Your Guide to Sales Compensation & PLG
July 27, 2023
Sales compensation design is notoriously tricky for software companies. It forces hard conversations about company goals, the profile of sellers that you want to hire, and how to use compensation to drive the right incentives and behaviors.
For companies that pair self-service and sales-assisted motions, that complexity multiplies. Common questions I get asked include:
- Are there different sales roles and comp plans for PLG companies?
- Should I compensate reps for deals that close via self-serve?
- Should I pay the same amount for landing new deals as I do for expanding accounts?
Today’s newsletter unpacks sales comp design with a specific eye toward those balancing product-led and sales-led motions. Keep reading to learn:
- What are the components of a sales compensation plan?
- How do I build a sales compensation plan at a PLG business?
- What else should I consider when navigating PLG sales compensation?
1. What are the components of a sales compensation plan?
It’s helpful to start by understanding the different levers that you have to work with, and when you might want to pull on each one.
- On-target earnings (OTE): The total earnings if a seller achieves their targets. This is the sum of the base salary plus variable compensation. It’s usually represented on an annual basis.
- Base salary: The fixed earnings or salary regardless of performance.
- Variable comp: The additional potential earnings based on performance. Variable compensation can take a number of forms (commissions, accelerators, bonuses, SPIFFS, kickers, clawbacks, etc.). This is usually ~50% of OTE for an account executive, but varies quite a bit across go-to-market roles.
- Quota: The target performance, which could be tied to a number of different metrics (ex: monthly recurring revenue, annual recurring revenue, new bookings, sales qualified opportunities, number of new customers). It is normally set at an individual level, but it can also be set at a team- or company-wide level.
- Quota attainment: How much of the quota has been achieved at the end of the period. Generally, SaaS companies expect roughly 50-60% of ramped reps to hit quota (i.e., 50-60% participation rate). Set quotas accordingly.
- Quota to OTE ratio: The ratio helps indicate the potential ROI or efficiency of a ramped sales rep. The rule of thumb is for a 5:1 ratio. For example, a seller with a $1M quota would earn $200,000 if they hit their quota.
SaaS companies, of course, like to make things more complicated than this! Within this general structure, you can start getting into more complex compensation levers in order to either encourage the desired behaviors from sellers or protect against potential downside scenarios. A few sales compensation 201 terms you should be aware of include:
- Accelerator: If a seller is consistently hitting quota, how do you motivate them to go for even more? An accelerator rewards sellers at a higher rate if they exceed the target. (I’m a fan of these.)
- Caps: On the flip side, a massive enterprise deal might totally break your compensation structure (especially if you pay accelerators). Some companies will cap the total potential compensation to minimize risk. (I don’t think these are necessary for the average PLG business, but you may want to consider a “windfall clause.”)
- Clawback: If a customer buys only to quickly churn or never pay their invoice, you may wish to retroactively deduct (or “clawback”) that account from a seller’s compensation. (Best practice is to enforce these if you have the accounting resources.)
2. How do I build a sales compensation plan?
Before jumping right into setting quotas or OTE, you need to get clarity on:
(a) your business goals, (b) the roles you need on your team, (c) compensation best practices for those roles at PLG companies, and (d) the behaviors you want to incentivize or disincentivize.
A. Business goals
Ultimately, most software companies want to grow their recurring (or reocurring) revenue. But there are different business goals for achieving that result. Specifically, you could consider:
- Increase ARR from new customers (acquisition)
- ↑ Higher conversion rate
- ↑ Higher price for each new customer
- Increase ARR from existing customers (expansion)
- ↑ Higher expansion
- ↓ Lower churn
For companies that blend product-led growth with sales, things get more complicated.
- You could sell via self-service, a sales-assisted motion, or both.
- You could sell into accounts that have existing product users (i.e., product-led sales) or outbound into entirely new logos (traditional selling).
- You could capture as much spend as possible upfront or focus on rapidly landing new customers then letting those customers expand over time.
- You could be testing a new go-to-market motion or scaling that motion.
I like to think of this as a simplified decision tree. It is OK to have multiple business goals, especially as your company grows, but these need to cascade to the appropriate go-to-market roles and compensation plans for each.
B. Roles on the team
Your business goals should inform the exact sales roles that you need and the skills that you need in those seats. You might hear this get simplified into hunter vs. farmer – but you’ll need to drill down deeper than that. Different go-to-market roles at product-led businesses include the following. (Yes, the average PLG company does still have an SDR team 📞)*
- Product-assist: Also called sales assist, product specialist, onboarding specialist, or inbound SDRs. This team focuses on generating qualified pipeline among product users for the sales team to close. To achieve that, product-assist reps focus on product activation and usage as a prerequisite for commercial conversations.
- Sales development (SDRs/BDRs): AKA business development. This team focuses on generating qualified pipeline among non-product users for the sales team to close.
- Account executives (AEs): Sales reps. This team takes that qualified pipeline and converts it into closed-won revenue. AEs generally focus on new customer conversion, although at product-led businesses they may be working with existing self-service customers.
- Account managers (AMs): AKA client sales. This team grows the overall book of business among existing customers by increasing adoption, selling into new teams or business units, or upsell/cross-sell.
Sales-assist is the main sales role that is specific to PLG businesses (other than a self-service “sales” role, of course). While the other three roles are broadly applicable across SaaS, PLG companies typically focus on account manager profiles who drive expansion revenue among existing customers. PLG tends to correspond with land-and-expand business models where the initial deal size is quite small relative to the total opportunity in the account.
