Setting Sales Quota and Compensation

Why is it important to set good sales quotas and compensation?

Quotas inform capacity planning and revenue expectations – accurate quotas inform financial planning on what you’ll be able to produce, which in turn informs budgeting and operational planning.

Sales quotas drive accountability from sales – they create an agreement between AEs and the organization about what constitutes success between the company and sales about the expectations of the position and organization. A quota establishes the “score” you need to hit as an AE.

They align sales behaviors with business success – sales compensation is the primary incentive you can use to align sales behavior with business success. Incentive-heavy plans get sales out of their comfort zone and talking to prospects.

When should you start setting quotas top-down (total bookings target) vs. bottom-up (achievable bookings per rep)?

Do both to triangulate to reasonable quotas – you need to factor in both the overall revenue goals of the company, and realistic productivity targets.

Start top-down by looking at the number of bookings you’re targeting – the board will set certain year-over-year growth expectations for the company. You want to start by looking at your team and setting quotas that can support that level of growth. 

Validate with a bottom-up approach – if your 10 AEs are being asked to do the work of 30, that gap needs to be bridged by adding capacity or reevaluating your goals. Look to past results to gauge reasonable and achievable expectations for what the market and AEs yield. This will inform your capacity model and your bookings model. It’s important to look at quota and attainment history–if you know your organization has historically hit 70% of quota, then you can’t plan for attainment to suddenly jump to 90%. 

How do you decide what’s achievable per rep?

The first seller will set the baseline early on – usually, the founder is the first salesperson and they can use their experience to eyeball what a full-time AE can sell for their specific company in terms of deal quantity and size. 

Look at historical performance and the state of the market – if you’re lucky enough to have historical data, use it. You can find your quota by looking at the history of your product, the size of the deals, and reasonable volume. 

If you don’t have historical data, look at competitors – look at what the standards are for AEs in your market. A lot of websites can give you what the OTE is. From OTE, you can figure out what your base commission rate is based on the quota you plan to set. You can also look at what competitors offer AEs in terms of OTE and their average sales price to compare your planned commission to theirs, and infer what your targets should be.

What’s the typical range of Quota:OTE? How does that vary based on deal size, new logo/upsell, gross margin of the product, etc.?

Typically, quota is ~3x OTE  – it depends on average sales price and the effort involved in making a sale. Most SaaS companies with a typical 70%+ margin land between 2x-3x, but it can reach 4x on the high end.  AEs selling hardware or industrial equipment (with lower gross margin or lower lifetime value) might have much larger ratios. 

How should you define contract value for quotas?

ACV is the standard for setting quotas at SaaS companies – you typically don’t see quotas set on anything other than ACV in the SaaS sales world. Non-closer SDRs will typically have activity quotas based on opportunities created, meetings scheduled, calls made, etc. 

A reseller might set quota based on gross margin – gross margin is really important for resellers or partners so they’ll get compensation and a quota from a margin percentage perspective.

Timing is an important quota lever – you might set quota on a monthly, quarterly, semi-annual, or annual basis. Some SMB sales orgs use this to set monthly quotas based on number of deals because they’re run-rate businesses trying to generate volume. Then, whether the rep attains that month’s quota or not, they start back at zero and have to rebuild it to hit their accelerators next month. These reps get higher accelerators because it’s harder to drive volume every month.

How does Quota:OTE shift in leaner economic times?

Ultimately, quota is just how you communicate expectations to sellers – firms should select what they believe would be a reasonable productivity (or quota) to OTE that makes sense for their business to make money, understanding what their cash burn is and how the commissionable expense is impacting their bottom line. Then, decide performance distribution and avg/median attainments (maybe 80%).

You can increase Quota:OTE, but be careful to avoid costly attrition – quality will always be expensive, but if the economics of your business demand it, you can increase the multiple of Quota:OTE. But be careful not increase ratio’s dramatically–that canlead to significant attrition. There is a financial cost in productivity loss due to attrition backfill and ramp times which could be as much as a year.  

