What's a good sales compensation model for reps in SaaS?

Paying your employees well is critical for your company for many reasons, such as attracting the right talent, retaining them, and motivating them to perform better.

In the SaaS world, good salaries matter more than you can imagine—especially when compensating your sales force. Hiring salespeople in the SaaS industry is an extremely competitive landscape. Just take a look at a few of these stats from Xactly, for instance.

• Technology and software companies experienced the highest sales attrition rate at 67%.
• In 2020, 58% of companies experienced higher voluntary sales turnover.
• The average tenure for a sales rep is about 1.8 years—even in the biggest ten tech companies.
• On average, it costs around 150–200% of a rep's salary and nearly six months to replace a single sales rep.

Several SaaS companies try to bypass this problem by leaning on a product-led growth strategy—assuming the self-service checkout style of sales will cut off their go-to-market dependency from sales (and marketing). But relying 100% on product-led growth is a mistake that hurts a SaaS company's growth, especially if it is growing rapidly.

This problem compounds further if you are a cash-strapped scale-up who is paying less than the market average. Potential candidates have a way of finding out how well or poorly your company pays through websites like Glassdoor or PayScale.

So what are you to do? On one hand, you need a ton of cash to bankroll your sales hiring. On the other hand, the sales reps may leave anyway, given the fierce competition to attract sales talent in SaaS.

Attracting good salespeople to your company and keeping them long-term is not very different from acquiring the right customers and keeping them loyal to your brands. Both customers and employees "choose" to spend their time with your brand. And compensating them well plays a big role in hiring amazing sales reps and grooming them to grow as sales leaders in your company.

Paying your sales employees is a bit more nuanced than paying employees from other teams in your company. If you understand these intricacies, you will be in a much better place to compensate your sales reps in a way that will motivate them and inspire loyalty. 

Sales compensation components and models

Deciding on a sales compensation plan requires you to map your business goals to the sales position you are hiring for. It is much easier for you to figure out a well-structured compensation plan if you can categorize the different roles in your sales team into simple "bands" or levels of employee experience. 

For instance, here's how most HR teams bucket new employees in their hiring funnel:

• Entry-level
• Mid-level
• Experienced

The pay range for sales reps varies based on the band that they belong to because it represents the level of experience they come with. Segmenting your sales hiring into sub-categories often implies that the more specialized a sales rep is, the better your chances of hitting your company's revenue target.

Once you sort out the different sales levels you need in your company, decide on the following compensation models to pay your sales reps regardless of their experience levels.

Base pay

Base pay is the fixed monthly/yearly salary that a sales rep gets in return for their service to the company. It is the only sales compensation plan similar to the salaries that people in other teams get. Base salary is often also known as the cost to the company or CTC. It's called 'base pay' because, in sales, it's rarely the only compensation that sales reps get. Sales employees often have a mix of basic salary along with variable pay, commissions, bonuses, etc.

Commission rate

A commission, or variable pay, is often calculated in percentage to a deal amount. For instance—if the base commission rate is 10%, they will receive $500 for a deal size worth $5000 or $1500 for a deal size worth $15000. Many companies don't offer a base pay to their sales reps. They employ them entirely on a commission basis—directly mapping their sales performance either to the sales target or the company's revenue.

On Target Earnings (OTEs)

OTEs are earnings that a salesperson qualifies for when they meet 100% of the sales quota set for them. By norm, OTEs are split 50–50 between base pay and variable pay. OTEs are often specified as part of the job description for a sales job. For instance, if a job ad for a sales position says "$45000 OTE", the salesperson will receive their base pay plus the $45000 OTE. Just like the sales quotas, OTEs are usually expressed in yearly figures.

Bonus

Sales bonuses are financial incentives given out to salespeople who exceed the sales quotas set out for them. Bonuses should not be confused with commissions. Like commissions, bonuses are either expressed in percentage or a fixed amount. But unlike commissions, bonuses are not necessarily structured in a sales compensation plan. They are additional perks that a company may offer to its sales employees when they hit a revenue milestone—either individually or as a team.

Non-cash rewards

Not all sales compensation models have to be in the form of cash. Many SaaS businesses offer non-cash awards to their top-performing sales employees to keep their morale high. Take the President's Club award, for instance. It's one of the most celebrated awards within the sales circles reserved for highly driven salespeople who help their employer company crush an important revenue target.

In addition to achieving the coveted recognition, salespeople who win the President's Club award often fly out to the desired location in an all-expenses-paid vacation.

