What is the Commission Structure for SaaS Sales Teams?
Software sales is a team sport. The ball gets passed from the SDR (Sales Development Rep) to the Account Executive to the Sales Engineer to Client Success with Sales Ops and Sales Leadership, ensuring that sales is a well-oiled machine.
So how is every member of a SaaS sales team compensated? Below are Saas Sales Commission FAQs:
How is a SDR compensated?
The Sales Development Rep’s goal is to set appointments for the sales team. They do this by cold calling, emailing, and LinkedIn messages, among other activities. It’s a grind.
The goal of compensating and managing SDRs is to keep them motivated and productive.
Depending on the company’s priorities, there are many ways to create incentives for SDRs:
1) Activity Quotas
SDRs are expected to identify and qualify leads. A range of activities can be included in a quota. For example:
Reply to inbound leads within 5 minutes
30 cold calls per day
50 personalized emails per week
2) Productivity Quotas
Setting up meetings (appointment setting) is a key sales development rep activity. This keeps the Sales Team productive. Often, SDRs have a quota of meetings to set.
3) Deal size compensation
If a deal that the SDR sourced eventually closes, they may get a certain percentage of the ACV (annual contract value) or ARR (annual recurring revenue), depending on the sales compensation plan.
How is a Sales Rep compensated?
OTE + Quota drives their commission.
1) The 10% Method
A 10% commission is a simple and scrappy way to do it, but it is not the best practice at scale long term.
Unfortunately, using the 10% method, the commission rate is not tied to a quota, so there is no room for overachievement, no tiers.
2) The Variable Commission Method
The best practice is to align the rep's variable compensation to a quota. For example, a $50,000 base salary and $100,000 variable compensation with an $800,000 sales deal quota would equate to a 12.5% commission rate.
The math: Variable Amount / Quota Amount = Commission Rate.
This way, we can set quota attainment ranges where after reaching the $800,000 quota, the commission rate can be multiples of 1.5x and pay at 18.75% sales commission as an additional incentive to your crush beyond quota expectations.
Although there is a higher cost to paying 1.5x and above in commissions after quota attainment, which raises the cost per deal, keep in mind that as the reps exceed expectations, so does the company as a whole, propelling exciting growth numbers to investors and employees. (To the moon! 🚀)
How is a Sales Manager compensated?
The goal of the Saas Sales Manager is to lead their team to hit and exceed quota. Sales leadership is compensated based on the sum of deals closed by the sales reps. Naturally, the Sales Manager carries the combined quota of their sales team (or sales region sometimes).
A SaaS Sales Manager has a higher base than the reps because they spend more time coaching, training, motivating, observing, measuring, and other managerial activities.
For example, with full OTE a SaaS Sales Rep is compensated $120,000. In this scenario best practices dictate that the Sales Manager is compensated approximately $150,000 OTE.
How is a VP of Sales compensated?
1) VP of Sales Quota Attainment
The Vice President of Sales is compensated similarly to their Sales Managers, just at scale. The VP of Sales' commission rate is calculated using OTE and combing all regions' quotas.
2) How Underassign works
Often, a combined quota discount is called "underassign." Management of the VP of Sales is realistic that the bigger your quota is, the more regions that make up that quota, the more challenging it is to hit that number because of so many moving parts. So, to keep the VP motivated, SaaS companies often underassign quota by 10% or so.
3) OTE for the VP of Sales
The OTE for a VP of Sales is around $400k+ at mid-tier Software companies. The commission rate, similar to Sales Reps, depends on the quota size.
How is a Sales Engineer compensated?
1) 75/25 Mix
Commonly, the Sales Engineer has a bigger base salary and a smaller variable as they are further removed from each deal and touch numerous deals. Remember that sales teams often have a 1 to 3 relationship, 1 Sales Engineer to 3+ Sales Reps.
2) The role of a Sales Engineer
The Saas Sales Engineer's role is to provide prospects deep product knowledge as the Sales Rep works their sales magic.
3) MBO component
The Sales Engineers' compensation may have a bonus competent called MBO (management by objective). They receive a score from 0-100% achievement of an objective set by their direct manager.
An example of an objective is to complete a series of trainings and pass a certification test.
How is the Sales Ops Team compensated?
Sales Operations (Sales Ops) help Sales Reps generate the initial quote, structure the sales deal correctly, and advise on the impact of commissions. They often calculate commissions for the entire sales team.
Sales Ops is incentivized to help the entire sales team attain quota and may sometimes carry a quota themselves.
Need help with your SaaS Sales Team's Commission Structure?
Learn more about ZenCentiv Sales Commission Software. We'd love to help streamline your sales compensation process.