A CEO and I recently discussed a sales commission plan for his company. I thought that sharing some of the aspects would also be useful to CEOs who are looking to hire sales people

  1. Should I hire a sales person? – It is often advised that CEOs need to sell as long and as much as possible until they can’t keep up. While this is reasonable advice, it should be thought through. Not all CEOs have the sales attitude and aptitude. They may be doing a disservice to their own company by not having effective sales techniques.
  2. Should I hire a VP of Sales first? – If you are lucky to have a sales person as your co-founder, then this is not a problem. For others, you should think of hiring a VP of Sales, after your 3rd or 4th sales hire.  By that time, you have got some traction and the VP of Sales would be a great addition to put together a scalable sales process and also help in closing deals.
  3. Should I create the incentive structure myself? – If it is possible, have the sales person work with you for a month or so, while you mutually create the incentive structure.
  4. What should Commissions look like? – Yes, this is the bread and butter for sales folks and is the big motivator. You should have a ladder structure for incentives and take into account the following results a) Email with interest from Decision Maker(s) b) Face to Face meetings with Decision Maker(s) c) Signed Deal (of various revenue levels)
  5. When should I pay my sales folks? – You would pay sales folks only when revenues are realized, never before that. If the sales person has succeeded in selling a multiyear deal, his/her commissions need to be calculated only on Year 1 revenues. If the customer is paying a monthly subscription, sales people are expecting their commissions upon the first revenue from customer.
  6. What if the customer cancels? – The customer may cancel for a variety of reasons. Therefore it is not good practice to penalize your sales person for that unfortunate situation. However, if the reason for customer cancellation is due to misrepresentation by your sales person, you should be able to reverse commissions (or withhold some future ones).  When you draw up your sales contract, remember to have a term that addresses customer cancellation scenario.
  7. Should I pay my sales person in company stock? Depends.  Stocks have vesting schedules, voting rights, and risks. While a VP of Sales may agree to be paid in stock for some of their work, it is unlikely that you would find a full time sales person working for equity. So, if you don’t have to, then don’t.

Of course, there are a lot of other details to hash through, but this provides a good framework to think about your sales hire and sales commissions.