After releasing my B2B Fintech Sales Comp Calculator, I received many inquiries on writing and structuring a commission plan, so I thought I’d start with the Top Ten Mistakes.
1. Not having a Commission Plan
Many startups believe they do not need a commission plan because the CEO is involved in all the deals and acts as the ultimate salesperson. This strategy is acceptable only if a) the CEO grew up in sales, b) is following a structured sales process, and c) is dedicating at least 75% of their time to prospecting and closing new business. Otherwise, you need salespeople – not sales support, and you need a commission plan. Pro Tip: Sales is always slower than desired; a commission plan ensures alignment between you and your salespeople and keeps them focused on selling.
2. Allocating too much (or too little) to variable compensation
The amount of variable compensation should be directly proportional to the frequency of sales. A good rule of thumb is that if the rep is expected to close fewer than 5 deals per year, set commissions to be 25% of their total comp; if 5-15 deals, go with a 50%/50% split, and if more than 15 deals, 75% variable is appropriate. The big caveat is that you need to have a history of quota attainment. If you lack history and quotas are set as wishful thinking, make your variable compensation model more conservative or use a guaranteed recoverable draw model (see #7 for more information)
3. Paying trailing commissions to hunters
If you want your salespeople to hunt (prospect and win new clients), pay them when they sign new contracts. You’re willing to burn cash for product development; burn it for sales, too. Think about it – do you want a product with no clients? If you fear accounts receivable or salespeople overselling your capabilities, you can align payments with money received, go-live date, and even implement a true-up/down. Just realize that any delay in payment means your salespeople will focus their attention on ensuring client success and not on winning the next deal. In my opinion, trailing commissions seem to always backfire in future years as current year income is not directly correlated to winning new business.
4. Choosing the wrong denominator
For early to mid-stage fintechs, I strongly recommend paying on logos and not on contract value or on annual recurring revenue. The reason is that you expect annual sales productivity to skyrocket year-over-year. For whatever reason, salespeople accept logo-based commission value decreasing if you double or triple their quota, but they fight like crazy if you lower a commission payout percentage. I don’t understand the psychological difference, but I warn you – it’s real. Also, feel free to add premiums for extended terms but realize that a two-year contract does not double your valuation over a one-year deal, so don’t pay on total contract value (TCV).
5. Assuming it’s all about the money
Compensation is a great driver; however, glory dollars are also very valuable. Here are several ways to use glory dollars. 1) include premium payouts (kickers) in the commission plan to align with expected behaviors. For example, include premium payouts for extended contract terms, being ahead of quota, deal profitability, ancillary services, or higher minimums, 2) support more conferences for salespeople who are ahead of quota, and 3) recognize the salesperson in front of the entire company and board of directors. for everyone (glory dollars)
6. Maxing out commission payments
It is true that if you win an elephant account, the CEO and C-suite will be actively involved in working the deal, and it’s quite likely to be less profitable than smaller accounts. So if you are paying on revenue (not logos, as I recommended), use a sliding scale where you pay out x% on the first $y of the contract value, then half the payout on the next $y of the contract value, then half it again and again. This keeps your salespeople focused on maximizing the deal value.
Sidebar, I’ve also seen fintechs implement an annual maximum commission payout. That’s crazy; you’re basically asking your salespeople to defer deals until the following year. Instead, you want them to be highly incentivized to close deals before the end of the year – as they’ll be expecting sales quotas to increase and hence per deal payout to decrease. If you find your team materially exceeding sales quota, that means you set quotas too low – either grin and bear it or exercise your right to change the plan midyear.
7. Offering a standard monthly draw
I completely support offering new salespeople a draw against future commissions while they are onboarding and building a pipeline. However, make it a decelerating draw based on the expected ramp-up period and whether you’re giving them a ripe pipeline. For example, if they are expected to earn $60,000 in annual commission, you have a six-month ramp-up process, and you are not giving them a ripe pipeline, I recommend $5,000/month for the first 6 months, then lowering it to $2,500 for the next 3 months, and then removing the draw altogether. This will help them with their cash flow while also ensuring they remain hungry.
8. Assuming salespeople know the plan will change.
I know salespeople are smart and logical. You see the logic: selling gets easier as you win more deals, and you expect sales productivity to skyrocket (2-10x is not unreasonable), so of course, you expect your intelligent salespeople to realize that the commission payout structure will decrease in the future. Warning: they have their blinders on. Explicitly state the term of your Commission Plan by including an expiration date (usually six months or one year) and include two T&C’s 1) Management, at its sole discretion, has the right to change the commission plan, and 2) Payout schedule is expected to change on the expiration date to reflect current market conditions.
9. Having unique Commission Plans for each salesperson.
Fun Fact #1: it always gets out. Fun Fact #2: it’s not necessary. Fun Fact #3: it unnecessarily introduces business and reputation risk. Yes, salespeople each come in with different levels of experience and different salary expectations. However, base compensation should be set for the role and function, and seasoned salespeople should carry a higher quota. A higher quota warrants a higher draw but not a higher salary or higher payout schedule. This way, you are paying for performance, not for perception. It also ensures you are living your DE&I values.
10. Forgetting T&Cs like claw-backs, true-ups, and true-downs.
I know you want your salespeople to see you as a cool, easy-to-work-with, non-bureaucratic fintech. However, the same reason why we include Terms and Conditions (T&Cs) in our client contracts also applies to our Commission Plan. Occasionally, salespeople intentionally or unintentionally oversell your capabilities, and the client will exit the contract. This is a huge risk for earlier-stage companies, as capabilities change rapidly, and salespeople aren’t always in the know. The commission plan should include date-based commission reevaluations. The typical rule of thumb is to have an evaluation one year after the contract is signed, but it may be sooner or later based on your typical onboarding cycle. The reevaluation would be a full claw-back of commissions if the client never goes into production, a partial claw-back if they do not meet the minimum expectations, and the opportunity for incremental commissions if the client far exceeds the expectations. I typically do not recommend that the salesperson has to return the commission payment, but instead, have it considered to be a draw balance payable against future commissions. The other critical T&Cs: Management reserves the right to change the plan, and such changes will be in writing and provided with at least 30 days’ notice; The payout schedule will change at the expiration date; No more than 100% of commissions will be paid regardless of the number of salespeople involved in the deal; and, All exceptions require written approval.
I know that's a lot to digest! No one said incentive comp was easy. I welcome thoughts and feedback from both my CEO and Salespeople friends.
B2B Fintech Sales Comp Calculator https://www.toplinefocus.com/sales-ote