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How to Structure Your Startup’s Sales Compensation Plan

Sales commissions are a hefty cost item for startups, because sales is so important at this stage of a company. Since you’re going to have to spend money to make money, make sure you are spending it wisely.

When you’re coming up with sales comp or commission plans, the most important thing you can do is to align the incentives and behaviors of the sales team to your key business objectives. You’re not going to get to those revenue-related business objectives unless your sales team is fully incentivized to get to them for you.

For example, in a B2B SaaS company, a key business objective might be to grow total contract value (TCV; the total value of your deal over multiple years) by a certain amount to achieve a high growth rate. Your commission structure should align the commission directly to the TCV of a deal. You might have a quota for the sales team based on TCV, and you might increase commission rates for TCVs that are over a certain range. There are different ways you could do it, but if you know TCV growth is a key business objective, it should be built right into the commission plan.

Another example would be cash: If you know getting cash in quickly from your customers is important, then you should build that into your sales comp structure. Salespeople might get earlier payment of commission when cash is collected earlier, or the payment of commission may be timed alongside when cash is received from the customer.

You might also consider employing accelerators, which means as soon as a sales rep beats their quota, their commission rate goes up. It accelerates what they can earn, and by virtue of that, you incentivize them in the right way.

Sales compensation is very sensitive. A really good salesperson can be very profitable for your business. Equally, a salesperson who’s not doing well is extra expensive; in addition to the cost of their base salary, you’re missing out on the sales you need from that team member. If you have a poorly performing salesperson, then it’s going to make a big impact on the overall financials of your business. It’s different from non-sales staff who might have a salary and a bonus structure that’s paid at the end of the year only. Sales is a lot riskier; there’s more upside to your business if it goes well and more risk if it doesn’t. Paying attention to your commission plan and setting it up correctly is very important.

Having said all this, your comp plan should also be really simple, because you are going to need to be able to understand it yourself. The sales team has to understand it and know what they’re doing — and why — if they are to be successful. We want it to align correctly to your business goals, and we also want to keep it simple. For help structuring and simplifying your comp plan, please reach out to me. I can help you work it all out.