A Basic Structure for a VP, Sales Comp Plan: 50/50/25+

Screen Shot 2013-09-12 at 1.57.29 PMOne key post I missed on the VP Sales journey was how to pay this critical role.  I don’t think it’s necessarily as nuanced and interesting a topic as how to pay and scale the sales team itself, or how to hire for this role.

But incentives are critical, and the VP Sales will likely be the Seemingly Most Expensive hire you ever make.  That’s stressful.  So let me tell you what I did and learned.  The 50/50/25+ plan.  And as you can see if you look at the Boston Strategy Group chart at the right, as usual, it’s just a little different from The Ordinary way to go.  Not a lot different, but meaningfully so.

Here’s what I learned and knew before I figured out the 50/50/25+ plan:

  • No best efforts cr*p.  Even if you hire a VP Sales very early, there has to be a clear quota and plan for him or her to hit.  No best efforts stuff.  I know it’s teamwork in a start-up.  But sales is sales.
  • In a start-up, the VP Sales has to also be aligned to costs, not just revenue.  It’s natural for a VP Sales not to care about costs.  Just to want a budget and a top-line number to meet.  But costs are critical when you’re adding sales reps and then a VP Sales ahead of profitability.  Sales just feels sooo expensive early on.
  • The VP Sales has to somehow be accretive.   This seems almost impossible, unless you give her a big quota, which as we’ve discussed, doesn’t scale.  So how can this big salary not just be a big drain on limited capital?  How can the VP Sales not be a “tax”, at least from a financial plan perspective?
  • The Good VP Sales have large OTE (On-Target Earnings) Expectations.  You can’t get a great VP Sales for a nominal $1X0k salary.  You can get a crummy one, however.
  • Many candidates will tell you they want a guaranteed draw for 6+ months.  They’re leaving something good for something risky.  So guarantee me my full bonus for 6+ months until I’ve built up a big enough pipeline to close enough revenue to hit my number.  Sounds fair — on the surface.

It’s tough.  And I got most of this wrong before I got it right.

So here’s what I figured out, for us, and it worked well.  It’s just one way to go:

  • A High OTE is No Big Deal — if your VP Sales Hits Your Number.  So don’t sweat it.  Instead, align it.  Do you really care if the OTE is $300k, or heck even $500k, if the VP Sales brings in $Xm more revenue than you expected?  Of course you don’t … and you don’t pay it if it doesn’t happen … plus bonuses “vest” over the course of the year …
  • So we paid 50/50/25+, which means:
    • 50% of OTE paid as base salary.  No draw (i.e., no guaranteed bonus for X months until you scale).
    • 50% of OTE paid as bonus, with the target being the overall company revenue number for the year.  Top-line revenue, inclusive of churn, inclusive of upsells and self-service, net of everything.  The same number you and everyone else in the company is trying to hit.  A number that’s hard to hit, but that you have say 50-60% confidence you can hit.
    • 25% or more upside for exceeding that plan.  Basically, we paid our VP Sales X% of every single dollar after we hit the plan for the year out.  That % has to go down over time, but the basic idea was if the Stretch Plan was hit (Stretch for us = plan that I had 25% confidence in hitting), then there would be a 25% boost on top of the OTE.  If the Stretch Plan was exceeded (which Brendon did), the comp goes up from there.  No cap.

It was that simple.   And what it meant, like the sales rep comp plan, was if the VP Sales killed it — the money would follow.  And if he didn’t, it didn’t, and the cost wasn’t that stressful.  And since our Real VP Sales killed it, he made good money, was highly accretive, and we got to cash-flow positive at $4m in ARR even paying our VP Sales well and paying our sales reps 25% of the deal size.

