The Four Stages of Sales Compensation Structures in Early Stage Startups
Your startup is just getting off the ground. You might have a few account executives and a sales leader in place; maybe some revenue and a handful of customers. The sales team costs real money, and the question before the company is: how do you know what quota plan to assign to the account executives?
I’ve seen four stages in early stage software companies. Some businesses employ all four, others just use one or two. Knowing about the options ahead of time may help you figure out the right sales plan for your startup.
Stage 1: Management by Objectives In the very earliest stages, the company doesn’t know how to sell or how to price. The most important goal isn’t price maximization, but just closing some business. Many teams in this stage guarantee a draw/salary for the account executives, instead of assigning a commission, while the company figures out the sales process. The salary is influenced by traditional goals or OKRs. The key idea: MBOs enable AEs to experiment with new processes to find the right one.
Stage 2: Logo Based Quota Bill Binch, former SVP at Marketo, employed this strategy in the early days. Quotas weren’t denominated in dollars; they were just a number. “Can you close six accounts this year worth more than $30k per year?” That’s a logo based quota. Logo based quotas empower AEs with more flexibility to find customers in new ways, build the important base of logos for marketing and fundraising, and enable AEs to develop confidence in their approaches.
Stage 3: Short Term Quota As the business transitions from Stage 1 or Stage 2, quite a bit is changing. Marketing is generating pipeline, which is likely coming in fits and starts. The company is hiring more account executives and determining how to forecast ramp time, ratios of SDR/AE and Sales Engineer/AE. During these periods of flux, the company can roll out a short term quota, a six month quota, and reserve the right to modify quota up or down depending on performance. By communicating this clearly at sales kickoff or during interviews, you can set expectations properly with the team.
Stage 4: Long Term Quota Long term quotas are annual quotas. At this point, the company has a predictable model in place which includes most of the key variables: ramp time, sales cycles, price points, consistent pipeline generation. And the company is confident in its ability to set up new and existing account executives to succeed. Long term quotas also might involve SPIFs (sales performance incentive funds) that incentivize different behaviors like upsells rather than new sales, or B2C customers vs B2B, or accelerators based on consistent quarterly performance that smooths bookings throughout the year.
The ultimate goal of any compensation plan is to ensure account executive success at each stage. Managing these plans properly will enable the company to recruit new AEs to scale, because the current ones excel. In addition, as the business grows, changing the commission plans enables the business to balance AE success and commissions with burn rate and runway.