Recently, my team needed to transition from a “growth team” (a scrappy mix of marketing and sales with fixed salaries) to a dedicated sales team with an incentive structure. While I didn’t have 20 years of tech-sales experience or a playbook to reference to define that structure, I did have the ability to run a nerdy mini due-diligence and come at the problem with fresh eyes.
I interviewed more than a dozen early-stage sales leaders and scoured the Internet for insight. In the end, I came up with a set of questions that any tech startup CEO or early-stage sales leader can ask to figure out how to pay their first sales hires.
While I can’t cover the full breadth of topics on defining a structure, I can cover two of the biggest issues: how to determine base versus variable compensation, and what actions should trigger commission. Answering these questions right sets the foundation for other key commission decisions.
1. Setting base versus variable compensation
Commission serves as both a carrot and a stick, which can be an awesome tool for focus and motivation. There is a difference, however, between a salesperson thinking “I didn’t make quota, I shouldn’t get those sick new Beats EarPods” and “I didn’t make quota, I can’t make rent.” As such, the first question I tackled was degree of variability in our compensation structure. In the process, I developed a set of questions that will assist when determining the right base versus variable compensation model.
Do you know your customer segment, and do you have a repeatable sales model?
This question evaluates whether your company is ready for a commission structure at all. In order for a salesperson to control their fate, they need to know the segment you are targeting and a baseline sales motion.
This question is deeply intertwined with assessing if you’ve attained the ever-elusive “product-market fit.” Without it, high variable compensation is more of a risk-share than an incentive.
How focused is your sales team?
This question is particularly important for early-stage companies because commission sometimes stands in opposition to the concept of “all hands on deck.” Often, the best initial sales hires are the “Navy SEALS” of industry: ready for a cold call, a networking event, or a pricing negotiation. To compensate primarily on closing sales or scheduling new demos may dis-incentivize behaviors you must have early on in a tech startup’s lifecycle. In short, the more focused your team is, the more comfortable you can be with setting higher variable compensation.
How much control does the salesperson have in meeting their target?
The more control the salesperson has, the higher the variable pay should be. For example, a grocery store cashier generates revenue but has little impact on how many people buy or how much customers spend. It wouldn’t be fair to pin their compensation on those metrics.
Variable compensation should be high only if the salesperson can control how many transactions they handle (e.g. by working an extra hour or scheduling an extra call).
2. Defining which actions trigger commission
The trigger — or what action a salesperson is compensated on — ended up being the most important question I had to answer. At first glance, it appears to be an easy answer: Trigger commission when there’s a sale. But it’s often far more complicated in practice, particularly at early-stage tech companies.
In short, the go-to-market (GTM) model of your company should drive the trigger. Examples of GTM models include: high-velocity SMB sales and upselling or an enterprise deal with a long lead time. However, “What is your GTM strategy” is not an easy question to answer. Here, too, I developed a few big-picture thought-starters to set you down the right path.
What stage of the lifecycle generates (or or should generate) the most money?
I recently spoke with a head of sales operations at a fast-growing SaaS company. The company’s primary means of generating revenue was post-sale, what is traditionally referred to as a “land and expand” model, where maintaining a relationship with the customer creates opportunities for upselling product add-ons. The sales account executives could not make quota unless they maintained a relationship with their customers. As such, incentives were more aligned with when the company made money, i.e. the post-sale.
However, many tech startups have built post-sale teams that are more focused on maintaining customer satisfaction than on upselling. In that case, the initial sale is still the focal point of the GTM model, which should be the focus of incentive triggers.
Are there other BIG objectives outside of revenue?
Clear prioritization is necessary to equip a salesperson for success. Customer logos may be more important for a seed-stage company compared to the revenue the accounts represent. In these instances, the most important metric the salesperson controls is the number of companies brought in the door, and it would make sense to provide “commission” on the logos themselves. Additional incentives, sometimes called SPIFFS, can be a way to integrate other objectives into the commission structure.
In a few words, what does each role in your sales and sales support structure do?
Don’t over-complicate the incentive structure. Force yourself to be reductive. In my case, our sales development representatives get qualified demos; our sales account executives close prospects; and our customer success representatives reduce churn and/or increase account size. Start here and iterate.
In the words of Bridget Gleason, vice president of sales at Logz.io, “Sales reps are not coin-operated at all. For something that is more cognitive, money is a factor, but there are other factors that are more important.”
It is important to get your commission structure right, but it needs to be paired with human elements. Help your sales team grow as professionals, give them ownership, and paint a vision of how the companies goals align with their own. But also know how to pay them if they close a big deal.
Michael Tong is head of business development at Spoke. He was previously with McKinsey, where he focused on tech strategy and customer experience. He also mentors at the prison entrepreneurship program.
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