Alternative Title: Your Sales Comp Plan is a Recruiting Channel
A lot of the people I work with are hiring junior sales teams under them for the first time. That gives me a unique opportunity to watch what people have tried, see what doesn’t work, and see what does work.
The combination of people I work with through one-on-one consulting, 1517 Fund portfolio companies, and just friends who are moving into more senior sales roles allows me to see in one year what most people get to see in a decade. Plus, I’ve helped a number of early stage teams hire sales people — usually SDRs and AEs, many of whom are very early in their careers.
And oh man, I’ve seen some mistakes.
(For the record, I am mostly talking about hiring junior sales folks here, often when you’re building out your very first sales team. I am not talking about how to compensate an experienced VP of sales. Jason Lemkin has good material on that.
I’ll also add that 80% of my experience is with SaaS companies. The fundamentals here should also apply to any other kind of sales team, but YMMV.)
Here are some rookie mistakes that, when I see a team doing them now, I cringe a little and see if I can kindly recommend some different approaches:
- PAYING BELOW MARKET RATE. This mistake tends to be done by somebody who is just for the first time in their career in a mid-level manager role. They interview a few candidates, nobody really jumps out, but one guy is willing to work on the cheap. So they go with him, figuring, “what’s the harm?” “You get what you pay for,” is true in luxury goods and true in hires. If somebody throws out a salary recommendation that is way below what you were thinking for their level of experience, that should send up red flags.
- GIVING NO, OR MINIMAL, UPSIDE. This tends to be a mistake that non-sales types make when they hire their first sales person. The technical founder brings on a sales person and compensates them with equity (long-term upside) in the company, but doesn’t give them commission or a bonus structure. This doesn’t obviously look bad at first but it drastically limits the number of quality applicants you’ll get for a role.
- NOT BUILDING IN EXPECTATIONS. “Quotas” can be a scary word for a founder or manager hiring their first sales folks, but somebody who either has worked in sales or knows they want to work in sales won’t see it that way. Quotas are just expectation-setting. If you don’t want to use quotas qua quotas, then set up the comp plan in a way that de facto quotas are built in.
When I first started advising teams on hiring out SDRs, I made a few of these mistakes myself. It wasn’t until I started working alongside VPs of sales with decades of experience or watching founders who were being coached by VPs with decades of experience that I realized so much of building a quality sales team comes down to designing a good comp structure for the junior members of the team.
A “good comp structure” is not just a motivational tool — it’s also a recruiting tool. A quality salesperson, even if they are junior and early in their career, will see some comp structures like gold mines and others like kryptonite.
This means that the comp structure helps select for better candidates even earlier in the recruiting process. A candidate who is more likely to be better sees a good, but challenging, comp structure and decides, “I want that,” and keeps going through the recruiting funnel. A candidate who would have been mediocre at sales and probably should go work in marketing or some lower-pressure market would be scared away. This saves you a ton of stress and time coaching poor candidates up later in the game.
Good Comp Structure Should Motivate the Right People
If you’ve read my book, you know I am a big fan of selection effect and appealing to “the right people,” not “all the people.” You want to design a comp plan to attract the right junior sales folks, not all the junior sales folks.
(Also a good rule: if somebody has been an SDR at more than 2 companies, they probably shouldn’t work in sales. If they’re otherwise a promising candidate, dig into why they haven’t been promoted to AE.)
You want somebody to say, “Ok, this looks like a challenge, but if I do a great job, I can be making good money for my age and get promoted relatively quickly.”
So you do NOT want:
- Below-market base pay.
- Cozy base pay (i.e., base pay that is so high that the person wouldn’t feel motivated to close more deals to earn more).
- Below-market commission.
- Unrealistic quotas.
- NO quotas.
- Upside that is measured in something other than cash.
That effectively means you can’t compensate an SDR just like a junior marketing person that has a quota and might get a small annual bonus if they meet the quota. That should be obvious but…it surprisingly isn’t.
The way that you balance base pay to be in a sweet spot with quotas that are neither unrealistic nor too low is with “earn it back” pay similar to (but not exactly) a draw.
“Earn it back” pay means you set a competitive base pay for the candidate and you set an above-market commission structure for them. BUT they don’t get the commission UNTIL they’ve earned their base pay and benefits back. Once they do that, everything is gravy.
This means that they effectively have a quota without you having to say, “you have a quota.” The quota is just the avg deal size / cost for the sales person.
For example, you have a remote junior sales person who makes $60,000/year as an AE with some SDR responsibilities, with benefits totaling $25,000/year. The total cost of the salesperson is $85,000/year.
If your average deal size is $10,000, that sales person needs to close 8.5 deals before they get commission.
SALARY = $60,000 BENEFITS = $25,000 ACV = $10,000 earn_back = (SALARY + BENEFITS) / ACV earn_back = 8.5
That lets you focus on other KPIs that are more useful for them than just “deals closed,” like leads generated, CTR, conversion rates, phone calls, etc.
It will also scare off anybody who isn’t sure if they want to work as an SDR or AE, and will save you a TON of headache.
Once they earn that back, commission should be uncapped and above market rate.
Hiring the Right Sales Team is Easier than Training the Right Sales Team
There are lots of other ways you can tweak the comp plan for a junior sales person. I’ve seen that this achieves 80% of the talent work that you want with a good comp plan, though. The quasi-draw is incredibly divisive. It scares away mediocre candidates and entices anybody with some basic experience in sales who thinks they can put in the elbow grease to make the job work. Most mid-level folks hiring for junior sales folks aren’t naturally coaches or trainers, so getting the mediocre candidates out before they become mediocre employees is more important than learning how to coach mediocre employees.
Spend the time hiring somebody with the right raw material who is excited about working overtime to get their skills up to snuff, then you won’t have to worry about “motivational” coaching or figuring out why they aren’t picking up the phone enough. Most of that can be done with the right comp plan.
Of course, there are other tricks and tips you can work into the recruiting process to make this easier for yourself. For example, you can require that candidates include a Loom video introducing themselves. I have peers who will require that candidates cold email them the application (and they don’t advertise their email addresses).
(I strongly suggest Jason Lemkin’s material on building out sales teams, especially more senior folks.)