One of the most consequential early decisions you'll make is how to compensate your first sales leader. Get it wrong, and you'll either overpay for underperformance or create misaligned incentives that undermine the long-term building of a healthy sales organization.
The challenge is that you're designing this comp plan in a time of uncertainty. You don't yet know how achievable your annual targets are. You might not know if your sales cycle will be 30 days or 180 days. You could still be figuring out your ideal customer profile and which market segments convert best.
Yet you need to hire a sales leader who will build your first real sales organization. And at an early stage company, the sales leader might even be doing some selling themselves, while they build out the team. So a compensation structure that motivates the right behaviors from day one is really important.
Most companies default to one of two approaches, and both have significant flaws for an early-stage company.
The first approach is to give the sales leader a high individual quota with standard commission rates. This works fine if they're going to be an individual contributor. But if you actually want them to build a team, that can create misaligned incentives that are hard to reverse. When comp is tied primarily to their personal production, it creates a massive conflict between what you're paying them to do and what the business actually needs.
The second approach is to tie most of their variable comp to team attainment of a number you pulled out of thin air. You might feel good about setting an ambitious target, but if it turns out your market needs more education than you thought, or your sales cycle is longer than expected, or your pricing needs adjustment, you've now put your sales leader in an impossible position of not earning enough to get by. They can't earn their comp through hustle alone when the underlying assumptions are wrong.
The compensation structure I recommend is built around three distinct components that work together to address the inherent ambiguity of building a first sales team and early-stage sales.
Component 1: Commission on All Deals
The sales leader earns a small, flat commission on every deal the team closes. Not just their deals. Every deal.
This might vary from 1% to 3% or more depending on the specifics of the company and the sales leader’s OTE. At 2% commission, if the company brings in $2.1M in new ARR for the year, the sales leader earns $42,000 from this component alone.
This does two important things. First, it ensures the sales leader is genuinely invested in the success of every team member. There's no incentive to hoard the best leads or to prioritize their own deals over coaching someone else to close. Second, it provides a smooth transition as they shift from carrying a bag themselves to building a team. Early in the year, when it's just them, they're earning commission on the deals they close. As they hire, they're earning on those reps' deals too. The economic model doesn't suddenly cliff when they hire their first rep.
Component 2: Quarterly Bonus
The sales leader earns a bonus each quarter for hitting quarterly bookings targets. This also ranges depending on the OTE and company specifics. For example, perhaps the bonus opportunity is $12,000 per quarter, for a total of $48,000 annually if all quarterly targets are hit.
This serves as a forcing function for setting and tracking near-term goals even when you're not confident about the annual number. If Q1 comes in lower than expected, you have three more quarters to recalibrate. The quarterly bonus provides regular earning opportunities rather than making someone wait a full year to find out if they're successful.
The key is sizing this appropriately. It needs to be meaningful enough to drive quarterly focus, but not so large that someone can have a great Q1, coast the rest of the year, and still earn most of their variable comp. In this structure, the quarterly component represents about 34% of total variable compensation, with the annual bonus making up the majority.
Component 3: Annual Bonus
The largest variable component is an annual bonus tied to achieving the full-year plan.