CEOs, CFOs and CROs are usually very involved in determining the on-target earnings (OTE) for the Sales leader role and they understand that the size of the Sales team matters. In addition to size OTE is driven by competition for top talent and then augmented by the skillful negotiating by the candidates themselves. The size and maturity of the hiring organization plays a role in these decisions but at least there are benchmarks (The Bridge Group, Radford, etc.) against which the “final answer” can be compared. Executive management is not flying blind.
But size also matters in over quota commission rate acceleration for Sales leaders. Is it reasonable to apply the same Base Commission Rate (BCR) multiples available to their team? No, acceleration for Sales leaders is dramatically different than for individual contributors.
I have yet to meet a successful sales manager who takes a leadership role expecting to only earn their OTE. They do everything they can to figure out a way to exceed quota. Ignoring Dan Pink for a minute, that’s the whole reason for comp plan design to include commission rate acceleration above quota! Equity is great long term but cash is king in the current quarter.
When modeling commission plans for Individual Contributors (ICs) I use some version of this Excel model, customized for the specific components deemed by the organization to motivate sales behavior. The CRO or VP of Sales usually has a target in mind that his team members should achieve for some given percentage over quota. For example, if an IC achieves 150% of quota, the CRO could request a plan that will double the ICs variable payout. The CRO wisely wants to plant the seeds of success in the minds of their team. It is often a mental game that offers large rewards when everyone believes it is possible to over achieve.
But will everyone over achieve quota? That’s highly unlikely. ICs vary in skill, experience and drive. So where does that leave the CRO on the spectrum of success for over achievement? If this isn’t adequately addressed by the organization, then the CRO will leave and is likely to take with them the most effective members of the sales team.
There are many design levers that could pay the CRO a competitive commission for quota over attainment. I believe a simple approach is always better so the two levers I use are the BCR multiplier and the range of over achievement to which the accelerated commission rate (ACR) is applied. Correctly determining these two variables should reflect the degree of difficulty facing the CRO to over achieve and that is where size matters.
A CRO managing an organization of 100 ICs has a more difficult task over achieving quota by 20% than a CRO managing ten ICs. There is usually a relationship between the size of the organization and its potential for over achievement. This could be quantified using stochastic analysis of the population of ICs but is probably more intuitive when examined from the perspective of booked revenue. For example, an inside sales organization having 100 ICs might have a quota of $80M rolled up to the CRO versus an organization of 10 which might roll up a quota of $7M. The effect of a $1M variance on the larger organization is only 1.25% of sales while the effect on the smaller organization is about 14.3%.
How do we translate this variability to equitably compensate the CROs of either organization?
I solve this by asking the same question of the CEO that was asked of the CRO to determine the BCR accelerators for AEs, “What should the CRO earn if they deliver 110% of their quota?” Wherever that bright line of over achievement in the mind of the CEO is, be it 5%, 10% or 15%, that’s where the second inflection point for the CRO’s comp plan should be placed. The accelerated commission rate that gets the CRO to the proposed payout for that over achievement is determined by this formula: (Target Variable – Annual Variable) / [(Inflection Point2 – 100%) x Quota]. The accelerated commission rate could be huge compared to their BCR. BCR multiples of 5X to 10X are common for CRO over attainment.
What happens after that second inflection point is reached? The rule of open ended acceleration that should be applied to ICs is usually not appropriate for the CRO. If the CRO were to achieve over the inflection point their compensation could be excessive since the accelerated commission rate can be so large. Consequently, you should use a smaller multiplier for any attainment beyond the inflection. They should continue to earn commissions at a rate at least as large as their BCR. This concept is more clearly represented in the above chart.
The method I describe above has worked successfully at numerous software companies but I’m sure is one of many options. How have you handled over quota commissions for your CRO or VP of Sales? Please comment below with your ideas or questions.