Annual Planning Part 6

Sales compensation and incentive design

We’re still deep in planning season. I’ve covered quite a few core planning topics the last few weeks. And so let’s take a look at sales compensation planning. If we’re working backwards from a date, we’re working towards our Sales Kickoff (SKO). At SKO the reps will receive two envelopes:

1. Sales compensation plan

2. Territory and accounts

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Don’t expect a sales rep to take a look at both and bow down in eternal gratitude. In fact, expect them to poke holes in it. It’s just part of the game.

So where do we start with comp planning?

I argue you should start with nailing the sales role first. In sales you can break it down into five discrete blocks:

• Demand Creation

• Buyer Identification

• Purchase Commitment

• Order Fulfillment

• Customer Service

Fill out a job matrix and you may come up with this:

The more ‘yes’ you see in the boxes and the more to the right you may see a higher risk point taken on. That risk will coincide with the higher leverage in the plan. For example, a sales rep with a 50/50 plan has a $100K base salary and $100K on-target variable (OTV) for a combined $200K on target earning (OTE). Never mistake a $200K OTE for a $200K salary. They’re not one in the same. Sales needs to perform in order to achieve that $100K commission.

An SDR on the hand may have a $60K base salary and a $30K OTV. That’s a 70/30 plan. Much less risk than the Account Executive.

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Let’s cover the following topics:

1. Pay mix and leverage

2. Quota multiples

3. Plan design options

Pay mix and leverage

Pay mix refers to the ratio between a salesperson's base salary (fixed pay) and their variable or incentive pay (commission, bonuses, etc.). A 70/30 pay mix means 70% of the salesperson's income is guaranteed as a base salary, and 30% depends on variable compensation tied to performance.

Factors Influencing Pay Mix:

• Role type (see above for example): Different sales roles have different ideal mixes. Account executives, who close new business, might have a higher incentive pay mix (e.g., 50/50), while customer success roles might have more stable pay (e.g., 80/20).

• Sales cycle length: Roles with long sales cycles tend to have a higher base pay to keep income stable during longer periods without deals.

• Market maturity: Newer markets with higher growth potential often justify a higher incentive mix to drive new business aggressively.

Below I lay out how the role and risk/reward impacts the type of pay mix you might consider.