B2B Sales: How to think about compensation for your B2B Sales team
October 28, 2022
And now, the long awaited next episode of our B2B series - Compensation for your B2B Sales team. In case you missed it, Part I on building out your top-of-the-funnel is here and Part II about structuring the team is here. We wrote this article in collaboration with our Operating Partners at Samaipata. It strives to be useful and actionable to early stage startup-founders, covering all the typical challenges. For our other articles, please find them here!
Your product’s in place, your sales team (mostly) in place, now how do you add more fuel to the fire to really motivate your sales team? We’ve dedicated this episode to this juicy topic of how to think about compensation for your sales team, especially as your team scales. Get it right and it’ll be worth a million bucks (literally!) but if not, it can become a tricky trap to get out of.
Similar to the rest of our B2B series (How to build top-of-the-funnel, How to optimise your sales team), we draw upon Javier Llorden’s expertise on B2B sales. He is one of our Operating Partners from The Hive and specialises in all matters B2B sales, including running large sales teams and advising startups, SMEs and Corporates. Javier has been a critical contributor to efficiently scaling up the sales efforts of our portfolio companies.
Our only caveat here is that principles discussed in this article are general guidelines only. Every business is unique and the best way to motivate your sales team will always depend on the type and stage of your business and how you work as a team. Now, without further ado, let’s dive straight in!
First, what are we trying to achieve here?
Remember, your TOP TOP TOP goal here is to align sales behaviour with business objectives. This will change across periods so incentives should also change to reflect them. Common objectives include generating new MRR or ARR, generating negative churn or expansion revenues, signing longer contracts, reducing churn, adding new logos, increasing gross margin etc.
Got it! Now, let’s start with first principles…
We’ve summarised Javier’s top 10 tips here.
Keep compensation simple: Make it super easy for your sales team to understand how to behave to get the best rewards. Even creating a calculator or dashboard to show them would help this.
Ensure commissions reflect the business objective you are targeting for the period: Targeting one to two objectives is reasonable but three would be too many.
Set quarterly targets and monthly variable payments with quarterly consolidation: This will help you to move fast and account for seasonality. Only stable companies should consider yearly targets and payouts.
Ensure your compensation plan is fair for everyone: Quotas should be attainable, though stretched to be most incentivising and grow the best team.
Define base vs variable commissions for every single function to be competitive for talent: Keep an eye out for unwanted attrition and (unfortunately) move fast on underperformers. Stick to the market for base salary but be aggressive on variable elements.
Profitability and CAC of your model is sensitive to commissions: Stay between 10-15% commissions for your whole sales machine for new business to maintain healthy unit economics.
Account for ramp up times when setting quotas for new hires: Ramp up time is a hidden cost, but consider 2 months for SDRs and 4-6 months for AEs.
Start your sales academy: As soon as you see the sales playbook working to keep scaling quickly and reduce ramp up time.
Retain your best performers: Offer more than just compensation, consider designing career paths. When scaling, try building your team bottom up by upskilling rather than introducing senior hires as default.
Aim for a normal distribution of sales performance: for an optimal team. Try to avoid the ‘double bump’ distribution with many overachievers and underperformers.
So how should it look like for different types of roles?
Different roles in the sales team may be working towards different business objectives, so their compensation should reflect that. Here’s a table summarising how you might index different roles’ variable components.
What’s the difference between a Variable and Commission plan? Variable is calculated as the % achieved out of their target quota and the payout reflects this. Commissions are a direct % calculated from an amount sold. The reason why AEs are Commission based is because (1) they are tasked with closing the sale and the probability of failing target quotas (incorrectly set) is high meaning payouts could be very binary and (2) it is straightforward and the team can smell the carrot here!
It’s also important to note there are many other components of the Variable to consider including mechanisms such as accelerators or cliffs, cap, how you account for expansion and renewal revenues. All these components can be adjusted to incentivise the right behaviour for your sales team.
Once you’ve nailed these basics… the key question is should you spend more in Sales and Marketing or not for new customer acquisition?
When you’ve gone past the stage of founder-led sales and have a well-performing sales team already (i.e. almost ready to scale), the hardest question is knowing whether to dedicate more resources into Sales and Marketing for new customer acquisition. Here, the critical metric is Sales Efficiency, which measures how much New ARR is generated for every $ spent in Sales and Marketing (acquisition only). It’s calculated as follows:
New ARR during period / Sales and marketing cost for new acquisitions in period
You can also use Quarterly figures too with this formula. The magic number here is around 0.75. If your sales efficiency is above 0.75 then you could scale your sales and marketing spend… but if it’s below, then there are underlying efficiency problems and you should try to solve those first before spending more. Scaling while being inefficient increases complexity making it harder to fix the issues.
You could also calculate sales efficiency including expansion revenue and you would get sales efficiency for the entire Sales & Marketing team by dividing ARR end of the period - ARR beginning of the period /Sales & Marketing cost. This will tell you how much ARR you are generating during the period for every $ spent in Sales & Marketing.
But remember… such metrics and benchmarks are most meaningful at the stage where your sales engine already exists (not at founder-led-sales stage!) and it’s about growing and optimising it. If you’re still at an earlier stage, take note and start tracking when you can so you can build the right habits and have a good starting point for when you are mature enough!
At Samaipata, we are always looking for ways to improve. Do not hesitate to send us your thoughts. We strive to partner with early-stage founders and to support them in taking their business to the next level. Check out more ways in which we can help here or for all our other content here.
And as always, if you’re a European digital business founder looking for Seed funding, please send us your deck here or subscribe to our Quarterly updates here.
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