Adjust quotas in line with territories – if each rep’s territory is growing due to sales teams getting smaller, then quotas should be larger to be in line with the company targets.

How should you adjust the quotas of reps with different abilities or territories?

At most early-stage companies, everyone should get the same quota – quota is the great equalizer, and early on, you’re just trying to drive revenue across the entire addressable market. If you don’t have set territories and you’re doing round-robin lead distribution where every rep has a fair shot at all of the inbound distribution, equal quotas set a fair standard. 

Equal quotas are easier to track and keep fair – they’re easier for financial reporting and forecasting, and they ensure you don’t play favorites among reps and set yourself up for a lawsuit.

Scenarios in which you might not have equal quotas:

• If you have unequal territories, score them and adjust quota – if John’s territory is an 8, and Jane’s a 10 because it has a higher propensity to deliver sales, then Jane would get a 20% higher quota.
• Sellers in greenfield markets might have lower quota and higher accelerators – selling where there hasn’t been prior activity, calls for lower quota and higher accelerators. Those reps will be driving brand new business in unfamiliar territory, building something from nothing. 

Should you use accelerators? How should you structure them?

Use accelerators in tranches of quota fulfillment to drive overachievement – gate accelerator multipliers by percentage of quota fulfillment. This way, reps are incentivized to overachieve. 

Individual businesses have to find accelerators that make sense for them, but they might look like

• 0-75% will be a modest decelerator 
• 75%-100% might be 1x
• 100%-110 might be 1.2x
• 110%-125% might be 1.3x
• 150%-200% might go as high as 1.5x-2x
• Decelerate at ~300% back to 1x

Figure out your accelerators based on earned commission expense for your company – you typically don’t want to exceed 130%, and even that’s a very high number. 130%+ might be acceptable when you’re early on and you want to get as many dollars in the door as possible. As your company grows, you’ll want to bring that number down, because it hurts financially over time. 

What guardrails are available to make sure compensation matches the value that AEs bring in?

Don’t pay the total comp from a long deal at signing – you don’t want to immediately pay out all five years on a deal, because the AE may not be around that long. Instead, you might pay out comp on years four and five after a year to give yourself a buffer. 

A clawback policy will protect you from quick-churn sales – say your rep sells a deal where the customer pays for 100 users in month one, which adds 100 seats six months later. The rep will initially get comped for 200 users because the expectation is that the revenue will continue onward. If at month six, the company churns or decreases the user count, you can claw back the commission you paid on additional 100 users, because the customer didn’t last 12 months. 

A lookback policy helps align actual revenue received with comp – these are complex and you probably need a bigger compensation team to manage. These help for situations where you give commission on a full deal, the customer decreases their contract in the middle, then increases again in the same period. You don’t want to double pay commission, because that second sale isn’t new revenue or expansion. Be careful with these, if you have a 90-day lookback, some reps will wait until the 92nd day to book a deal so it’s not subject to the policy. 

Have discount limitations and approvals – establish a target price for the product you’re trying to achieve and then establish limitations on discounts to get you there. You might have tiered discounting approvals that allow each seniority level to approve discounts of different sizes.

A tiered discount approval scheme might look like:

• AEs up to 10%
• Managers up to 15%
• VP up to 20%
• CEO up to 30%

Make wise choices around exceptions – have guardrails to ensure you’re not losing money on every deal. You might make exceptions for certain deals to get an impressive customer logo on your website. But these pay dividends in terms of recognition and cachet, and can only be approved by senior leadership. 

Use a decelerator at the high end of your commission – after a certain point (often you’ll see ~300% of quota) the rep returns to base commission rate or even a bit below it. From there, it’s “all you can eat” at that rate. This can cause reps to slow down deals so they fall into the following period—but these are the sort of games you have to live with. 

How should you use comp plans to incentivize desired sales behavior?

