As competition for labor escalated to a fevered pitch in the last decade, companies lured AEs with promises of higher on-target-earnings (OTE). To keep the cost of sales constant, CFOs demanded higher quotas.
But along the way, something bad started to happen. Fewer and fewer AEs hit quota. This was a lose-lose-lose for CFOs who ended up with lower margins, for CROs who lost their jobs, and for AEs who wrestled with failure on a daily basis.
In some instances, even more bizarre things began to happen. The old rule-of-thumb for quota over-assignment (how much more quota is collectively assigned to AEs as compared to CROs) was 10%. Today, it is not uncommon to see over-assignment as high at 50%. That is sheer madness.
It is time for a reset.
Though I don’t have the data, I have a strong hypothesis that average new business generated by B2B SaaS AEs has not wavered all that much from $600K. But, imagine you have a $120K OTE with a 50-50 split and a $600K quota (hence a 20% theoretical cost-of-sale). Further, assume the following performance distribution:
- 40% of reps hit $500K
- 40% of reps hit $600K
- 20% of reps hit $800K.
In this case, the “average” rep attainment is $600K.
The take-home pay for AEs (assuming the company pays 10% for sales up to quota & 20% beyond)
- $110K for the reps who hit $500K
- $120K for the reps who hit $600K
- $160K for the reps who hit $800K
The cost of sale is therefore 20.7% (higher than 20% since we have ‘over-paid’ the ‘under-performing’ reps.
As I’ve stated, a big problem here is that 40% of AEs go to bed each night feeling as though they are failing. There is a better way.
Imagine instead quota was lowered to $500K and OTE was lowered to $110K. Now:
- The 40% of reps who hit $500K still get paid $110K.
- The 40% of reps who hit $600K will still get paid $120K. (assuming we pay 10% on the first $100K over target).
- The 20% of reps who hit $800K will still get paid $160K. (assuming we pay 20% on all sales after exceeding $100K over target).
Here, the same amount of money changes hands yet every rep gets to feel successful. This leads to stronger retention and a culture of success.
Now, some may object that we are favoring the reps who earn $500K and making the comp plan more complex (with the odd accelerator thresholds). To fix that, set OTE to $100K, quota to $500K, and continue to pay 20% for sales over quota. Now we pay:
- $100K for the reps who hit $500K
- $120K for the reps who hit $600K
- $160K for the reps who hit $800K
I prefer this final simplification. CFOs sleep happy since cost of sale is a predictable 20%. CROs sleep happy because quotas have been set reasonably and they don’t win even when their reps lose. All the AEs are happy too. Those hitting $600K or $800K are not impacted. Most of those who hit $500K are probably better off overall (due to the lift in well-being) even if they would not have traded $10K for the mental health benefit.
If you want to make this change with an existing sales team, then you probably need to go with the $500K quota + $110K OTE option since you’ll do more harm lowering people’s take home pay. However, if you are adding a new team, I recommend setting quotas where everyone is a winner.
Finally, some will argue that if you lower quota then you lower performance. I don’t buy that unless quota is very low and OTE is astronomically high. I’d argue that AEs who feel successful are driven to pursue greater success – much more so than AEs who give up feeling they have failed. And, the extra 20% for every dollar won is a strong incentive.