Startups: This is how you design a winning sales commission structure
If you're faced with the challenge of developing a commission structure for your first sales hire as a startup, there are two very different ways you can go about it.
The collaborative way
You're looking for someone with whom you can collaboratively create a sales commission structure.
"I don't know the right way to do this, but I want to find out together with you.
I will pay you a base salary for the first couple of months while we develop the commission plan.
If you want maximum money, go to a more established company that has everything in place already. If you want maximum learning and growth, join us as you'll work directly with me (one of the founders or senior hires at the startup).
We'll have to create this sales commission plan not just for you, but for every future sales rep as well. So this won't be an easy job."
Find someone truly excited about tackling this challenge, and then get to work together. Or go in the opposite direction.
The fake it till you make it way
Pretend to know what you're doing. Present your first sales hires with a commission structure that's based on the results you want: wishful thinking.
What if they don't deliver these numbers?
You let them go, lower your expectations, adjust your commission structure and then hire new people.
Why can't you keep the same reps? Why do you have to fire them? Because they will be (rightfully) upset if you gave them a flawed commission structure.
They won't trust you and won't feel excited about working for you anymore. So bring in new people and start from scratch with them—this time with a more achievable commission structure. Download your free sales hiring checklist to make the process easier.
Which way should you choose? That depends on your personality and the kind of company you want to run. Both are viable, both work, and more importantly both will get you going immediately.
One of the biggest mistakes I've seen founders make is to wait way too long to figure out "the perfect commission structure" before hiring salespeople.
There is no such thing as getting the commission structure right the first time around. This, just like everything else in a startup, will be about trial and error. Success will be achieved by moving and learning fast and course-correcting rather than thinking your way to perfect solutions and getting it right with the first execution.
We know founders that have been waiting for over two years before hiring much needed salespeople because they had analysis paralysis about the "right compensation structure". Don't be one of those startups!
Crunching the numbers
Once you have decided which way to go, you'll need to think about the actual numbers. How do you best incentivize sales reps? How do you align their interests with your business' interests? There's a delicate balance to it: you want them to be aggressive enough to pursue deals with determination, but you don't want them to close bad deals.
Coming up with the right commission plan is a difficult and complex task. Here's another post you can check out on the topic: An Initial Sales Rep Compensation Plan.
Real-life case study
A friend of mine got hired as the head of sales and business development at a cool startup.
He was about to hire the first salesperson, and needed to come up with a commission structure.
Their product costs several hundred dollars a month. His idea was to pay out $100 every month for the sales rep who brought in the deal for the first 12 months.
He asked, "What do you think? Is that a good idea?"
I told him to not spread things out so much. Instead, pay upfront, but pay a little less.
Rather than paying out $1,200 over the course of 12 months, he could pay $600 after three months.
What's the advantage in structuring things like this?
It will keep the sales rep motivated. If a sales rep knows he'll still get commissions for the deals closed six months ago, he might become complacent. You want your sales reps hungry.
Is this the perfect commission structure for his business? I doubt so. But it's a decent way to get started.
But what about churn? Expansion revenue? I know there are a lot of details that need to be fine-tuned to design a compensation plan that will fuel and scale your sales efforts. I don't want to suggest that it's easy at all.
Just like it's impossible to hit product/market fit without having your product hit the market, you won't get compensation/salesperson (and sales model) fit without having salespeople perform under your compensation plan highlighting the strengths and weaknesses of it.
Still feel like you need more help? Book a free sales office hour with me and we'll chat in more depth about your startup compensation structure. :)