales mindset than I’ve got would thrive on this, but it feels to me a bit like a “heads I win, tails you lose” outcome for the company. Doesn’t really seem like you’d lose the motivating factors either by opting for a policy that errs toward the super generous in significant upside scenarios.

Sales reps hate these structures. Professional sales managers understand these structures are demotivating and harm sales.

The author to be blunt, simply does not know what he is talking about and nobody should listen to his advice on structuring comp plans.

You might want to forward his article over to your competitors, though.

Sales plans are often a mess of percentages and edge case goals, mostly meant to attract folks by showing a large hypothetical "on target earnings". Then if you do really well you might hit accelerators which can be exponentially more.

The reality is these quotas are typically created to be either crushingly hard to achieve or the best a financial model predicts your territory can do. Either way, the deck is typically stacked against you, even if the math seems favorable.

Your gut is right. That is horseshit. I’ve built many comp plans and hired several sales teams. I’d never offer that structure to any sales person I wanted to retain. These kinds of gamed comp plans are for people that don’t really know how to build the right teams.

Lots of folks in this thread talking about how this comp plan is BS/poorly structured. I don’t disagree, but IMO this is a result of salary/comp deflation in tech. We’re going to see more of these types of plans as companies try to pay reps 30% less while appearing to keep comp the same.

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