A key consideration is where to draw the account segmentation line for where you do or don’t deploy sales people. My view is that sales should work with product-qualified accounts—that is, accounts who are both in your ideal customer profile (ex: 500-5,000 employees, industry X) and who demonstrate signals of commercial intent based on their product usage. Folks should think about how to set account segmentation based on incrementality and efficiency—where does a sales touchpoint materially improve the self-service customer journey?
If you buy into this philosophy, you should be more or less indifferent as to whether these product-qualified accounts ultimately purchase via self-serve or through a sales rep. What matters is that the size of the overall book of business grows relative to how it would perform without any sales assistance.
*To keep this piece digestible, I’ve left out sales support roles such as sales engineers, solutions consultants, and onboarding specialists.
C. Best practice sales compensation
Setting all caveats aside, it helps to see examples for how this looks at a typical product-led business.
- 70/30 split of base to variable compensation
- Illustrative OTE of $75-$100k
- Variable compensation tied to either customer experience KPIs (ex: number of product-qualified leads), new customer conversions, or a revenue quota that’s attainable based on the volume of new sign-ups
- Sales development
- 60/40 or 70/30 split of base to variable compensation
- Illustrative OTE of $75-$100k
- Variable compensation tied to pipeline specifically sales qualified leads (SQLs), meetings, or pipeline dollars. The volume expectation depends on the size of the target customer and annual contract value
- Account executive
- 50/50 or 60/40 split of base to variable compensation; this equates to variable comp at ~10% of new ARR
- Illustrative OTE of $200-$250k
- OTE is less important than the quota:OTE ratio (typically targeting 5:1). For example, Enterprise reps tend to have higher quotas and their comp packages are more significant than SMB.
Variable compensation generally tied to closed/won recurring or reoccuring revenue (i.e. ARR, MRR)
- Account manager
- 60/40 or 70/30 split of base to variable compensation
- Illustrative OTE of $150-$200k
- Variable compensation generally tied to net dollar retention or net expansion within a predefined set of accounts
D. Behaviors to incentivize
Within these roles, there are a wide variety of behaviors that you may want to see from the team. These behaviors tend to change as you launch new products, test different sales plays, go after a new customer segment, or navigate a changing economic environment. A few specific tips to keep in mind:
- When you’re testing a new role or a new motion, you may want to start by rewarding the activities that you believe will lead to the desired outcomes.
- As you shift to scaling, you want to reward the outcomes themselves.
- You want to reward actions that are within the rep’s control. For example, an outbound SDR can generate a qualified opportunity at a target account, but the actual conversion is out of their hands.
- You want to avoid rewarding behaviors that can lead to negative impacts down the funnel. For example, if you only pay an AE on the size of the initial ‘land’ deal, you may set them up to over-sell a customer and limit any expansion opportunity for the AM (or worse, pass a churn-bait customer over the fence).
- Exclusively focus on MRR/ARR attainment if you’re simultaneously asking for different behaviors from the reps (ex: contributing to an improved self-service onboarding flow, creating a feedback loop with the product growth team).
3. What else should I consider when navigating PLG sales compensation?
👉 Should account executives get paid for an account they supported that ultimately bought via self-service?
My rule of thumb is yes, if that account is assigned to them based on the product-qualified account scoring. You’ll just want to account for this self-serve revenue when setting the size of their overall quota. You may also want to periodically audit self-serve deals to monitor whether there was meaningful sales activity prior to purchase.
If you don’t compensate reps for these deals, you risk creating artificial conflict between self-service/PLG and sales efforts. You may also set up a bad customer experience where folks feel pressured into buying a plan they don’t need before they’re ready (or where they don’t buy entirely because they’re pushed to go too big, too soon).
👉 Should account executives get paid for expansion revenue on new logos that they closed?
I lean toward paying for expansion revenue within a predefined amount of time after the deal closed (usually somewhere between four to 12 months), even if the rep didn’t materially generate that expansion opportunity. My rationale is that this is both fairer to the rep and it encourages the rep to close deals quickly (land-and-expand) rather than go-for-broke within the first transaction.
Mature usage-based businesses might even consolidate the AE and AM roles, and instead have AEs stay with their accounts over time. That way sellers stay focused on ongoing adoption and usage rather than just the initial commitment. This is especially common within the Enterprise customer segment where there’s nearly limitless expansion potential.
👉 How do I focus reps on bigger deals rather than selling a bunch of small <$5k deals?
In my view, you solve for that based on which accounts you assign reps. Not by penalizing reps for supporting a high-value customer who’s not ready to spend $100k, but might get there in six to 12 months. Assign accounts that have the potential to spend real money even if they want to start small.
👉 Should I cap commissions?
Generally speaking, no. The potential exception is in the case of ‘outlier’ deals (ex: $1 million+ revenue), which could break the standard compensation plan and where there will inevitably be sales support from the broader team and not just the assigned AE. Including a “windfall clause” in the comp plan terms and conditions can cover your financial exposure here more effectively than a formal cap.
4. What other resources should I check out?
- Growth Unhinged: How to pair PLG and sales in 2023
- OpenView: Going Usage-Based? It’s Time to Rethink Your Sales Comp
- Viola Group: Usage-Based Pricing Sales Compensation
- ICONIQ: The Definitive Guide to Sales Compensation
- Bridge Group: SaaS AE Metrics and Compensation Research
- Sales Hacker: Sales Compensation Plan Blueprint