Structuring Compensation For Sales

You want to attract great sales talent but at the early stages of your venture you may not have the cash or great organizational support in the form of marketing and sales budgets or a track record for your product or service. So how do you structure the sales compensation to attract talent in a ways that meets the company goals and rewards the sales professional.

“So how do you structure the sales compensation to attract talent in a ways that meets the company goals and rewards the sales professional.” 

You of course are going to try to show sales professionals that they should take below market salary for the opportunity to work for your company. That may not work or you may have to show the sales professional how you are going to make up any deficit with additional upsides or opportunities.

The Elements of Compensation

On the financial side, the elements of compensation at your disposal are the following:

• Base Salary
• Commissions
• Bonuses
• Commission Earning Rules
• Payout Rules
• Equity

You are trying to strike the delicate balance of preserving your venture’s scarce resources with attracting the talent to drive revenue growth. Here are some techniques to try to strike that delicate balance.

Techniques to Create Compensation

You are generally going to have to pay “market rates” for salary based on your market and industry. In sales comp, you should set a Target Compensation – let’s pick $84k as a basic number to work with – the sliding scale now becomes the mix of salary to at-risk compensation, usually commission. In this case, the total compensation is at or near market rate for the position, given the industry and market.

• Ask for Lower Base in Exchange for Higher Commission Rates. If a candidate is willing to take a lower base in exchange for a higher commission than your norm, that’s a good deal for you. If he or she ends up making a lot of money, that’s a win-win for everyone.
• Start with a 50/50 Blend.Start with a 50/50 blend to start ($42k salary and $42k commission). This assumes that the product is relatively straight forward to sell and that the sales process is more predictable.
  • Adjust Based on Maturity and Risk. If that sales process isn’t predictable, you’ll likely have to be more of a 75% salary, 25% commission. If you’re super early, in your product release cycle, the mix could be 90% salary and 10% commission but usually this is a sign that you have hired too early.
• Avoid Commission Only. While there are some industries in which commission only structures work, it is rare that these structures work. The “you get what you pay for” almost always holds true. Be wary of anyone who is willing to work for commissions only unless they have been incredibly thoughtful in vetting the opportunity and setting some upside in stone.
• Avoid Capping Upside. Avoid capping people on the upside especially if they are willing to accept less base compensation. This sends the wrong message that even though they are willing to take risk, you are not willing to reward them handsomely if they kill it on the upside. Bad message with little benefit.
• Pay Quickly. Especially is salespeople are taking lower base salaries, pay them as soon as you can after the company has received the cash. This sends a good message and encourages them to take more risk. Many salespeople are turned off by the risk of not getting paid especially in a startup in which cash is constant topic of conversation.
• Add Equity. Salespeople typically don’t receive equity because unlike other team members, they are compensated on revenue that comes in. If you add some equity in the form of options upon the achievement of sales goals, this is an upside they generally cannot get in traditional sales jobs in the marketplace.

Picking a Structure that Works

It’s important to pick a structure that has longevity built into the plan. You don’t want to be changing compensation plans every year, or worse a couple of times a year. Here’s an example using the numbers above.

• Base salary – $4,000/month
• Commission – $4,000/month at 100% of Plan.
  • Usually paid on the 15th of the following month. You’ll need the time to close out the month and calculate the commission.
• Quota is based on 100% of what is the attainable goal
  • There are two ways to pay commissions: on a sliding scale vs. a straight percentage basis (e.g. 125% of goal paying out 125% of commission). This single tweak will have a greater impact on driving sales behavior.

% of Goal% Payout70%50%80%70%90%80%100%100%110%115%120%140%

• Depending on the base, being below a minimum (in the case above <69%) would payout a zero commission.
• Above Goal should provide incentive to increase your number – vs. being a straight linear calculation.

Watch Out for Jealousy

In many cases, despite the fact that you and other early employees have worked tirelessly, the sales professionals end up earning more than many employees. Because of the commission element of their compensation, this is just the nature of the beast if you expect to attract talent. Accept it but be ready to manage it in you and your team.