Split their compensation 50/50 between base salary and commission. This means that half of their salary is paid out regardless of their performance – as a salary – and the other half is only paid out based on their performance in the role.
This is the industry standard. Some comp plans are set up as a 60/40, with 60% as base salary, but this usually exists only when a sales leader is coming from a larger company and needs more cash up front to offset the dramatic change in their overall compensation. This can be offset by more equity as well.
Variable targets are the dates that are used to hold sales leaders accountable.
In a higher transaction businesses (smaller contracts), you should hold a leader to a monthly cadence of sales (net new, expansion and renewals) but pay them their variable comp on a quarterly basis. This way, a leader can miss their Jan number but still hit their quarterly targets and still get paid their full commission for that quarter.
In a lower transaction business (larger contracts), you should hold a leader to a quarterly cadence of sales (net new, expansion, and renewals) and pay them quarterly. Since most businesses are slower performers in the first 2 quarters, you should assign 30-40% of the variable comp to the first 2 quarters and the last 60-70% to the last 2 quarters. This way, the leader has a fair chance to hit their full variable compensation goals.
Thresholds are the minimum percentage of a target goal required to hit before getting ANY part of a variable payment.
Industry standard is 70% of the target, meaning a sales leader must reach 70% of their quarterly number before they start getting paid their variable comp. Once they hit 70% of their revenue target for the quarter then they get paid 70% of their variable.
Accelerators are payments that are made to a sales leader for exceeding their goals.
It's industry standard to pay a sales leader accelerators, at a higher commission percentage than their normal variable pay, for an annual target, but not for quarterly targets. Otherwise, a sales leader who crushes their Q1 target could wipe out the comp budget for the entire year.
Standard Example Package
Here's an example compensation package for a VP of Sales aiming to book $8M in new ARR for one year:
- 50/50 split between base pay (salary) and variable pay (commission).
- 250k base / 250k variable, which can be adjusted down based on the experience of the leader.
- Variable Targets per quarter of $1.5M, $1.5M, $2.5M, and $2.5M in new ARR.
- Threshold set at 70% of the quarter variable target, with a bonus paid out at 110%.
Of course, your mileage may vary. Work hard to understand what specific terms your VP of Sales is looking for in their new role. Some may value equity over cash comp, or a flexible remote work policy instead of more vacation days. At the end of the day, you want to do your best to set them up for success.
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