Does Your Comp Plan Make Sense?

How is AE Comp calculated? Most of the time... they are just a best guess.

"our quota is 600k/year and our OTE is 162k" - some random manager or recruiter

Why? Why are those the numbers? Is this based on recent results? Math? Anything?

Unfortunately it's usually just a guess on the part of several people. Here's how it's setup MOST of the time.

• Set a salary - call it 90k
• Double the salary to figure out the On Target Earnings (OTE)
• So 90k salary = 90k commission at OTE (180k total)
• Multiple the OTE by 5 and that is your ‘quota’
• The commission rate would be 10%?

So… 90k x 2 = 180k x 5 = 900k Quota

Here’s the secret - that equation is something that a bunch of big companies pulled out of thin air 20 or 30 years ago. It's BS. It's fiction. It's a myth and it's WRONG.

There’s a BETTER WAY!?

What is the market rate for top talent - you want top talent right?

How much tenure/knowledge does your sale require? How HARD is it to sell? That impacts your salary range BIG TIME.?

How long is your sales cycle - longer cycles usually mean higher salaries b/c people have mortgages, kids, and eat food.?

So figure out what the salary is going to be to attract the type of reps you’ll need

THEN you need to figure out how much pipeline a rep can manage - 10? 20? 50? Active opps at a time? This is important b/c you are going for efficiency but also don't want to have things fall through the cracks - your average deal size and sales cycles lengths will impact this. If it takes twice as long to lose as it does to win - your reps can’t handle as much as you’d like them too. Watch win/loss cycles to optimize this.?

What win rate can a top rep achieve in their respective segment? Not what the average does but what the top 10%-20% are doing - what is possible with great support/training/effort?

What is the expected ASP (Average sales price)? Again, what does good look like, not average.?

Ask yourself - can we expect to provide/create enough pipeline to feed these reps to their capacity (or close to it?) - sure they may need to create some opportunities for themselves but is it all possible??

Then do that math:

Opps/QTR x ASP x Win Rate = ARR per quarter x 4 = ARR per year

What is your floor on AE return - how much do you need them to return compared to their cost? Usually you’ll need at least 3x their cost to be profitable (depending on lead cost and other CAC inputs) but often 4-6x is going to give you closer to 10-12 month CAC rations.?

Lets say you want that 5x (the IBM number I mentioned)

Then figure out what your commission % is going to be to make up the other component of OTE after you set your salary.?

Example: Here are my inputs for my fictional business

• 90k Salary
• 40 qualified leads per month
• 20% win rate
• 40k ASP

320k ARR/QTR = 1.280M ARR/Year

I’d like a 4.5x cost/return multiple b/c I have a good inbound engine that lowers my lead costs and I can afford it with a strong mid-market ASP.?

So the OTE I can shoot for is 284K per year. Then I subtract 90k and the variable component goal is 194k. That means my commission % should be 15%

If the inputs go up/down then the results change. If a rep isn't hitting the top 20% on these figures they'll have a lower OTE - this should be TOTALLY possible to achieve if/when someone does a really good job.

We might put in some accelerators to push people towards that full OTE so they are getting bigger % as they come up to their goal (start at 10% and accelerate to 15% when they hit) - maybe some contests/spiffs along the way - prizes and awards for top performers and swag all around.?

If you used arbitrary double the salary and multiple by 5 - you’d look like you were ‘over achieving your quota’ b/c it was set way too low - you’d also likely end up with a commission % that might not incentivize your top reps or make sense to your financials.?

When you set your sales goals - you can use the inputs to set targets on every conversion and metric in the funnel (not just quota attainment).

Make sure your comp designs have actual attainable math baked in - be transparent with everyone about how it all works and try and keep it simple - your goal is to grow ARR, so incentivize what matters most.?