READ THIS AFTER YOU READ BELOW: https://sacks.substack.com/p/the-difficulty-ratio

Bottom Up by David Sacks

Simple Math to Set Up a Sales Team

How to structure quotas, compensation, and territories for a new sales team.

DAVID SACKS

DEC 01, 2020

Let’s say you're a SaaS founder who’s looking to build a sales team for the first time. How do you structure quotas and compensation for the initial sales reps and their manager? Oftentimes, the biggest hurdle in hiring the first sales rep is not knowing how to incentivize them. This post provides simple rules that you can use to set up a sales team. Structured properly, the process is surprisingly mathematical.

Individual Plans

Let’s start with the sales plan for an individual sales rep, or “account executive” (AE). The key elements of an AE sales plan are:

• Base Salary;
• Quota;
• Commission Rate;
• Variable Pay (Quota times Commission Rate); and
• OTE (“on-target earnings”), the sum of the AE’s Base Salary and Variable Pay.

This sounds like a lot of variables, but two industry standards allow us to simplify greatly:

1. The standard commission rate for SaaS products is 10%. For example, closing a $100,000 ARR deal generates a $10,000 commission.
2. In constructing an OTE for an AE, a 50/50 split between base and variable compensation is typical. For an AE who’s hitting quota, their variable pay will equal their base salary.

Taken together, these standards generate a third rule: the typical quota will equal 10x base salary. I call this the Rule of 10. This generates the following pay scale for AEs: