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The equation of commission/OTE = FYE/TAM seems highly arbitrary. Why does the % of sales I close correlate to the % of my at-risk income? Wouldn't a more dire

The equation of commission/OTE = FYE/TAM seems highly arbitrary. Why does the % of sales I close correlate to the % of my at-risk income? Wouldn't a more direct equation be quota = FYE/TAM ? If you're expecting your reps to close 20% of the leads they get, then set their quotas accordingly. Don't reduce their commission base - you're running a very real risk of dramatically under compensating your star performers, and overcompensating your dullards. Quick example - Joe Slimeball only closes half the business he should, but he would W2 (according to your numbers) 67.5k. Sally Awesome manages to find a few extra customers and makes sure they are happy with your product (yeah - sales people should be doing that too, it's not all about the tech, there's a human side to FYE) so she closes 30% of her leads. Her take home (depending on accelerators) would be 82.5k-90k. 3x the performance, and a few $$ extra? That's great way to lose your best reps to other companies, and encourage the rest to idle along at minimum effort levels.

tyre 11y ago
This is a good observation. If we didn't track metrics, we would end up paying a lot to under-performers. Quotas, in our view, are correlated but slightly different and not a great way to encourage reps to close quality deals. Quotas are dependent on what we believe a rep should be closing. If they are consistently not hitting their quota, we'll try to figure out why (not enough outreach, lower-than-expected conversion to demo or demo to purchase) and, if things don't turn around, they would be let go. Same as any other job. In terms of compensation, our commissions are paid on a recurring monthly basis[1]. Consistently performing at a higher level means compounded growth of income. We based this on the excellent features of SaaS recurring revenue (stability + compound revenue generation) to further incentivize long-term sales thinking. Also, as the product expands, that FYE/TAM ratio gets higher. So in a year or two, that commission/OTE ratio is different as we enter into a higher growth stage. That will encourage more outlier behaviour and make the differences between good and great more pronounced, but at this point we are small so that is less of an issue. We can closely track performance. [1]: http://meditations.seneca.systems/rethinking-sales-commissions-for-saas/ http://meditations.seneca.systems/rethinking-sales-commissio...
- djrogers 11y ago
  I hope it works out for you, but I don't work with (m)any reps who'd jump at that kind of deal. On your end, metrics don't fix the retention problem. On the reps end, you're missing a lot of emotional and phsychological drivers that sales people crave 1) no windfall opportunity - your rolling monthly commission eliminates any chance that someone is going to earn a six figure commission check by landing a whale. While most reps never or rarely pull that off, it is a huge motivator to both the rep who does it and his/her peers. 2) can you say handcuffs? A rep isnt going to want to get in to a situation where they know the only way they will ever get paid on the true LTV of all their customers is by staying with you until the company dies (not that it will). You might think this will improve retention, but t will also drive away a TON of good and great sales reps. 3) you're going to burn them out - using your example of a rep who closes (and gets paid monthly) on 10 new customers a year, your most successful reps are going to overloaded in short order. This leads to ignored customers and stressed sales teams. The normal way of handling this is to progressively cut a reps territory and/or account list, which works fine if they've been fully compensated for the customers LTV, but if you take half of someone's landed accounts off their monthly rolling commission you're going to have a revolt. Again, I hope this works for you, but I have my doubts.
theodorewiles 11y ago
I agree that just equating Commission / OTE = FYE / TAM seems pretty arbitrary, I was unclear how this was "optimal". In my understanding, commissions are used when effort is not observable but outcomes (i.e. closing a sale) are. An additional point in my head is that the commission / base trade-off is a decision that depends on how sensitive your salespeople are to risk. I think you would really want to set marginal benefit to marginal cost. In this case, the marginal benefit of increased commissions would be incremental increases in effort and marginal costs would be incremental decreases in customer satisfaction or decreases in employee retention due to risk aversion. Of course, these might seem harder to quantify that FYE/TAM, but I think that the fraction of FYE is a little made up to begin with :)

tyre 11y ago

This is a good observation. If we didn't track metrics, we would end up paying a lot to under-performers. Quotas, in our view, are correlated but slightly different and not a great way to encourage reps to close quality deals. Quotas are dependent on what we believe a rep should be closing. If they are consistently not hitting their quota, we'll try to figure out why (not enough outreach, lower-than-expected conversion to demo or demo to purchase) and, if things don't turn around, they would be let go. Same as any other job. In terms of compensation, our commissions are paid on a recurring monthly basis[1]. Consistently performing at a higher level means compounded growth of income. We based this on the excellent features of SaaS recurring revenue (stability + compound revenue generation) to further incentivize long-term sales thinking. Also, as the product expands, that FYE/TAM ratio gets higher. So in a year or two, that commission/OTE ratio is different as we enter into a higher growth stage. That will encourage more outlier behaviour and make the differences between good and great more pronounced, but at this point we are small so that is less of an issue. We can closely track performance. [1]: http://meditations.seneca.systems/rethinking-sales-commissions-for-saas/ http://meditations.seneca.systems/rethinking-sales-commissio...

djrogers 11y ago
I hope it works out for you, but I don't work with (m)any reps who'd jump at that kind of deal. On your end, metrics don't fix the retention problem. On the reps end, you're missing a lot of emotional and phsychological drivers that sales people crave 1) no windfall opportunity - your rolling monthly commission eliminates any chance that someone is going to earn a six figure commission check by landing a whale. While most reps never or rarely pull that off, it is a huge motivator to both the rep who does it and his/her peers. 2) can you say handcuffs? A rep isnt going to want to get in to a situation where they know the only way they will ever get paid on the true LTV of all their customers is by staying with you until the company dies (not that it will). You might think this will improve retention, but t will also drive away a TON of good and great sales reps. 3) you're going to burn them out - using your example of a rep who closes (and gets paid monthly) on 10 new customers a year, your most successful reps are going to overloaded in short order. This leads to ignored customers and stressed sales teams. The normal way of handling this is to progressively cut a reps territory and/or account list, which works fine if they've been fully compensated for the customers LTV, but if you take half of someone's landed accounts off their monthly rolling commission you're going to have a revolt. Again, I hope this works for you, but I have my doubts.

theodorewiles 11y ago

I agree that just equating Commission / OTE = FYE / TAM seems pretty arbitrary, I was unclear how this was "optimal". In my understanding, commissions are used when effort is not observable but outcomes (i.e. closing a sale) are. An additional point in my head is that the commission / base trade-off is a decision that depends on how sensitive your salespeople are to risk. I think you would really want to set marginal benefit to marginal cost. In this case, the marginal benefit of increased commissions would be incremental increases in effort and marginal costs would be incremental decreases in customer satisfaction or decreases in employee retention due to risk aversion. Of course, these might seem harder to quantify that FYE/TAM, but I think that the fraction of FYE is a little made up to begin with :)