Think about the compensation plan as a dashboard to manipulate sales behavior – you have a bunch of knobs and levers, and based on what you do, you’ll drive certain behaviors. Evaluate your comp plan against business objectives and adjust—while taking into account that complexity will be more difficult to manage. 

You can design your plan to align sales behavior with your strategy:

• Tying compensation to KPIs – you might link ~20% of compensation to multi-year deals, renewal rate targets, or other KPIs to induce selling behavior that aligns with business goals. 
• Revenue multipliers – if you want to boost the launch of a product, speed up a slow season, or bump your pipeline, you can apply a multiplier from a revenue perspective to certain activities (not commission). So a $100K closed deal for the new product might be credited for $125K that’s multiplied by normal commission accelerators. These provide short-term boosts to behaviors that you hope become habits for AEs. 
• Incentivizing upfront cash – if you’re hungry for upfront cash, you can tie an incentive so that reps will push for contracts with a front-loaded payout.

Alongside the plan, you can highlight successful reps to drive competition and ambition:

• Cash rewards – modest lump sums given to top performers during competitions, or to incentivize certain behaviors.
• President’s Club – these keep sales incentivized. Winners might get an all-expenses-paid trip to the Bahamas and meet with company leadership. It’s recognition of their work along with a tangible reward. 
• Special recognition – calling out high performers in leaderboards, shoutouts, or town halls. This costs nothing and it’s a way to tell employees their work is noticed. 

How should you adjust goals and comp for new reps who are ramping?

There should be a quota even during onboarding – new reps should still be expected to close. If they’re not, you’re losing capacity during the 6+ month ramping. Don’t expect fully ramped selling right away, but set expectations that you want them to produce. 

Haircut quota for new hires and increase it stepwise over time – new hire quota might be 10% of a mature rep in the first month, and increase 10% every month after. So by the 10th month of their tenure, their monthly quota is that of a mature rep, but their first-year quota is still smaller than a mature rep. You’ll do this knowing they might not close any sales in the first month, but then they have a chance to make up for that as their quota and ability grows over time. 

If you don’t want to use quotas on new reps, use KPIs – you can track rep progress based KPIs that suit the role and what they need to learn. For example, they might have to give a demo in the first three months, sit in on 10 calls, schedule 2 meetings, etc. Then, if they do end up closing deals, you can pay a flat rate of base commission, but that’s not counted to their KPI quota.

New hire target incentive compensation will be lower to account for lower quota – ramping reps who hit their lower quota typically won’t be comped the same as a mature AE. They can have the same base comp, but their target incentive will be lower because their quota is lower. If they have a 50% quota and the fully-ramped target incentive is $120,000, then the ramping rep will have a target incentive of $60,000. They also usually can’t make President’s Club unless they hit a full-load quota.

How should you structure comp for sales leaders?

Leaders should have a quota that’s cumulative of team quota with a 10-15% haircut – if you have a team of 10 reps with a $1M quota each, then the manager quota might be $9M. This accounts for expected losses of productivity like AEs who quit, don’t hit their number, or new hires. Then, the manager can hit their number even if all the reps weren’t in their seat for the whole term. 

The size of the quota haircut increases (in smaller intervals) as you go up leadership – your first-line manager might have a 10% haircut. But their boss might have a 12% haircut, and so on. You don’t want all of the managers going to President’s Club but none of their AEs. 

Leaders have a 50/50 split between base and incentives – similar to AEs, managers typically have a 50/50 split of OTE earnings between base and incentives (tied to ACV). A portion of that incentive pay might be tied to hitting strategic targets. If renewals are bad in their leader territory or you want new logos, 20% of their incentive pay might be tied to that. 

How should you communicate quotas to reps?

Announce at the sales kickoff meeting – show the comp plan, quotas, and accelerators in the kickoff meeting at the beginning of the fiscal year. Take some time to explain the comp plan to the team. You also usually want to show a high performer with big earnings from last year to demonstrate that success is achievable. 