Arriving at the right sales compensation model for your team

If you are expanding your sales team, getting your sales compensation right for everyone on the team can be tricky. If your compensation structure is flawed—even if unintentionally—it can lead you to several problems such as bad branding among potential sales hires, high employee turnover rate, or failure to achieve your revenue goals.

Thankfully, there are several options for you to structure sales compensation plans that can improve your sales hiring process and allocate the right resources to grow your revenue.

1. Map your sales compensation plan to business objectives

It's a good practice to align your sales compensation plan with the business goals. But it's easier said than done. To arrive at a reasonable calculation, you will first have to figure out answers to a few important questions:

• What's your company's current standing in the market?
• What's your next revenue target?
• How many salespeople will you need to achieve the target?
• What are some of your weak points in sales?
• How do you reward your salespeople at present?

Once you have answers to these complex questions, it's easier to benchmark your salespeople against reliable revenue data depending on your company's location, industry, and size.

Here's an example from the 2018 salary split data for Account Executives across the US shared by Peak SalesRecruiting:

Of course, you should also study the competitive landscape to understand how salespeople are being compensated in other companies. Combine this market data with the above answers, and you will have good clarity on what's a good base pay for each band, how to structure your variable pay, and if you should offer other perks like bonuses or non-cash incentives to keep your sales compensation fair and competitive to the market norms.

2. Based your sales compensation on what they bring to the table

Sales reps who are specialized in selling to enterprise accounts deserve a better paycheck than those who come with a track record in selling to mid-market accounts. That's because a single enterprise account often brings more revenue to a SaaS business than multiple mid-market accounts combined.

That said, it's only fair to structure your sales compensation plan in a way that compensates a rep based on what they have to offer. For instance, the base pay for an entry-level account executive is significantly different from the base pay for a seasoned inside sales manager. The commissions and other perks can also differ based on a salesperson's seniority level, portfolio, skills, and other attributes. 

For example, you want to plan your commission rates based on the stages of the sales cycle.

‍

3. Offer a good mix based on your unit economics

A good sales compensation plan accounts for a good mix of base pay and a generous performance-based variable pay. The base pay gives your salespeople a sense of financial security, while the incentive component keeps them motivated towards their goal.

For example, most sales-driven SaaS companies offer their sales reps a fixed base pay + (x)% of every deal closed. Many of them offer a 50–50 split to keep it fair and square. Others make the variable pay higher in ratio to the base pay to incentivize good performance.

Your unit economics (cost-to-revenue ratio) is at the fundamental of your compensation model. As a very rough guide based on our experience, it makes sense to set a quota that's approximately 5x the OTE, including base salary + bonus. 

But, this is just a guideline. The complexity and difficulty of your sale will determine the ratio your business can support. The idea is to arrive at a win-win arrangement to ensure that the sales reps get the compensation they deserve while the company maintains a healthy profit margin.

4. Don’t be afraid to apply clawbacks

Research from a few years back shows that underperforming sales hires can cost a company anywhere upwards of $2 million. Companies usually invest hundreds of dollars into hiring, training, and compensating their sales employees. When they don't perform, quit, or are fired from their positions, the company sets back by hundreds of thousands of dollars—or more. Selling to the wrong customer account is also a huge part of the problem. Sometimes sales reps may sell to any and every account to stay afloat or crush their quotes.

Clawbacks are enforced largely to discourage sales reps from selling to the wrong customers. The idea is to acknowledge sales as a stakeholder in retaining customers—and not just in acquiring new ones.

Clawbacks are measures to retrieve commissions from a salesperson if a customer churns early or doesn't hit a benchmark. For instance, let's say a salesperson receives a commission of $700 on closing a deal worth $7000/year. But if the customer churns before completing three months with your company, the salesperson has to repay the $700 commission to the company.

The idea is to encourage better sales discovery and thereby product-customer fit. Ideally, clawbacks are usually balanced with a clause that makes customer retention the responsibility of the customer success team after three months. That way, sales reps get appraised for each deal they close while keeping their commissions.

Final thoughts

We hope that the above guidelines will help you identify the best model for compensating your sales teams. Compensating sales teams in SaaS companies is always a bit tricky because the core business objectives don't stop at selling to new customers but keeping the recurring revenue model strong for longer. Therefore, you would need a sales compensation plan that incentivizes the salespeople to sell to the right customer accounts, be a part of the retention strategy, and perform at their top levels at all times.

Ultimately, compensating your sales team well doesn't just solve the problem of attracting, grooming, and retaining the best sales talents but also helps you push the envelope when it comes to scaling your revenue potential.