Many startups begin with a founder that spends part-time on the idea while still having a paying job. Another common approach is to secure a small amount of funding via “friends and family” or even to self-fund with personal savings. These super-lean methods of starting can be great for focus during the early validation stage but once the idea is proven and more resources are needed, how does the startup go about hiring the first employees with zero/little cash in the bank and not enough revenue to self-fund? The answer probably lies in equity but it’s not as easy as some think. In this article I will explore the various nuances and give some specific examples and recommendations.
I can’t tell you how many startups go through the effort to think through the best method to compensate their sales team but don’t take the next step to document it so that it can be clearly communicated. Deciding about the metric(s) on which to pay the sales team and the right split of base compensation versus sales commission is absolutely fundamental to any sales compensation plan. But that’s not enough.
In the spirit of keeping a sales commission plan simple, many business owners or sales executives choose to use a simple straight-line methodology. In other words, 88% achievement of the sales goal equates to 88% commission payout when compared to the “at plan” amount. Seems fair, right? It’s definitely simple. But it leaves out features and upside leverage that many sales reps and sales managers seek. Let’s explore further by introducing two variants to the straight-line sales commission methodology. I’ve also included a sales commission calculator for both.
Compensating a sales team is a tricky and sensitive endeavor that requires a lot of advanced planning. I previously wrote about my 5 Golden Rules of Sales Compensation. But even if you follow those rules you’ll need to decide about the underlying structure of the sales commission plan. And while there are numerous ways to compensate a sales team, most of them fall into two categories: absolute or relative. This article will explain the fundamental differences between these two methods to help you decide which is best to use for your sales team.
Certain roles in the company call for a bonus as part of the total compensation plan. But what criteria should be used for determining the bonus payout? Common choices include company-level, department-level, individual or some combination of these. These are different from sales commission plans (see related article titled “5 Golden Rules for Setting Sales Compensation Plans“) and are commonly called Management By Objectives (MBOs). The original concept of the MBO was introduced by Peter Drucker decades ago. And although the way MBO bonus plans are administered has evolved over time, it is still is an important part of many management systems today. This article will explain the basic components of an MBO bonus plan and some tips for administering them. I’ve also included an MBO template for you to use.
How much equity should you give an advisor? Should the shares carry any special provisions like anti-dilution or change-of-control acceleration? What about giving the advisor cash compensation? Tough questions for a startup founding team that’s doing it for the first time and faced with an advisor they desperately want to bring on board (see related article titled “Selecting an Advisor”).
The short answer is there is no universally-agreed market rate for advisors. And if you want a superstar, you’ll need to pay whatever they demand or be forced to go with one of your other options. But I realize that doesn’t give any guidance so for purposes of this article let’s take superstar advisors out of the equation and just deal with “normal” scenarios.
Sales incentive plans are really delicate things. This stems from the fact that the best sales reps/managers intuitively do whatever puts the most money in their pocket. They do so assuming the company has put a lot of thought into how they are incentivized and, therefore, whatever pays them the most surely is good for the company too. Because of this, don’t expect a sales rep to read your mind.
Never break these rules when setting commission plans for your sales team.
Within legal and ethical limits, a good sales rep should do whatever puts the most money in their pocket and it’s up to the company to make sure their associated actions and behavior are consistent with the company strategy. But this is sometimes easier said than done. This article provides insights and suggestions for this dilemma and relates to one of my five golden rules of sales compensation.