Incentives are critical and the VP of Sales will likely be the seemingly most expensive hire you ever make. Consider these points when formulating a plan:
No best efforts incentive.
Even if you hire a VP Sales very early, there needs to be a clear quota and plan to hit. No best efforts rewards. Start-ups are about teamwork, but sales are sales.
Align your VP of Sales to costs, not just revenue
Costs are critical in a start-up, and sales teams are expensive to build. The norm is to focus on top-line numbers and budgets, but in the early days include costs.
Can you avoid the VP of Sales just being a cost on the balance sheet?
This is a tricky one, without a personal quota. However, for very early start-ups it’s entirely necessary, although not scalable.
In the beginning, consider bonuses and goals that match the overall company ARR goals
If you have a very early stage business, have everyone work towards the same year end revenue goal. Normally, you would expect the VP of Sales to be responsible for net new business.
In the early days with smaller teams, one overall company goal encourages everyone to pull together, can foster a great team environment and removes the barriers around post signature revenue responsibility.
Focus on high OTEs over guarantees
You can’t get a great VP of Sales without a great incentive plan that allows them to over achieve. It’s likely there will be a push for a guarantee period if they are walking away from an existing pipeline and taking a risk.
A guarantee may be necessary to attract the right candidate; however, aim to keep the time-period to a minimum, between 1-3 months. Guarantees can remove some of the initial hunger. Preferably, structure a plan with a high earning potential.
Monthly bonuses can be considered as a trade-off against a guarantee, but won’t work when working towards an annual target.
Don’t stress about a high OTE
If the plan is correctly aligned, don’t stress the high OTE numbers. You are only going to pay if a higher than expected amount of revenue has been achieved. Pay well when a realistic plan is hit, pay very, very well when it’s exceeded.
Work on the formula of 50/50/25
- 50% of OTE paid as a base
- 50% of OTE paid as bonus, with the target being the overall company net revenue number for the year, inclusive of churn and upsells.
- 25% or more upside for achieving a stretch number.
- No cap – continue to pay out on all revenue achieved beyond stretch.
This will appeal to a great VP of Sales on the way up. It won’t appeal to a mediocre one or one on the way down!