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Whether you’re leading an early-stage SaaS company with a few sales reps or a public SaaS company with a global team, properly designing and incentivizing your sales organization is crucial to surviving and thriving. As part of a new research series, we surveyed revenue executives across the ICONIQ Growth B2B SaaS portfolio and network to understand how they structure compensation and incentives for their teams.
We have summarized select findings from our research below, specifically related to how SaaS companies incentivize account executives—the sales reps responsible for closing new logo deals and, sometimes, expanding existing customers. Our Definitive Guide to Sales Compensation includes even more detail, including benchmarks for OTEs, variable mix, quotas, commission rates, and more. We invite you to follow our broader go-to-market series for additional insights.
1) Identifying the business goals and behaviors you want to drive
Sales incentive programs are mostly about driving behaviors in your reps that align with your company or team goals. These goals can shift as your company scales, responds to economic conditions, or rolls out new products and features, but it’s critical to identify these goals and ensure alignment towards them across your team.
Most companies align on goals and roll out updated sales incentive plans once per year during the annual planning process. However, some GTM leaders prefer to revisit goals and incentives bi-annually or quarterly to allow for more flexibility and agility in responding to market shifts.
The most common metric incentivized for account executives is closed won recurring revenue.1 That said, the specific revenue metric you incentivize should depend on your revenue model. Most B2B SaaS companies incentivize Annual Recurring Revenue (ARR) or Monthly Recurring Revenue (MRR) rather than bookings, Total Contract Value (TCV), or Contracted Annual Recurring Revenue (CARR). You can read more about revenue recognition in our SaaS Glossary.
The next most common metrics incentivized include other types of closed won revenue (i.e. non-recurring revenue like services and implementation revenue), like the duration of the contract term and the number of new logos acquired. (1)
How many metrics should you choose? This is widely debated, and there’s no one-size-fits-all approach. However, one to three metrics is most common. While it can be healthy to have a multi-metric incentive plan to drive balanced behavior, you also want to make sure that your plan isn’t overly complicated. Sales reps should know at all times exactly where to focus and their “gap to goal.”
Some common examples of multi-metric plans
- Closed won ARR and number of new logos: this ensures sales reps are closing enough total revenue but aren’t relying too much on one or two “whale” deals—it incentivizes focus on smaller deal sizes with potential for upsell across many new logos. This can be useful for land and expand businesses that are trying to grow with their customers.
- Closed won ARR and net dollar retention: this ensures sales reps are bringing in enough total revenue but are also bringing in high-quality, healthy customers that will renew and buy more of your product.
Your business objectives and the metrics you choose to incentivize will inform how you align roles and responsibilities across your go-to-market teams, which we’ll address next.
2) Establishing account executive responsibilities
Roles and responsibilities are inextricably tied to incentives. Before creating your incentives program, it’s important to understand the bigger picture of roles and responsibilities across your organization.
In B2B SaaS, an account executive (AE)—colloquially, a “sales rep”—is typically an individual contributor within the sales organization that is responsible for bringing in revenue. The type of revenue an AE is responsible for can differ by organization and could include a combination of closing new logo deals, renewing existing customers, and expanding existing customers via upsell and cross-sell. Below is a general example of how roles and responsibilities could look.
The behaviors you want to encourage in an AE will depend on the revenue mix for which they are responsible which, in turn, will inform how you should design their incentives program.
As organizations scale, responsibilities may shift between the roles in a sales organization. For example, it is typical for an early-stage company with a small sales team to have “do it all” AEs that own everything from new logos to renewal and customer expansion—and sometimes even build their own pipeline without the support of SDRs. As the company scales and the customer base grows, this role splits into pre-sale (“hunters”) and post-sale (“farmers”). From there, post-sale can split into different roles for renewal and expansion, and even further for upsell and cross-sell.
Most often, we see AEs responsible for new logos and expansion, while account managers and/or customer success managers are responsible for renewals. (2) However, the question of who should own renewals and expansion is heavily debated in B2B SaaS circles, and one we will return to in later posts.
3) Quantify specific goals or quotas against these metrics
Once you have established company and team goals, identified the behaviors you want to incentivize, and selected the metric(s) that align with those behaviors, you need to quantify specific goals against those metrics. This part of sales incentive planning is both art and science, especially for an early-stage company with less revenue history and predictability.
