Sales is one of the most vital functions for your company’s success – after all, there’s no use creating an amazing product if nobody buys it.

Because selling is so important, it can also be one of the more intimidating functions to hire for. Further complicating things is that sales compensation and goals are usually structured differently from other roles. Particularly if you don’t have experience building a startup sales team, it can be hard to know where to start.

If you’re about to make your first sales hire and aren’t sure how to set things up, or if you already have a sales team but your current setup isn’t working, this guide is for you. We’ll go through the basics of sales incentives and how to set them up for the results you want, what to look for in your first sales hire, and how to set your sales team up to succeed.

What We’ll Cover
Sales Compensation: How it Works
How to Set Up Sales Incentives
Sales Compensation Plan Basics
Tips for Setting Your Sales Incentives
What to Look for in Your First Sales Hire
How to Set Your Sales Team Up for Success

Sales Compensation: How It Works

For most roles, compensation is straightforward: an employee is paid a set salary or hourly wage, maybe with a bonus if certain conditions are met. For the most part, the employee already knows how much money they’ll make in each paycheck when they sign their offer.

Sales compensation is different. For sales reps, their pay is usually tied to performance.  Depending on how consistently the rep is closing deals (and how valuable those deals are), their income might vary significantly between pay periods.

There are various reasons why Sales is compensated so differently than other types of roles, but the biggest one is simply that it’s easy to measure sales success.

While your business’s success will depend on the hard work of all your teams, in most roles it’s difficult to tease out exactly how each individual person contributed. For sales reps, on the other hand, it’s quite simple. Your sales deal numbers provide you with exactly how much revenue each rep brought to the company. This lets you reward your team’s best performers, and incentivize the activities that drive the most results.

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How to Set Up Sales Incentives

Getting your sales incentives right is important, because the incentives will be what ultimately give your sales team their direction. The sales compensation plan essentially communicates which activities are most important to the company, which is why it’s important to ensure that your plan emphasizes the right things.

Sales Compensation Plan Basics

Most sales compensation plans combine a number of different factors to determine how much your team gets paid. Generally, a sales offer includes a base salary and an on-target earnings amount that a rep can earn through meeting performance targets (usually sales quotas).

Let’s take a moment to go over the common elements of a sales compensation plan (Already familiar with these? Go ahead and skip to our tips for setting up sales incentives):

Base salary 
This is your rep’s guaranteed minimum salary, which does not include any additional earnings from commission or other sales incentives. 

Example: A sales rep is hired at a base salary of $50,000, with OTE targeted at $100,000. Even if the rep never closes a single sale, they’ll still receive regular paychecks for that $50,000 salary (though their future with the company might be in doubt!).

Commission
When a sales rep closes a deal, they’ll usually be paid a percentage of the sale’s total value as commission. That percentage is your rep’s commission rate.

Example: A sales rep has a 15% commission rate, and closes a deal worth $100,000 in revenue. The rep would receive $15,000 as their commission.

Variable Pay 
This is the additional pay that your rep will receive based on their performance. Usually this comes from commission on sales deals, though some companies may opt for a bonus structure instead.

Example: A rep is hired at a base salary of $90,000, and earns $50,000 in commissions over the year. That $50,000 is variable pay, since it was not guaranteed and instead was earned through closing sales. If the rep had closed more or fewer deals, the variable pay number would change.

Quota
This is how much money your sales rep is expected to bring in during a particular time period (monthly, quarterly, yearly, etc). If your startup sells physical goods, this will be a certain amount of revenue for that period. If your startup is a SaaS or other subscription-based business, this amount will probably be expressed in MRR or ARR.

Example: An enterprise sales rep might be assigned a quota of $1M for the upcoming period, based on the company’s forecasts. They would then be responsible for selling enough deals to reach the $1M mark, within the specified timeframe.

Quota Attainment
This is how much your rep actually brought in, vs. their assigned quota.

Example: A sales rep was assigned a quota of $200,000 for the quarter, and during that quarter they closed $180,000 in revenue. The rep’s quota attainment was 90%. A different rep was assigned a quota of $120,000 and closed $140,000 in revenue; that rep’s quota attainment was roughly 115%.

On-Target Earnings (OTE)
This is the amount your sales rep can expect to earn if they hit their quota. As we’ve seen, your rep’s actual pay might be different depending on performance. 

Example: A sales rep is hired at the $50,000 base salary from our first example. Their quota for the year is $600,000, and their commission rate is 10%. If the rep hits their annual quota, they’ll make $60,000 in commission. $50,000 base + $60,000 commission = $110,000 OTE. 

Accelerators
To reward their team for going above and beyond, some companies offer further incentives for sales reps who close additional sales after 100% of their quota has been met. This often takes the form of higher commission rate for the rest of the quota period.

