Back in the day, premium comp for some software sales execs made simple and easy sense. Traditional software had 90% gross margins, and the classic enterprise sales reps, the best ones, could close a million or more dollars a year. Paying them 20% all-in on what they closed was easy, a 5:1 ratio ratio. Close a million, make $200k. Close two million, make $400k. More or less.
So things got a bit broken with SaaS sales exec comp in the run up until 2020, and then it got really broken in the crazy times of late 2020 and 2021. When VC rounds exploded in size, and multiple unicorns were born a day.
Everything just diverged from economics that really made sense:
- Fintech companies and pseudo SaaS companies with low gross margins stiill had to pay the same or similar commissions as high margin SaaS companies to stay competitive. This wrecks the unit economics. SaaS companies and fintechs and pseudo-SaaS companies could end up paying out the entire year’s margin in a commission check.
- General competition for AEs drove OTEs up about 20%. Not a bad thing per se, but it also puts a lot of pressure on business models. But where does that 20% magically come from? Either higher quotas, lower attainment, or for now, more venture capital.
- Folks that increased quotas to compensate for sales comp inflation and lower margins ended up in many cases with low attainment. No one is happy. Many SaaS companies just agreed to higher OTEs, and packed them with higher quotas as well. Net comp didn’t go up all that much, but more AEs missed quota, were stressed, and a spiral ensues.
- Startups that just accepted compressed ROI on sales commissions ended up pretty stressed in 2022. If sales reps ended up costing 35%-40% of what they closed, all-in, instead of 20%, that might have been OK after a big unicorn round. For a little while. But eventually, the math has to pencil out. A sales comp plan where 35%+ of the deal goes to sales can drive your burn rate up dramatically. Truly dramatically.
Ultimately, so much AE and SDR comp math from the 2019-2021 era just doesn’t end making sense once there’s a bit less venture capital in the system.
- In the end, low gross margin startiups can’t pay as much per deal as higher margin ones.
- And in the end, sales reps really can’t take home much more than 25% of the ACVs they close. For a little while it’s OK. But it all breaks at scale much higher than that.
- Sales reps can jump from gig to gig if they want, but they will succeed the most where they understand the profitability of their sales comp plans. At least, try to understand the mechanics here, and how the company makes margin and money.
- Sales reps should be wary of comp plans that look too good to be true. Do your diligence, and find a place you can hit 100%+ of quota, feel good, and close at least 3x-4x of what you take home.
It’s a slow reckoning in some cases. Growth-at-all-costs combined with a lot of venture capital can create some crazy sales comp plans and incentives — for a while.
But the reckoning sort of has to come. You seeing plenty of it in industries under some pressure.
Sales reps that want to make more, ultimately have to close more. At least, unless there is a ton of venture capital funding the gap. And even there, it doesn’t last. Everyone, eventually, has to get to better margins and then cash flow positive.
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Jason Lemkin, Khareem Sudlow