Most companies use multiple methods to identify their goals across metrics like new revenue, number of logos, and revenue retention.2 “Bottom-up” forecasting uses internal information such as historical pipeline and conversion rates, existing pipeline, sales rep capacity and productivity, and self-reported commitments to set a goal. “Top-down” forecasting uses more external sources of information such as total addressable market, current market share, and macroeconomic conditions to set a goal.
A specific goal against closed won revenue is referred to as a quota. Allocating quotas to sales reps is the trickiest step of the incentive planning process because quotas should be both challenging (in order to achieve revenue growth goals) and attainable (to fairly compensate and retain your sales employees).
Quotas can differ drastically depending on company-level variables such as stage and average contract value, as well as rep-level factors such as a rep’s responsibilities—such as whether they are focused only on new logo revenue or both new logo and expansion revenue—and assigned segment, like whether they cover SMB, mid-market, enterprise, or strategic companies. Typically, each rep’s quota should be 5x-7x more than their all-in cash compensation. (1)
When setting quotas, you should also forecast expected attainment against these quotas. Only 60-70% of account executives achieve their quota on average, so you may need to over-assign quotas to get to your company-wide goal. Most companies over-assign quotas by 20-30% to ensure individual quotas align with the company-wide revenue plan. (1)
4) Tie performance against these goals to compensation
Once you have specific goals against the metrics you want to incentivize, you can tie a rep’s performance against these metrics to their cash compensation.
The portion of cash compensation tied to performance is called variable compensation, and variable compensation plus base salary equals a sales rep’s all-in cash compensation, or “on-target earnings” (OTE). The idea is that if a sales rep achieves or exceeds their goals, they are “on-target” and should be taking home all or more of their OTE.
Of all individual contributors on a sales team, account executives typically have the highest portion of their cash compensation tied to performance. AEs have a median of 50% variable compensation, account managers have 40-45%, SDRs have 30-40%, and sales engineers and solutions consultants have 20-25%. (1)
The mix of variable versus fixed (i.e., base) cash compensation for account executives varies primarily by the segment of the market they are focused on selling into. Most SaaS companies segment their AEs by customer size: small-medium sized business (SMB), mid-market, enterprise, and strategic. Total on-target earnings for AEs range from $150K with a smaller portion of variable for those in the SMB segment to $350K with a larger portion of variable for those in the strategic segment.
There are multiple ways to tie performance against goals to a rep’s variable compensation. A commission-based variable is the most common, in which reps earn their variable compensation by receiving a portion of the revenue they’re bringing in. Of SaaS companies, 89% pay AEs commissions on new logo revenue, 76% pay commissions on customer expansion revenue, 53% pay commissions on services revenue, and 28% pay commissions on renewal revenue. (1)
Companies allocate different commission rates (percent of the deal paid to the sales rep) for different types of revenue depending on what they want to incentivize. New logo and customer expansion revenue are usually valued the highest, with a median 10% commission rates, while services and flat renewal revenue have medians of 4-5% commission rates. (1)
While most account executives earn their variable compensation through commissions, alternatives exist. Sometimes variable compensation will be tied to a sales performance incentive fund (SPIF), which is basically “all or nothing” cash tied to a goal—usually a sales contest. For example, you could have a one-metric plan where AEs make commissions for the ARR they bring in, but a SPIF where the sales rep with the most logos or best customer retention receives a cash bonus.
Another alternative to commission-based compensation is a commitment-based plan that is more aligned with a “management by objectives” (MBO) approach. MBO sales incentive plans can be common at very early-stage companies that are hiring their first sales reps, as it can be challenging to come up with specific revenue targets and quotas. This also holds true for companies expanding into new markets or rolling out brand new products. Sometimes these companies start with MBOs—for example, ten new logos in the first year, one Fortune 500 customer, etc.—as they prove out and iterate on their go-to-market motion.
Many companies monitor the effectiveness of their sales incentive programs and refine their compensation plans by looking at leverage ratios. Leverage ratios calculate the multiple of variable compensation achieved by a rep (leverage ratio = actual variable earnings / target variable earnings). Most companies report their top-performing sales reps should be making ~2x their variable compensation target—this is even higher for early-stage companies at 2.25x. If your top performers are over or under this target, you may need to adjust your goals and/or compensation targets. (1)
In upcoming chapters of our Go-to-Market series, we will share research related to GTM organizational structures, roles and responsibilities, sales enablement, GTM reporting, and more. Sign up for our mailing list here for additional insights and upcoming research.
Published:
August 28, 2023