Example: A sales rep has a quarterly quota of $100,000 with a 10% commission rate, and their company offers an accelerator of 15% commission on all deals past 100% quota attainment. In Q3, the rep meets their quota, then closes another two deals worth $10,000/each before the quarter ends. The rep then receives $13,000 in variable pay for that quarter – $10,000 for meeting their quota, and $1,500/each for the two accelerator deals.

When you sit down to create your plan, you’ll need to bring all these elements together into a structure that will set both your team and your company up for success.

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Tips For Setting Your Sales Incentives

So how do you create a sales compensation plan with the right incentives for the results you need? Here’s a few tips for getting it right:

• Figure out the role of your sales team in the company. This might seem straightforward – your sales team is there to sell, right? That’s true, but not every company makes sales in the same way. Will your reps be going out and looking for business, reaching out and building relationships with target customers? Or does your business operate on more of an inbound model, where prospects will find you through search or other methods, and your reps will work those inbound leads?
  
  It’s important to think through what your company’s sales process looks like (or will probably look like) before you decide on incentives. If your reps are incentivized for activities that don’t line up with how your company actually gets business, then you and your sales team will both have a problem (as a bonus, this also gives you an idea of what kind of background you should look for in your sales hires).
  
• Make it as simple as possible. Remember that the ultimate purpose of the sales compensation plan is to tell your salespeople what you want them to do. If your incentive plan is too complex, it’s not clear what your team should be prioritizing (good rule of thumb: if it can’t fit on an index card, it’s probably too complex).
  
  When you’ve drafted your plan, read through it pretending you’ve never seen it before. If you were a new sales hire with no context on how the plan was developed, would it be easy to understand what the company wants you to focus on?
  
• Do your homework. Different industries have different standards for commission rates and structure (for example, a 4-6x quota-to-OTE ratio has been recommended for SaaS companies). Research what’s common in your specific vertical or market space, so that you can ensure your plan is competitive enough to attract high performing reps.
  
  The flip side is also important – carefully consider your company’s costs and expected deal size, to ensure your compensation plan is financially sustainable for your business’s growth (if you’re unsure how to do this kind of analysis, it can be worth bringing in professional help).

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What to Look for in Your First Sales Hire

It’s always important to get the right person in the right role, but it’s critically important for your first sales hire. This person will help you build one of the most vital functions of your business, which can also make it a bit tricky to find the right fit. 

The first hire into sales will need a different skillset than someone joining an already-established sales team. Later hires can follow the team’s playbook; the first hire will have to write it, while still executing to close deals and bring in revenue.

So what are some traits to look for in your first sales hire? 

• Initiative. As a one-person department (at least in the beginning), your first sales hire won’t get a ton of direction on day-to-day activities. They’ll need to be a self-starter, who can find things that need to be done.
• Problem-solving. Building a function is never easy, and being the first person in means there won’t be examples of how previous reps overcame challenges. Your first hire needs to be a quick thinker, who looks for solutions when they encounter an obstacle.
• Ability to think strategically and tactically. This goes back to building the playbook. You’ll be looking to your first sales hire to figure out how sales at your company should work. This means they’ll need to get the big picture on what to go after and why, as well as the day-to-day activities that will move the pipeline forward to close.
• Great selling skills. Last but not least, the most important part. Besides building programs and solving problems and writing playbooks? Your first sales hire also needs to be a pro at actually making sales.

The traits to look for in your first sales hire are really not so different from what you’d look for in the first hire for any function, and that’s actually the mindset we recommend. Hire sales with the same base criteria you would for anyone else: a reasonable person with a good track record, who’s engaged with the company and its mission.

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How to Set Your Sales Team Up for Success

Making the right first hire is a major step towards building a great sales team…but it doesn’t mean you’re done. It’s equally important to set that person (and their eventual team) up for success. Here’s a few things to keep in mind:

• A salesperson is not a magic bullet. If you assume that all you need to do is sign an offer, then sit back and let your new salesperson rake in the revenue, you’re in for disappointment. You’ll still need to give them support, particularly because…
• Even the best salespeople still need enablement resources. Your rep is going to be an expert in selling, not necessarily an expert in your product and market space. You’ll need to make sure they have the tools they need to build that expertise, especially around why your product or service is the best choice for their prospects. This is important, because…
• Your reps will sell better if they believe in the product. Can salespeople sell products they don’t think are really that great? Sure – but in almost all cases, they’ll sell it much more effectively if they understand why it’s good, and how it will help their customers. Listen to your team’s concerns, and take the time to address questions or set up additional training. It’ll pay off with more closed deals.

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Your sales team will be one of the most integral components of your company’s success, so it’s worth taking the time to get it right. By putting together a thoughtful sales incentive plan, making an initial hire with the right skillset to build the function, and providing ongoing support to your sales team, you can set up both your sales reps and your business for success.

Pilot has helped thousands of startups manage their financial back office, and make the right choices for their business. If you’re just starting out, try our guide to what to do after you found a tech startup.

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