Month: September 2024

In Part 1 of this 2-part blog, we examined how to drive sales behavior through a well-aligned compensation plan. In Part 2, we will determine how to extend your Series A runway by mastering the balance between capital efficiency and commission payout schedules. How you structure your commission payouts will not only align sales behavior it can significantly impact your cash runway, affecting everything from upfront cash outflows to your overall cash burn rate. Understanding these dynamics is essential to maintaining financial stability while driving revenue growth.

This blog will examine key considerations and strategies for effectively managing commission payouts.

Download Companyon’s Sales Compensation Framework HERE.

Commission Payout Considerations

The commission payout schedule can significantly impact your startup’s cash runway in several ways:

1. Upfront Cash Outflow: If the commission payout schedule requires upfront payment upon closing a sale, it can lead to a significant cash imbalance, especially if the sales cycle is long or if multiple sales are closed simultaneously. This immediate cash expenditure and the rest of the customer acquisition costs can strain your startup’s financial resources, particularly if it’s operating on a tight budget or during periods of limited cash flow. What’s more, it does not align sales behavior to the business benefit of cash collections—your sales team should be motivated to accelerate cash collection whenever possible.
2. High Variable Cash Flow: High commission payouts based solely on sales performance introduce variability into your startup’s cash flow. This variability makes it challenging to predict and manage cash flow effectively, leading to potential cash shortages during low-sales periods.
3. Impact on Working Capital: Large commission payouts ahead of collections tie up working capital, limiting the funds available for essential operational expenses such as salaries, marketing, product development, and overhead costs. This will hinder your ability to invest in growth initiatives or respond to unforeseen expenses.
4. Cash Burn Rate: High commission payouts accelerate cash burn, reducing your cash runway and increasing the urgency to secure additional funding. To make matters worse, a high cash burn is unattractive to many investors in this climate.

How can you design a balanced commission plan from the start? 

1. Adjust Payment Terms: Stagger commission payments over time or tie them to specific milestones rather than upfront. A typical approach is to pay a portion of commissions immediately (50%) on bookings, preferably at quarter end, and pay the balance on collection (50%). 
2. Optimize Sales Cycle: Streamline your sales process to reduce the time between closing a sale and receiving payment, improving cash flow predictability. Incentivize annual pre-pays to accelerate collections and offset commissions that are paid upfront.
3. Forecast Cash Flow: Develop robust cashflow forecasting models to anticipate commission payouts and identify potential cash shortfalls in advance.
4. Explore Financing Options: To support cash flow during commission payout periods, consider alternative financing options such as lines of credit, invoice financing, or revenue-based financing.

By understanding the key considerations and following a structured, risk-balanced approach to designing the compensation plan, you can empower your sales teams to thrive in the new playbook-led environment—driving sustainable revenue growth and market expansion.

Check out our blog for more expert guidance. We cover everything from marketing and sales execution to data modeling, fundraising, and recruiting. 

Download Companyon’s Sales Compensation Framework HERE.

For early-stage startups that are raising a Series A, moving from a founder-led sales approach (where the founder is often the primary salesperson) to a playbook-led model represents a significant milestone. This shift entails implementing structured and scalable sales processes and methodologies. A crucial aspect of this transition is the design of a compensation plan that motivates and aligns the sales team with the new strategy.

When you are raising funds and you need to demonstrate and execute a scalable business model, your sales compensation plan is a manifestation of your whole go-to-market (GTM) strategy. It reinforces your business goals, sets up the right sales behavior and balances the cash-out of customer acquisition costs (CAC) with the cash-in from collections to help meet your capital efficiency goals. In addition, it is both the roadmap and contract with your sales team.

In this blog, we’ll explore the key considerations and steps in creating a compensation plan for sales reps that drive the right sales behaviors and support the desired outcome.

Download Companyon’s Sales Compensation Framework HERE.

