Compensation Frameworks

❗Disclaimer: This overview is meant to be informational and should not be considered legal advice. Please work with your legal counsel before finalizing any policies.

Pay transparency has been a hot topic within HR circles for many years - how much should companies share around pay, and what are the implications of oversharing? Despite the ever-present debate, few companies have moved to have fully transparent compensation (i.e., Buffer ), with most companies opting for a much more opaque stance - each employee only has a lens into their individual pay.

What is Pay Transparency

Pay transparency refers to companies having clearly defined pay ranges for each role that are available to current and prospective employees. This transparency promotes pay equity, fairness, and for many companies, is a requirement for compliance in 2023.

The goal of pay transparency is to give employees an understanding of why they are paid within a specific range and what they need to do to reach the next step in their careers and salaries.

In addition to providing a clear overview of careers and salaries, pay transparency aims to:

Increase Pay Equity

According to the National Committee on Pay Equity, pay equity means that “the criteria employers use to set wages must be sex- and race-neutral.” One way to achieve that neutrality is to use a set salary formula or approach to pay across the company - relying less on salary negotiation and more on tightly defined levels.

Encourage Honest Discussion

When employees feel valued and properly compensated, they are more engaged, satisfied, and productive in their work. This trust also leads to more open and frequent career conversations between manager and employee and can reduce unforeseen attrition. Employees who work at more transparent companies will be less likely to leave an organization due to compensation misunderstandings. Companies interested in retaining their best employees should move toward more transparency.

Stages of Pay Transparency

Often, companies assume that transparency means they have to share a company-wide spreadsheet that details each employee’s salary. While that is an option, there are several more conservative stages of pay transparency a company can opt for when getting started.

For most companies, Stage 3 or 4 is the right place to start. Focus on communicating pay ranges to individual employees and train managers on the why behind the company’s pay structure.

Stage 1: Individual Pay

Employees only know what they are being paid and have no insight into why or where their salary falls amongst the broader employee landscape. This approach is not recommended. It can create a lot of confusion and frustration for employees AND hiring managers who might need to explain salaries to potential hires.

Stage 2: Market Data

Companies are able to explain how they have used market data to determine a specific employee or candidate’s pay. This tends to be the most common level for early-stage startups.

Stage 3: Pay Ranges for All Levels & Roles

Every role has a clearly defined pay range assigned by job level. Employees are able to access these levels and understand where their salary falls into the overall pay scale. *This does not mean full clarity into every employee’s specific pay.

→ This is the level of transparency required for compliance with new state transparency laws.

Stage 4: Company-Wide Philosophy

In addition to pay ranges, managers are able to explain the reasoning behind pay ranges and how/ why the company developed its pay philosophy.

Stage 5: Radical Transparency

All employees have granular information about everyone at the company's pay. While some companies have opted for this option (i.e., Buffer ), it's still fairly uncommon.

Pay Transparency Laws

Salary History Bans

There are currently 21 states that ban employers from requesting salary history information from job applicants. The laws are aimed at ending the cycle of pay discrimination. Some laws further prohibit employers from taking disciplinary action against employees who discuss pay with coworkers.

State-Specific Laws

Many states are enacting laws that require companies to include pay ranges (not equity/ stock options) in internal and external job postings. Here are some state-specific laws going into effect, with more likely to follow:

California (SB 1162 goes into effect 1/1/23)

• California was the first state to enact a pay transparency law. The current law requires employers to provide the position’s salary or hourly wage after an applicant has completed an initial interview.
• All California employers have at least some obligations under the law
• Effective January 1, 2023, employers must: provide the pay scale for a position to an applicant on reasonable request, provide an employee with the pay scale for their current position on request
• For employers with 15 or more employees: include the pay scale for a position in any job posting; and require third parties that announce, post, publish, or otherwise make known a job posting to include the pay scale in the posting
• All employers, regardless of size, in that employers must maintain job title and salary history for all employees during their employment and for three years thereafter
• Civil penalties ranging from $100 to $10,000
• Private right of action in civil court

