This post provides an in-depth look at how SaaS companies can approach setting sales quotas and commissions. It is a companion piece to our how-to guide on SaaS Sales Compensation: How to Design the Right Plan. We recommend starting with this first post.
When setting specific comp targets, you’ll want to start by figuring out your quotas – using either a top down or bottoms up approach.
Top down quotas
A good place to start is to look at what other companies have been able to achieve with the same kind of salespeople. The Bridge Group SaaS Inside Sales Survey provides useful benchmarks in this area, but there is a wide variance in quotas ranging from less than $500K to over $1M. The general rule seems to be that quotas go up as as your average contract size goes up. But as the survey finds, it is generally not a linear relationship.
Bottoms up quotas
Start by figuring out how many deals a salesperson can close in a typical month and multiply that by the average contract value. There is no simple benchmark number here, and it will likely change over time depending where you’re at in your learning curve as well as the complexity of your sales process. For example, a simple product where there is inbound demand, and requires only one to two calls to close, is very different than a complex product needing multiple calls and where you’re still identifying the necessary decision makers.
Check quotas to sales costs
Another good check, your quota should be about five times greater than the on-target earnings of your salesperson (see more discussion in the Salesperson Unit Economics section below.) Ideally, quotas will be 6-8X OTE for your sales team to be in the top tier.
Now that you have quota, you can figure out what the rough commission is to meet the desired OTE.
Commission Rate = Variable Sales Comp on Target / Quota
For example, if your reps can sell 100 accounts at $10K ARR per account, their quota will be $1M. If your OTE is $150K with 50% base and 50% variable, your commission will be 7.5%. (This would correspond to a quota to OTE of slightly above 6X.)
Again, you’ll want to check this against some industry standards. 6-12% is the range that seems most common in The Bridge Group survey. But commissions can vary widely. In our 2015 survey of 305 SaaS companies we found that median commission for inside sales was 8.9% and field sales was 9.5%, but with a wide distribution: 50% were between 7% and 11%.
Once you have commission rates and quotas, you can start capacity planning – mapping out the number of leads, calls, and conversations each rep needs to be having and where those leads will come from. You should also start hiring, often ahead of your needs to account for the time involved in hiring and ramping a new salesperson. My article, A Shockingly Common Way That Sales Misses Plan, talks more about hiring ahead of your needs to ensure you don’t miss plan.