A few thoughts on the plan:

  • Don’t do a guaranteed draw.  I know it seems to make sense.  But the thing is, if you pay your VP Sales in full on hitting the plan, it shouldn’t matter if that gratification is delayed a few months, so long as the real OTE is high.  A draw actual is an excuse for laziness.  It sucks some of the hunger out.  And lets the candidate blame others for their own issues.  {Yes, I know some will disagree and this is controversial.  Just my view.}  Or if you end doing a draw, keep it short (e.g., one quarter) and make the VP Sales have to “make it up” in sales quota payments by the year-end.
  • But do pay well when they kill it — against a sane plan.  And don’t cap the upside.   That’s the trade-off.  No draw, no huge salary for just showing up.  But you have to pay very well when a realistic plan is hit (not a ridiculous one), and you have to pay very, very well when you exceed it.  This will appeal to a great VP Sales on the way up.  It won’t appeal to a mediocre one or one on the way down.
  • Pay bonuses out monthly.  The flip side of the no guaranteed draw.  No delayed gratification here.  It’s hard enough to come into something new as VP Sales and make magic happen.  Once it does — pay now.  Not later.
  • In the beginning, consider bonuses and goals that match the overall company ARR goals.   My VP Sales and I both worked toward the same goal as everyone else in the company — the end-of-the-year revenue goal.  EchoSign has a self-service component, and the Client Success team managed churn, and upsells were split between Sales and Client Success.  You could make an argument the VP Sales should only be responsible for net new revenue from sales.  And that may be the way to go later.  But until you are at $Xm in sales, I say everyone should have the same revenue goal where practical.  One overall revenue goal for the founders and VPs and everyone.  It also incents the VP Sales to work with the other functional areas around post-signature revenue (support, product, client success, etc.).

Good luck!  I think anything works well here, as long you align interests, and the plan is achievable.

You can see from the above chart, and in the Boston Strategy Group data here, that most VP Sales are heavy on guaranteed comp and light on the upside.  You’ve been warned.  :)

13 comments

  1. Definitely agree with not doing a draw and baking it into the over-and-above bonus based on performance. We did the draw with one of our sales VPs and could clearly see the lack of sense of urgency in going after the target.

  2. Yup, the upside must be there but real talent will always bet on itself.

  3. Hey Jason. Trying to resolve one thing in this post. You say to base bonus on overall revenue goal for the year (I agree) and to pay bonuses monthly (I agree). But how exactly do you do that? For example, if a VP of Sales has a revenue target for FY 2014, how should the bonus he is paid at the end of January 2014 be calculated?

  4. Pingback: 7 Guidelines you Should Heed on SaaS Sales from Jason Lemkin

  5. Arie

    Hey Jason,
    Does this formula significantly change if the VP is heavily vested with equity?

  6. mhamedi

    Great post.
    I have a quick one, what size equity is generally expected for a VP when joining an early stage start up, with product launch (1 month), good early traction, no paying customers yet?

    • Most VPs will be looking for 1%+-. Less if it’s already a hot company, and accelerating, and they still have something to prove. More if it’s not yet hot, or they’ve already proven themselves. If it’s really very early, you need to add in some sort of extra equity to account for the next round dilution, IMHO.

  7. Alex

    Jason, great posts. How did you compensate reps and VPs for monthly versus annual deals? For example, if we did a $1K monthly deal it’s $12K ARR but the business only gets $1K. How does that count for the overall number for the VPS and the reps, and what should do they get paid?

    • We did two things. First we followed the cash. Very few customers want to pay $1k a month so it works itself out at the credit card vs. invoice line. To be specific, if they paid month-to-month then: (1) payed as if it were an annual deal, and clawed back prorata if cancelled in < 12 months, and (2) paid a lower % of ACV out as commission (5/7th of annual payment commission). In your example, if they paid $1k a month on a $12k ACV deal, we would have paid a ~ $2500 commission and clawed it back by netting it against future commissions if they cancelled before month 12.

  8. Jason, Great post. Very timely for us.
    Our company bills mo/mo (in arrears) and customers tend to grow over time. Quarterly revenue quotas based on incremental new revenue only captures part of the value delivered to the company. The remainder is difficult to predict as many companies scale from small initial invoices to much more significant amounts over time. We’re contemplating a second component which is to offer a percentage ‘carry’ on revenue over a longer period of time (12 mo.). Any words of guidance or caution about the best way to approach this unpredictability? Thx.

    • There’s no perfect answer here. Basically, what we did is this: sales rep gets credit for all additional revenue closed in Year 1 as long as they did SOME work. If it ended up 100% through customer success, we sometimes didn’t pay. In hindsight, we should have paid 100% of the time though as it didn’t really matter.

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