Colorado

• Employers with at least one employee in Colorado
• Applies to work tied to Colorado locations; and remote work performable anywhere
• Employers must disclose, in each posting for each job opening, including opportunities for promotion: the hourly or salary compensation, or a range of the hourly or salary compensation, a general description of all benefits and other compensation to be offered to the hired candidate, including any bonuses commissions, or other forms of compensation; and all employment benefits, including health care and retirement benefits, paid time off, and any other benefits that must be reported for federal tax purposes (minor perks are excluded).
• Postings for promotions must also include the job title or position description and how employees can apply
• Employers must make "reasonable efforts" to announce, post, or otherwise make known all opportunities for promotion to all current employees on the same calendar day and before making a promotion decision
• Fines of between $500 and $10,000 for each violation (fines waived if postings are brought into compliance after the first violation)

New York City

• Employers with four or more employees, if at least one employee works in New York City
• Employers must include the good faith minimum and maximum annual salary or hourly wage in all advertisements for open jobs, promotions or transfer opportunities for jobs It does not apply to a job advertisement for positions that can or will be performed, at least in part, in New York City
• Employers are NOT required to disclose “other forms of compensation or benefits offered in connection with the advertised job,” such as bonuses, incentive compensation, stock or other benefits
• Employers also are NOT required by law to create an advertisement in order to hire or promote an employee
• The law allows for civil penalties of up to $125,000  
• The  first violation of the law is $0, so long as the employer cures the violation within 30 days of notice of a complaint

Washington

• Employers with 15 or more employees, if at least one employee is based in the State of Washington
• Applies to postings for remote work that could be performed by a Washington-based employee
• Effective January 1, 2023, law amended to require covered employers to: disclose in each job posting for each job opening the wage scale or salary range, a general description of all benefits and other compensation, provide employees offered an internal transfer or promotion the wage scale or salary range on request.
• Civil penalties in response to complaints, ranging from $500 for a first violation to $1,000 or 10% of damages (whichever is greater) for a repeat violation
• Actual damages, double statutory damages (or $5,000, whichever is greater), interest of 1% per month on compensation owed, payment for attorney’s fees and costs  
• Private right of action available

Connecticut / Maryland / Nevada / Ohio / New Jersey

• The specific language varies state-to-state, but generally requires employers to provide a salary range if the candidate requests it - applies to new hires, transfers, and promotions.

Building Your Pay Transparency Plan 

Determine the level of transparency best suited for your company

Review pay transparency requirements for your state and local area to determine the level of transparency best suited for your company. 

Align with the leadership team on key principles

Align as a leadership team on the principles you will use to make decisions on compensation. This will ensure that your pay practices are consistent with your company values and goals (e.g., we will meet twice a year to review compensation trends and align on our approach). 

Update internal and/or external pay ranges 

Update your internal and/or external pay ranges so that they align with your principles. If you have levels or roles that are outside of the range, don’t panic. Instead, try to understand the root cause of the difference and create a plan to move toward alignment. If you don’t have pay ranges, use market data, if applicable, and your own knowledge of key business needs to create them. 

Build a manager and employee communication plan 

To effectively communicate your pay practices, build a manager and employee communication plan. 

Employees: Include plain language explanations and opportunities for employees to ask questions. This might involve hosting informational sessions or creating a resource on your company’s intranet. Determine what works best for your team, and provide as much transparency as you are ready on principles, philosophy, and ranges. 

Managers: Provide key phrases and conversation starters to support them in critical moments of pay conversations like annual planning, performance reviews, and new hires. You can also empower them by creating sustainable FAQs and conversation prompts, and guides. 

Create a culture of trust and open dialogue

When developing these new principles, it’s critical to communicate that you may not know the answer to a question. Provide transparency where possible, but also use this as an opportunity to learn and grow. By creating a culture of trust, transparency, and open dialogue, you can set your company apart and foster engagement and retention.

Do’s and Dont’s for Pay Transparency Compliance 

Do

• Audit existing job postings to ensure 100% compliance
• Coordinate with recruiters and other employment agencies to confirm that they, too will align their practices to the new legal obligations
• Maintain relevant records, including copies of all job postings
• Consider conducting a privileged & confidential equal pay audit to assess possible pay disparities based on sex or race/ethnicity
• Monitor for further developments as the pay transparency trend continues 
• Train managers about how to address pay with employees

Don’t

• Post broad pay ranges without providing more context for the wide range (e.g., $100,000 to $200,000, depending on geographic location, educational credentials, etc.)
• Forget to include favorable language in job posts about other forms of available compensation (e.g., bonus, deferred comp, stock options, health benefits, gym memberships, etc.)
• Forget including salary information on postings for interns
• Tell employees that they cannot or should not discuss their pay with other employees

FAQs

When do the pay transparency laws go into effect?