Understanding the Transition from Founder-Led to Playbook-Led Sales

The shift from a founder-led to a playbook-led sales motion signifies a maturation in your startup’s sales strategy: founder-led sales rely heavily on the founder’s network, evangelization, and domain expertise, whereas playbook-led sales introduce standardized processes, sales methodologies, and scalable tactics executed by professional GTM teams to drive predictable revenue growth. Implementing a comprehensive and thoughtful sales compensation plan is a crucial aspect of navigating this shift well.

A sales compensation plan is not just about setting parameters for salaries, commissions, and bonuses. It’s about aligning your entire sales team to ensure every rep is focused on your company’s short-term and long-term goals. Let’s discuss how to reach that alignment.

Key Considerations in Compensation Planning

Compensation plans guide the behavior of your sales channels. They need to be dynamic enough to tweak behaviors and outcomes according to short-term tactics but robust enough to align sales behavior and compensation to longer-term goals. Here are some of the key considerations when building your compensation plan:

1. Align with Strategic Objectives: Align the compensation plan with your startup’s strategic objectives, not just revenue but specific goals such as target market segment expansion, ideal customer profile (ICP) acquisition, existing customer revenue expansion, pipeline development, and customer logo retention.

Ensure that the plan incentivizes behaviors and outcomes that support the unit economics you need to build a strong business that attracts customers, employees, and investors.

2. Balance Fixed and Variable Components: Balance fixed salaries and variable incentives (commissions, bonuses) to attract and retain top sales talent.

Allocate 50% to a maximum of 70% of on-target earnings (OTE) to fixed salaries. In an early-stage business, a lower fixed income of 50% will give you more incentive leverage to target specific behaviors and outcomes as you build your playbook while allowing you to offer higher OTEs to attract the right talent.

Don’t overengineer the variable compensation. It is not unusual to offer a simple flat commission for 75% of the variable and a quarterly bonus targeted at short-term incentives for the other 25%. It is hard to establish credible goals when there is limited traction to base them on, so make it clear to your team that goals may change as you climb this learning curve together.

3. Set Realistic Quotas that Reward Performance: Establish achievable yet ambitious sales quotas that reflect your startup’s growth trajectory. Design commission structures that reward new customer acquisition (new logos) and existing customer expansion (upsells, cross-sells). To encourage reps to go above and beyond, include accelerators or bonuses for exceeding quota or landing high-value accounts.

4. Consider Adaptive Quotas to Manage Headwinds: At this stage of growth, quarterly targets often change, necessitating flexibility in compensation plans throughout the year.

To address this, quotas can be set every six months and sometimes quarterly during the first year of expansion to adapt to evolving market conditions and performance trends. Incorporating a portion of variable compensation paid out regardless of sales in a given quarter can provide stability and motivation for sales reps during periods of volatility.

This adaptive approach ensures that the compensation plan remains aligned with the company’s evolving needs and encourages consistent sales performance despite challenges.

5. Leverage “Disincentives” to Align Sales Behavior: To focus on the right market segment, you must do more than target it. Sales disincentives—such as withholding quota contributions, commissions, or bonuses for sales made to non-ICP customers—can steer sales teams toward desired behaviors and outcomes. For instance, by implementing disincentives for selling to non-ICP customers, sales reps are encouraged to focus on prospects that align with the company’s target market, resulting in higher-quality leads and improved customer retention. If you pay lower commissions on non-ICP customers or exclude them from quota attainment, sales reps will only focus on your ICP.

6. Track and Adjust Performance: Implement a robust tracking system to monitor sales performance against quotas and targets. Be prepared to regularly review and adjust the compensation plan based on actual performance, market dynamics, and business objectives.

The compensation plan is critical to your desired outcomes in a coin-operated role like sales. Implementing these methodologies will help transform your sales department from a group of individuals to a true team—sharing a focus, a vision, and objectives under your control. This is a vital step for any expanding company transitioning from founder-led to playbook-led sales.

At Companyon, we specialize in accelerating growth for early-stage software companies by providing the expertise and hands-on guidance needed to navigate these pivotal transitions. If you’re ready to propel your startup to new heights, contact us today to learn how we can support your journey from seed to Series A and beyond. Explore our blog for more insights and detailed guidance on scaling your sales operations.