This post will explain how sales plans (aka sales compensation plans, or sales commission plans) work by breaking down some key terminology, and sharing some of my personal experiences to help contextualize that knowledge to help you as you embark in your sales career.
How IBM Approaches Sales Plans
IBM has one of the longest running tech sales organizations in the world, so starting here is a good baseline for industry terminology.
Imagine you heard the statement “Your sales plan will be an individual quota plan, $100K OTE, 50/50 split, uncapped commissions, with a quota of $1mil ACV. Your first quarter will be a ramp quarter, where you will be paid as if you met your quota.”
Confused by all the terms? We’ll break it down below.
Firstly, all sales reps are either on a Team Quota Plan (TQP) or Individual Quota Plan (IQP). For example, Sales Engineers are often on TQP and Account Executives are on IQP. This decision is made based on how much you have a direct impact on revenue, and how much teamwork is involved in the deals. I started at IBM as a Sales Engineer (also known as Technical Sales Specialist) and moved to an Account Executive role, so I’ve experienced both.
Secondly, all sales reps have base/variable split that makes up their OTE. I started at IBM as a Sales Engineer, so I was on a TQP with a 80/20 base/variable split. What that means is that if my OTE was $100K, my base salary was 80% of that ($80K) and my variable salary was ($20K). If I met my quota, I would make $100K (also known as On Target Earnings or OTE). If for some reason I completely missed my quota, I would earn $80K and $0 commissions. From there, I moved to an AE role and had a 70/30 split. When I worked in door-to-door sales at Vivint, I was 100% commission, can you believe it?
Thirdly, all sales reps have a quota related to a metric and a time period For example, at IBM my annual quota was $700K revenue in annual contract value (ACV). When I was at Shopify selling Shopify Capital Loans, my quota was around $1mil in loans disbursed to businesses, per month. Generally speaking, reps find monthly quotas more stressful than quarterly ones, or annual ones, because very tight performance management can feel micromanagey.
Fourthly, all sales reps have limitations for a training period and for overperformance. At IBM, for the first 12 months, I was on a “protected quota”, meaning that they would measure my performance, but even if I missed it, I would still get my full variable compensation for that time period. When I was at Shopify on a TQP, we achieved 150% of our target, and we had an accelerator meaning that the 50% commission was doubled to 2x, so it was paid out as if we hit 200% of our target.
To summarize, the next time you have a sales interview, the above serve as useful questions to help understand what your sales compensation would be like. The following questions are very common to ask and will showcase your industry knowledge: “What type of sales plan will I be on? What is my measurement? What is the base/variable split?”
Side story: When I was at IBM, they changed my sales plan from 70/30 to a 55/45 split, while maintaining the same OTE. Do you think this was positive news for me or negative news?
If you guessed negative news, you are right! A higher base salary is always preferable if your OTE is the same. A bird in the hand is worth two in the bush. More risk should be balanced with more reward.
Now that you understand how a sales plan is structured, let’s talk about industry standard.
How B2B SaaS Companies Are Able to Offer OTEs as high as $350k
I personally have friends in B2B SaaS Sales that have OTEs in the 300’s. Here are public examples on Repvue. I will explain how this works.
B2B SaaS companies have very high profit margins, usually up to 80%. Therefore, they can afford to pay salespeople up 20% of revenue generated from a sale.
For example, imagine a sales rep signs a contract with a law firm to acquire a subscription license for $1000/year.
Year 1: DocuSign brings in $1000 of revenue with $200 being COGS. Of the $800 profit, $200 goes to the sales rep as commission
Year 2: DocuSign has recurring annual revenue of $1000 since its a subscription, and they don’t need ot pay the salesperson commission, since they’re only compensated on new business, not existing business.
Understanding how a business operates, we can then generate this “Magic Formula”.
Magic Formula: A Sales Rep’s Quota Should Be 5X Their OTE.
Let’s apply this formula into some real life examples.
A Junior Account Executive at Shopify will have a $100K OTE, on a 70/30 plan. $70K base, $30K commission with a $500K ACV quota.
A Mid-Market Account Executive at Oracle will have a $200K OTE, on a 50/50 plan. $100K base, $100 commission with a $1mil ACV quota.
This formula was validated from this research report from the Bridge Group Inc, who interviewed different 300 SaaS companies.
Do note that for non-SaaS companies, this formula may look very different because the margins are not as high.
Applications Of This Knowledge
If you ask a SaaS AE what their quota is, you can likely calculate what their salary is
If you are negotiating a salary and they give you a quota that is more than 5X your OTE, unless there are business specific reasons e.g. the product is a market leader and super easy to sell, you might be unfairly compensated for the difficulty of the role.
To gather enough skills to become qualified to get a full sales-cycle role at at B2B SaaS company, I would say it takes 1-2 years post graduation.
But once you have those skills, you can pretty much go to any SaaS company (anything on the Forbes Cloud 50 list) and get a salary package like the one above
The below post can provide an even more in-depth analysis.