Colorado’s law is already in effect. New York goes into effect on November 1, 2022. California’s new law goes into effect on January 1, 2023, so you must proactively develop a plan to comply with publishing pay ranges in job postings as soon as possible!

We have the ability to hire remotely from any state. Do these laws apply to me?

If you have any employees in Colorado or New York, you must comply with the laws in those states. California’s law does not specifically address remote roles, but further clarification on this is likely coming.

For California, so long as you have 15+ employees, companies based out-of-state and hiring for jobs to be done in California will be required to disclose pay ranges.

Can I avoid these pay transparency laws by adding language into my job descriptions that we will not hire from certain states (ex., Excluding candidates in CO and NY)?

No. After the Colorado law passed, and remote companies started putting language into their offers that Colorado applicants weren’t allowed, the states came out with a clarification that companies that state they will hire remotely anywhere in the US cannot exclude certain states and that language must be removed. If you have the ability to hire in states such as Colorado, New York, and California, you will need to add pay ranges to all US job descriptions listed as “remote” that do not require the role to be physically present in another state.

What should we expect once pay ranges are posted in job descriptions?

Once pay ranges are published, employees will be able to see pay ranges for all posted jobs. If employees are working within those jobs, they will see whether they are on the low, middle, or high end of the range or if their compensation is outside of the range. Employees could potentially see what their manager makes or other more senior positions.

Should we share pay ranges for roles being hired outside of the US?

Likely no. Pay transparency expectations vary country by country, so it’s best to get into compliance first in the US and wait until pay transparency laws come into play in other countries. You can share pay ranges with existing internal employees who ask, but you don’t have to. Continue to monitor global trends to decide how your approach to global pay transparency evolves over time.

Where should the pay range be displayed?

Pay ranges should be posted within the text for all US-based roles as part of your standard role template. These pay ranges will appear in all places you find the job posted, including the career page, LinkedIn, and all other job boards.

How will this impact the way we recruit and hire candidates?

Pay transparency laws may call into question the way in which companies present compensation and negotiate offers. Some companies are choosing to be more strict about bringing in all new hires between the low-end and midpoint of the pay range upon entry, so they have room to grow within their role and stay in range. Ethena has gone public with the fact that they don’t negotiate salaries.

References:

• BuildIn article
• Cooley Alert: California’s Broad Pay Transparency Law Takes Effect Next Year
• Sidley Article: California Governor Signs Pay Transparency Law

The purpose of an equity grant refresh is to retain top-performing employees. As employees vest through their original equity grants, the financial incentive to stay at the company often decreases. Refresh grants can re-align long-term incentives and become a key lever in retention.

There are many ways to address refresh programs. The goal is to balance what is affordable for the company and attractive to the target employees.

Included below are the refresh grant best practices we've observed across many companies. To provide a data-driven perspective, we've included slides from Radford's 2022 Venture-Backed Equity Refresh Survey. They also have a fantastic writeup about equity grants here.

Determine If Now Is the Right Time

• Formal refresh grant programs are most common once product-market fit has been established.
• Pre-product market fit companies should consider spot grants for key employees instead of a structured program. Spot grants are typically given to early team members and follow the process outlined in the "Developing a Plan" section below.
• Most companies will begin to consider implementing a refresh program when they have several critical employees who are ~60% vested or when the company anticipates retention challenges.

Understanding Your Long-term Strategy & Growth Needs

• Equity is one of the most valuable and limited resources you have as a startup.
• Before deciding on a refresh strategy, map out your headcount growth, the equity requirements to achieve it, and the timeline before your next funding event.
• To develop a sustainable program, be aware of your available employee stock option plan (ESOP). Your existing ESOP needs to cover equity grants across all new hires, promotions, and refreshes.
• Create or review the hiring plan needed to achieve critical milestones through the next funding round. Each hire, in particular executives, decreases the available option pool. A poorly planned refresh program can impact the equity needed to hire new employees.
• Once you know what percentage of the option pool you have available, decide which employees are eligible (see ‘Developing a Plan’ below). Providing small grants to many employees will have less of an impact than meaningful grants to a few top performers.
• Review the proposed plan with your board and compensation committee. Boards have seen many refresh grant models and can provide important feedback.