Build a commission calculator – reps are very money driven and they want to be able to see how their deals translate into their bank account. Providing a calculator motivates them and shows them how much they’ll receive based on the deals they’re juggling. Every rep will use this and track their deals. 

Create a bookings policy to show the terms and conditions – these are the fine terms that dictate what’s allowed, what’s not, when clawbacks come into play, what the accelerators are, etc.

What are common quota and compensation mistakes?

Creating unattainable quotas – it’s unreasonable to set a quota of $1.2 million if you’re closing $10K deals and sales aren’t quick. Unattainable quotas will lead to a disgruntled salesforce and you’ll lose good sellers. A good quota is a stretch but still within reach of ambitious AEs. 

Using a compensation tracking system that can’t handle your plan – complexities like clawbacks and lookbacks require support and if your system can’t handle them, they’ll require a big lift to track and report. 

Creating complex comp plans with lots of rules – if you’re under $10M in revenue, keep it very simple. Tie your plan to a simple compensation amount per sales dollars booked. You can use simple, high-impact programs like spiffs to build simple incentives around KPIs. These allow you to be proactive without creating a Byzantine comp plan.

Paying out sales incentives before you have the cash – early-stage companies should pay out 50% of the comp when the deal is signed and 50% when the customer pays. Access to cash is limited and a real concern in the early days. 

How should you report on each rep’s sales performance during the year? How public should that reporting be amongst the team?

Display leaderboards that show percentage of attainment – the leaderboards should be team-specific, but if you’re small with two teams, you can do a combined leaderboard with everyone’s stacked ranking. Only include fully ramped AEs on this. A ramping AE might get lucky and have something fall in their lap which causes them to blow out their number. 

As a company gets bigger, less transparency is okay – as you grow and add different teams and more complexity to your sales org, target incentives and quotas will begin to differ. You don’t want to set yourself up to explain why each segment, organization, and territory is different. 

How should finance track total projected and realized sales compensation throughout the year?

Use your CRM to track bookings – your CRM is the primary tool for tracking sales closed, and it can help you forecast your future bookings to get a sense of the comp obligations you may have to pay out.

Use your finance system to track invoices paid – this will help you keep track of which closed deals have been paid, which is often coterminous with commission payments. 

Commission tools are helpful but require administration – e.g., Callidus, Spiff, Forma.ai, and QuotaPath. They can save you calculation hassle, but have to be spoon-fed information. You need to be certain that the CRM is feeding correct information because they’re garbage in, garbage out.

Keep an eye on large projected cash outlays – finance needs to account for the commission expense associated with revenue. If you have a blockbuster quarter, it can set you up for an unexpectedly large cash outlay, especially when people hit their accelerators at the end of the fiscal year. Sales leaders can help by giving general forecasts of expected sales so that finance can plan ahead. Finance will amortize commission expenses over the length of the contract, but the actual cash will need to go out the door upfront. 

What are the most important pieces to get right?

Sanity check your quota against historical information – if you’re lucky enough to have historical information, use it as your baseline. If you have 80% of AEs hit their number, then you know it’s achievable and you can bump it up to incentivize excellence and eke out more sales.

You’re going to be off on your first quotas, learn from it – setting quotas is a science and an art. The first couple of sales hires will probably blow out the number because you don’t know what you’re doing and you don’t have the right quotas and structures. Learn from the data you collect and structure comp plans accordingly going forward. 

Press the company effectively to set sales reps up for success – sales are somewhat beholden to activities in other functions. Building a saleable product and pricing it effectively has a tangible effect on sales.

What are the common pitfalls?

Failing to adjust quotas that are unattainable – economic uncertainty might require you to adjust your quota and comp plans. If no reps hit their numbers, you end up with a dejected workforce where reps leave or coast. Similarly, if a manager starts with a quota for ten reps but two left at the beginning of the year, you can’t expect them to hit their numbers.