Simplifying Sales Compensation
A Beginners Guide for Startup Founders
Imagine you're about to hire your first sales rep. You've got the perfect candidate lined up, they're excited about your product, and then they ask the inevitable question: "What's the compensation structure?"
Suddenly you're sweating. You've mastered your product roadmap, you've pitched to investors successfully, but figuring out how to pay salespeople? That's a whole new language.
Let's break down this complex topic into something actually useful for you as a first-time founder.
The Secret Sauce of Sales Compensation
Here's a truth bomb: How you structure your sales compensation doesn't just affect your budget—it shapes your entire sales culture. Get it right, and you'll have a motivated team bringing in quality customers. Get it wrong, and you might find yourself with high turnover and bad-fit clients that churn quickly.
When to Hire Your First Sales Person
DEFINITION: Founder Saturation Point - That moment when you're drowning in sales calls and your product development is suffering because of it.
Don't rush to hire sales people. Wait until you (the founders) can no longer handle the sales pipeline yourselves. By this point, you'll have crucial data about:
How realistic your sales targets are
What a reasonable pipeline looks like
This gives you the foundation for setting compensation that's both motivating and sustainable.
The Magic 5X Formula
DEFINITION: OTE (On-Target Earnings) - The total compensation a salesperson can expect when they hit 100% of their quota. That includes both their base salary and any commissions.
Here's the golden rule: A salesperson should bring in at least 5X their total compensation in revenue. For example, If you pay someone $100,000 OTE (base + commission), they should generate at least $500,000 in sales.
This isn’t a one size fits all rule, though. For SMB deals, the multiplier might be closer to 4X. And if you're selling big enterprise contracts, you should expect at least 6X or higher.
Test Your Knowledge: The Complex Cases Quiz
Before we dive deeper, let's see if you can solve some real-world compensation challenges. These scenarios will test your understanding and prepare you for the complexities you might face:
Scenario 1: The Long Sales Cycle
Your enterprise SaaS product has a 9-month sales cycle. Your sales rep has been nurturing deals for 6 months but hasn't closed anything yet. How do you compensate them fairly while maintaining motivation?
Scenario 2: The Expansion Revenue Challenge
Your product has significant expansion potential after initial purchase. You want to incentivize sales reps to not just land deals but also set them up for future expansion.
Scenario 3: The Multi-Player Sale
Your sales process involves multiple team members: SDRs who generate leads, AEs who close deals, and CSMs who implement and expand accounts. How do you split commissions?
Scenario 4: The Seasonal Business
Your business is highly seasonal, with 60% of revenue coming in Q4. How do you structure compensation to maintain consistent performance and retain sales talent year-round?
Scenario 5: The New Market Entry
You're entering a completely new geographic market where your product is unknown. The first sales hire will need to build presence from scratch.
(We'll reveal our recommended approaches to these scenarios at the end of this article!)
Splitting the Paycheck: Base vs. Variable
DEFINITION: Base-Variable Split - How you divide total compensation between guaranteed salary and performance-based pay.
The Base Salary, should be comfortable enough for the sales person to cover their living expenses in the location. While the Variable is the one incentivising great sales performance.
This split isn't fixed and tends to shift depending on where your company is in its journey. Early-stage startups often offer a higher base because it takes time to build pipeline. As things mature and the sales process becomes more repeatable, the variable can play a bigger role.
Think of this like the ratio of vegetables to dessert on your plate:
Setting Commission Rates
DEFINITION: Commission Rate - The percentage of revenue a salesperson earns from each deal.
Two common approaches:
From Dollar One: Pay commission on all sales
Post-threshold – You set a baseline quota of the person’s base salary, and once they hit that, they start earning higher commissions. This motivates the sales rep to push past the threshold. And from the company’s side, you’ve already made back the cost of their fixed salary by that point, so everything after is upside.
Pro tip: NEVER cap commissions! That's like telling someone to stop making you money. 🤦♂️
The Payout Timeline
DEFINITION: Commission Deployment - When and how you actually pay the commissions earned.
Most startups pay commissions quarterly after the customer pays their invoice.
Example:
Customer signs $12,000/year deal (billed monthly at $1,000)
Each quarter, $3,000 is realized
Commission is calculated and paid on that $3,000 quarterly
This approach:
Protects your cash flow
Keeps sales people focused on quality deals
Reduces turnover since reps see consistent payouts
Motivates reps to find customers less likely to churn
The Sales Comp Cheat Sheet
Wait until founders can't handle sales anymore
Set quota at 5X the total compensation
Start with 60/40 or 70/30 base/variable split
Pay commissions on actual revenue collected
Never cap commissions
Remember: Your compensation plan isn't just about paying people—it's a strategic tool to drive the right sales behaviors and outcomes. The right plan motivates your team to find high-quality customers who will stick around and grow with you.
Quiz Answers: Handling Complex Cases
Here are recommended approaches to the scenarios we presented earlier:
Scenario 1: The Long Sales Cycle
Answer: Implement milestone-based bonuses throughout the sales cycle
Why? This keeps motivation high during lengthy sales processes by rewarding progress, not just closed deals. Examples include bonuses for first meetings with C-level, completed proof-of-concepts, or signed LOIs.
Scenario 2: The Expansion Revenue Challenge
Answer: Pay normal commission on initial deal and reduced commission on expansion
Why? This incentivizes both landing new clients and setting them up for growth. The salesperson gets immediate reward for the initial sale but stays invested in the customer's success.
Scenario 3: The Multi-Player Sale
Answer: Tiered commission structure with different percentages for each role
Why? This clearly defines responsibilities while acknowledging each contributor's role in the customer journey. For example, SDRs might get 10% of commission, AEs 70%, and CSMs 20% on first-year expansions.
Scenario 4: The Seasonal Business
Answer: Quarterly quotas that reflect seasonal differences
Why? This acknowledges business reality while maintaining consistent performance standards. Q4 quota might be 60% of annual targets, while other quarters share the remaining 40%.
Scenario 5: The New Market Entry
Answer: 80/20 base-to-variable ratio for year one, moving to 60/40 in year two
Why? This provides security while the market develops but creates a path toward standard compensation as the territory matures.
If all this still feels overwhelming, remember: even experienced founders revisit and adjust their sales compensation regularly.
The goal is progress, not perfection!