Identify Ways to Address Retention Outside of Compensation

• Compensation increases and equity grants should not be the only tools in your retention toolkit. While some employees prioritize compensation, others might value promotions, the opportunity to manage a team, new projects, etc.
• Building a culture of regular 1:1s and high-quality performance reviews is the most effective way to align retention efforts with individual employee goals.

Developing a Plan

Eligibility

• The most common triggers for eligibility are tenure and performance. While past performance is important, always consider an employee's future impact when defining your criteria.
• Typically, only the top 50% of employees meeting or exceeding expectations are eligible.
• Employees who have 60% of their total equity grant vested are potential risks for leaving. We recommend evaluating employees for eligibility on their 2 year anniversary.
• Important: Not all employees should receive a refresh. Avoid the peanut butter approach - giving a small amount of equity to all employees. In the end, this will spread the grants resources too thin and dilute their impact.

Grant Size

• Grants should be calculated based on a percentage of the employee’s replacement cost today, i.e. as if they were hired today.
• Grant size may change based on the number of eligible employees and the total amount of equity allocated for refresh grants. It is common to reward employees differently depending on performance and impact. Percentages range from 10-60% with many companies targeting an average of 25% of the new hire grant for eligible employees.
• High performers, typically 10-15% of employees, may receive a larger refresh grant. Ex. 1.5x the standard grant size

💡 Example Grant Scenario:

• Sarah is a software engineer and a top performer who is 50% vested and eligible for a refresh grant.
• Initial hiring grant: 1,000 shares
• Replacement cost if hired today: 100 shares
• Refresh grant (replacement cost x 0.25): 25 shares‍
• Note: The original grant is not used in calculating the refresh grant.

Vesting Schedule

• Refresh grants typically vest over 4 years, similar to new hire grants.
• The majority of companies include a 1-year cliff: 25% vesting in the first year, followed by monthly vesting.
• While removing the 1-year cliff for refresh grants is less common, it is more employee-friendly.

Implementing the Program

Evaluate Refresh Grants Regularly

• Decide if refreshes will be tied to performance review cycles or based on individual employee vesting.
• Evaluate eligibility regularly, at minimum 1x per year. Many companies use their annual or bi-annual performance cycle as a trigger.

Develop a Communication Plan

• Don't assume employees will automatically understand the potential financial impact of a refresh grant.
• Develop a script for managers to explain refresh grants to employees - why they are receiving it, the potential value, vesting schedules, etc.
• Even well-crafted programs fail to impact retention without a supporting "value" message. We recommend using the expected exit value to communicate the potential financial impact. See our post on a recommended Offer Process [link] for a detailed description on identifying motivators.
• Equally as important, develop a script for employees who are not receiving a refresh. If employees ask, managers should be able to defend the program.

Equity Refresh Data

Lightspeed Equity Refresh Survey

In 2021, Lightspeed ran an equity refresh survey some of our portfolio companies. Results can be found here.

Radford's Refresh Survey

*Radford AON 2022 Venture-Backed Equity Refresh Survey

There are an endless number of compensation tools & data sets on the market. While the most common are Radford, Carta, Pave (formerly OptionImpact), and OpenComp, there are a number of other options to suit every company’s needs and price point. Below are some tools to check out.

• Carta Total Comp — total compensation management, in addition to their core equity management platform
• Pave, Pequity, Complete, or Agora — compensation planning, management, total rewards statements, visual offer letters, and benchmarking
• Figures - start-up & scale-up salaries for Europe. Figures provides compensation benchmarks, gender equality audits, and gives further insights so you can make qualitative & informed decisions about your compensation.
• Kamsa — software providing real-time global market data and resources for job leveling and compensation planning; has some international data
• Lattice Compensation — leading performance management platform, which also covers goal setting, engagement, compensation, leveling, competencies, and career paths
• OpenComp — compensation intelligence platform
• Syndio — helps companies measure, achieve, and sustain workplace pay equity
• More Traditional / Public Company Data Sources
• Radford (AON) — most widely used global database for private and public company data; has the most robust set of international data; takes a considerable time commitment to participate and an analyst is needed to interpret data; data is often lagging in-the-moment market trends versus more modern solutions
• Compensia - most relevant for executive level compensation
• Payscale — employer and employee reported salary data
• Willis Towers Watson — similar to Radford, but includes far more public company data

Carta Total Comp

Carta Total Comp provides you with a large equity dataset and powerful HR integrations to help you make better compensation decisions faster. With every customer integrated through their HRIS system, Carta rich dataset is improved in live time.

