For sales professionals considering a new job, your potential compensation plan may be the most important data you will be evaluating. It’s also the information that is frequently misunderstood by new sales reps.
Before you accept a position, ask the hiring team for a copy of the compensation plan, and make sure you understand it thoroughly; ask for clarification on anything that is not specified.
To help with your evaluation process, here are a few tips that will help you understand the basics of most plans:
Base salary vs. variable compensation
Your base and variable compensation are the foundation of most plans. Base is the amount you will make on an annual basis. When it comes to base salary, you should understand how often you get paid and if the company has milestones which result in a pay raise. For example, some companies offer a base pay raise after four quarters of consecutive quota achievement.
Variable compensation is the commission you will be paid on closed/won business. When evaluating variable compensation, it’s important to understand if the percentage paid varies depending on the type of deal. For example, the percentage could differ on new business vs. renewal business; up-sell business; or based on the term length of the contract or multi-year agreements.
Bonuses, accelerators and decelerators
Some companies include incentives such as compensation bonuses or commission accelerators (increases). Most are tied to sales performance such as exceeding your quota. They may also have decelerators – or reduced commissions – based on how you are performing compared to the agreed-upon quota. For example, you might incur a reduction of 20% in variable compensation rate if you are under 70% quota attainment. In this scenario, you would want to know whether this means 70% of year-to-date quota, or 70% of quarterly quota. This should be spelled out in the plan.
Companies may offer equity incentives as a bonus. Be sure to understand the type of incentive compensation and all the accompanying details. For example, if the incentive is an option, what type of option is it? What is the strike price? What is the vesting schedule?
Many employers offer new sales reps ramp time – the time it takes a rep to get to full quota attainment. During this time employers often have different quota attainment and variable compensation rates, which allow a rep to earn money as they get started in the new role. If the job you are considering has ramp time, make sure you understand the specifics.
Employers often offer a compensation draw (an advance against future anticipated variable compensation earnings). This can be in conjunction with ramp time or as a substitute for ramp time. If the job you’re considering offers a draw, be sure to understand if it’s recoverable or unrecoverable.
Quota is the amount of revenue you are expected to generate for the company. It’s typically adjusted on an annual basis, but most employers reserve the right to make adjustments at any time. When it comes to quota, it’s important to understand how the percent of achievement impacts your commission rate. You will also want to consider how ramp time impacts quota; whether it is new business or renewal business quota; and how multi-year agreements impact quota.
When evaluating a comp plan, ask questions if there is a section or data point you’re not sure of. Also, before signing off on an offer, always talk to an existing rep and ask for the details. You should know what percentage of the current sales organization hit their quota last year and how fast it takes a rep to ramp to full quota. These questions will help you make a smart decision on your next sales position.
Are you ready to discuss your terms with a new potential employer? Learn How to Negotiate a Sales Offer