• Benchmark: Make compensation recommendations that keep you competitive using the most reliable private company data. Carta uses aggregated employee data to inform the equity and salary benchmarks in CTC.
• Communicate: Carta’s Total Compensation Scorecard gives company administrators direct insight into the compensation of their employees against the compensation strategy defined in their compensation philosophy. The Scorecard leverages the power of Carta Total Compensation’s benchmarking data to evaluate a company’s compensation decisions.
• Plan: Plan allows an administrator to define the company’s compensation philosophy within Carta Total Compensation (CTC). Admins can set specific market targets for salary and equity to reflect the company’s labor market for talent, which can define an overall philosophy for the compensation program or setting specific targets for each job area.

Pave

Pave is a SaaS platform that allows you to plan, communicate, and benchmark your compensation in real-time, saving you time and improving the employee experience.

Free

• Benchmarking: Pave's Benchmarking tool provides customers with benchmarks for compensation. The product works on a give-to-get model which means that you must integrate your systems and provide Pave with your data in order to receive access to the benchmark data. This ensures that data is collected from the source of truth and that data will not be stale. Data is aggregated and anonymized before it is served to a user in production.

Paid

• Compensation planning: This product will eliminate your use of spreadsheets when running merit cycles. You will be able to make streamlined and intelligent compensation decisions using Pave's real-time market data, intuitive analytics tools, and merit cycle workflows. You will easily administer bonuses and equity refreshers during merit cycles with customizable recommendation and approval workflows.
• Total rewards & visual offer letter:  The Total Rewards portal gives employees a total compensation hub to visualize how salary, bonuses, benefits, and equity enhance their total compensation package. Visual Offer Letter is the same portal, except it is for candidates. Offers that are created within your ATS will populate within Pave. Recruiters will see their offers listed in Pave and be able to send those offers to their candidates via Pave.

‍

Figures

Figures offers reliable start-up & scale-up salaries for Europe. They provide compensation benchmarks, gender equality audits, and gives further insights so you can make qualitative & informed decisions about your compensation.

Key Features

• Access to detailed gender equality indicators for data-based gender pay gap audits.
• Risk analysis with areas of attention, for example, underpaid employees at risk of leaving.
• Unlimited access to the platform for your team: founders, executives, HR team, and managers, you can add anyone you want (with full or restricted access).
• Continuously new compensation data sets for Germany, France, the UK, The Netherlands, Scandinavia, Spain, Portugal and further European countries.

Products

• Real-time compensation market data from start-ups and scale-ups per role/level, filterable per company headcount, funding, industry, and further filter options.
• Dedicated company dashboard with an overview of your market positioning and an accurate salary grid for your planning.

This sales compensation guidance is specifically targeted for early-stage companies. For perspectives on comp plans for scaling sales teams, check out our interview with Hayden Stafford, President & CRO of Seismic, here.

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Sales comp should be tightly tied to your company and sales strategy. While there is no one size fits all model, a well-designed plan takes the overall company stage, size, product market fit, and goals into consideration. If any part of the puzzle is off, this can drastically affect sales compensation and a rep's ability to succeed. ‍

💡 Your sales team is the execution engine to get your product to market, treat them accordingly.‍

Tightly Tie Compensation to Company Goals

‍Articulate company goals and targets and align them with your compensation approach.

Reassess Goals Often and Consider Quarterly Quotas

When you are early on with product market fit or entering a new sales environment, goal reassessments and quarterly quotas allow for quick changes to the plans and will help maintain motivation and retention.

Update Your Strategy as You Grow

‍Sales plans should be reassessed regularly and will change as the company grows, sales processes mature, and more reps join the team.

Define Incentive Plan Participants

Clearly define the sales teams' roles and responsibilities and who qualifies to participate in a sales plan. Only employees whose responsibilities are clearly tied to persuading customers to move forward with a decision should be included in a sales compensation plan.

Account Executive

‍Responsible for obtaining customer commitment and closing business. In very early stage companies, this role may do everything sales related. In later stage companies, the AE's role will be supported by additional team members.

Lead Generation

‍Responsible for generating leads to pass along to the AEs. This includes outbound (cold calling) and/or inbound (waiting for phone call/email contact) leads. Acronyms often used: BDR, LDR, SDR, OBR.

Sales Engineer

‍Responsible for assisting AE with technical aspects of sales. Work with the prospect’s technical team to secure a ‘technical win'. Also called a Solutions Engineer or Pre-Sales Engineer.

Building a Plan

A well-designed compensation plan motivates and incentivizes employees to do their best, is transparent and fair — clearly communicating to all sales teams how incentives are earned — and evolves as the business grows and changes.

Define Your Compensation Mix

• ‍Align the Mix to Influence & Responsibilities: The mix of variable vs. base salary should be aligned with role responsibilities. How much does your role influence the customer's decision?‍
• At-Risk Plans Are the Norm: “At-Risk” (achievement of quota dictates compensation) plans are the common framework for sales comp strategies, and the mix will vary based on roles and responsibilities.‍
• Reserve Aggressive At-Risk Plans for Sellers: While "At-Risk" plans are the norm, it's important to distinguish between Aggressive At-Risk plans and. Conservative At-Risk plans. Aggressive plans place a high percentage of total comp on variable incentives. These aggressive plans should only be used with employees who are directly responsible for persuading and closing new customers. ‍
• Equity Should Not be Variable: Equity is typically determined at the company and role level and should not be defined as a variable part of sales compensation plans.‍
• Pay Mix Will Evolve Over Time: Your ideal pay mix will depend on your stage of company and will evolve over time (ex., all AE’s at Box are on a 50/50 mix comp plan because the sales process & timelines are well-established).

Designing the Plan

Well-built sales plans are measurable, quantifiable, and attributable. When building your plan, consider the following 8 elements:

1. Eligibility: Who is and is not placed on a sales comp plan?
2. On Target Earnings: How much money is earned when the rep achieves the target?
3. Pay Mix: What is the mix of base salary vs. variable pay?
4. Plan Type: What type of plan is used?
5. Plan Measures & Weights: What is a rep reassured on, and what % are target incentives (TI)?
6. Plan Mechanics: What payout method is used, and how much upside is provided in the plan?
7. Performance Period: What is the measurement period?
8. Payout Frequency: How often is the rep paid?

Typical Designs at Startups

Commission Rate:

• Paying a fixed % per unit sold. May provide acceleration.
• Best for: Early-stage startups before you know your targets.
• Pro: Very simple.
• Con: Can be very expensive if you set the rate incorrectly and may create challenges when moving to a quota.

Quota-Based:

• Quota is provided for each rep. Pays % of TI for each quota attained expressed as Individual Commission Rate (ICR).
• Best for: Companies with sufficient data to properly set quotas.
• Pro: Allows for precision and fine-tuning for market/territory.
• Con: If you don’t have enough data to set a quota, you can be misaligned and demotivate reps. Plans can also become complex.

Management By Objectives (MBO):

• Measured on quarterly objectives, may be sales results and /or deal-based milestones.
• Best for: Flexibility and roles with long sales cycles (12+ months). Typically capped payout at 120-150% of plan.
• Pro: You can reward on milestones and change incentives. For example, Letter of understanding, customer engagement strategy document (early stage), new logos, etc.
• Con: Very operationally burdensome. You will have to revisit measurements quarterly.

💡 Tip: Use no more than 2 plans at any given time. Over time, try to move all reps to quota-based and retained MBOs for unique sales cycles (government, banking, etc.).

Design Tips

• Use no more than 2 plans at any time.
• Plans should shift and evolve over time as the business grows and product market fit is found.
• If the geography dynamics are similar and labor allows, comp plans can span multiple geographies and countries. The key is to ensure the roles and sales cycles are the same.

Elements of an Effective Plan

• ‍Simple and Easy to Understand: Reps should always know what they are being measured on and how their quota achievements affect compensation.‍
• Aligned to Business Strategy and Job Roles: The plan should have clear ties to publicly available company goals and initiatives. ‍
• Plan Measures Have a Clear Line of Sight: Reps should have a clear ability to influence the outcome and trajectory of their comp through successful outcomes. Tying sales compensation to something the rep has no control over is extremely demotivating (e.g., profitability when the rep can't control pricing).‍
• Motivational With an Appropriate Amount of Upside: Ensure that the projections made about the upside are closely tied to reality. A significant chasm between projected upside and actual upside can result in retention issues.

Scaling Your Team

The key to hiring your first rep and, eventually, scaling your sales team is to identify your overarching sales strategy and goals but stay flexible and adaptable as your sales team evolves.

• ‍Hire the Right Person: Hiring the wrong person can set you back months in company progress.‍
• Keep it Simple: Start with a simple plan and scale as you go.‍
• Measure the Right Things and Don't Box Yourself In: Don't overcomplicate the plan or create a situation where the rep is bound to fail. First reps have a hard role and often face numerous hurdles to successful outcomes (still finding product market fit, undefined processes, untested pricing structures, etc.). Create a plan that focuses on moving the company and product forward and iterate on this over time.‍
• First Rep Incentives: There are a number of plan options available for a first sales rep, but typically we see companies choose one of the two models below.

Plans as the Team Grows

As mentioned before, keep the plans simple and aim for a plan that encompasses the broadest range of roles & responsibilities. Below is simplified guidance around typical plans seen for a mid-stage company. We recommend using this as guidance, not as an exact template.

Unexpected Circumstances & FAQ

Responding appropriately to unexpected events is critical to ensure you keep your sales team “in the game” and provide motivation during difficult times. Below are some suggestions for dealing with headwinds vs. tailwinds.

Headwinds

Situation:

• Quotas are now too high.
• Salespeople's income is in jeopardy(even more than normal).

Response (pick one or two):

• Reduce quotas
• Provide additional quota credit.
• Add acceleration below goal.
• Utilize SPIFFs and sales contests.

Tailwinds

Situation:

• Quotas are now too low.
• Payouts are much higher than expected.

Response (pick one or two):

• Live with it!
• Utilize windfall clauses where appropriate.
• Limit credit in any one month or quarter.
• Limit total pay in the year & pay the balance in a future year.
• Reduce acceleration above goal.

Additional FAQs

Performance Periods

Should I measure sales reps quarterly? Semi-annually? Annually?

It depends on your sales cycle and how well you can set goals into the future. Ultimately, it’s a tradeoff between short-term flexibility of a quarterly performance period and exposure to potential overpayment due to a short period.

How do I motivate a rep when they have long sales cycles and aren’t expected to close anything for 6 to 12 months?

There are two primary options for this situation:

1. Implement a less aggressive pay mix to recognize reps will take a long time to close business.
2. Use an MBO-based plan that measures results leading up to deal closure.

Crediting & Payment

When should I pay commissions? At contract signing? At invoice? When cash is received?

You should pay the sales team as close to the deal closure as possible. If you don’t have problems making the contract “stick,” pay at signing. Otherwise, pay at invoice. Avoid waiting to pay until cash is received if it can be avoided (i.e., a loan that is repaid from future commissions). Most SaaS companies pay some type of draw, and it varies based on market position and expected ramp time.

How should we think about and use Sales Performance Incentive Funds (SPIFs)?

Think of SPIFs purely as a short-term incentive that can drive sales behavior in a month or quarter. Target them at a specific product or performance level in conjunction with the regular sales comp plan. Use wisely, or they can become the sales comp plan!

Plan Design for Other Roles

How should we compensate Customer Success roles?

It comes down to the tasks you are asking a CSM to perform: Customer Adoption? Renewals? Add-on Selling or upselling? Based on this answer, you can choose the right plan design. The more “salesy” the CSM role, the more it should have an at-risk plan design. Otherwise, go with an add-on bonus plan.

How should we compensate Lead Generation roles?

Typically these roles are measured on one or more of the following:

1. Meetings Scheduled.
2. Qualified Sales Opportunities.
3. Pipeline Generated None of the above measures is perfect, so realize it is a bit imprecise and that lead generation roles are typically stepping stones to other sales roles.

Adjusting the Plan

Should I adjust quotas?

Each situation will be a bit different, but here are some aspects to consider:

1. Shorter performance periods allow for easier adjustment of quotas.
2. You always want reps to have their heads “in the game” and be motivated to achieve.
3. If events are beyond the rep’s control, you should strongly consider adjusting quotas OR alternatively providing extra quota credit retirement.

Additional Resources

Books

• Compensating the Sales Force by David J. Cichelli
• What Your CEO Needs to Know About Sales Compensation by Mark Donnolo

Websites & Blogs

• https://www.alexandergroup.com/roles/hr-sales-compensation/
• https://www.zs.com/insights?topic=Sales%20Compensation
• https://www.salesglobe.com/salesglobe-forum/

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