I have written about new laws in NYC that prevent employers from asking candidates about previous comp or W2 earnings. These laws aim to reduce inequality with the idea being that you pay someone what they are worth, rather than an uplift on what they previously earned. Instead of asking for prior earnings or for proof of prior W2s – candidates are now asked the less far invasive question “What are your comp expectations?” This has put some power back in the hands of the candidate and will no doubt add to an inflationary phase in earnings in the coming years. Some candidates have already started asking for big steps up in comp even though they may not be worth that jump.
It should not however be a total free for all. The market will eventually come back to equilibrium. So what will be the driver of that balance? Ultimately it is the percentage cost of sales and you should be very aware of it when negotiating on comp. Rather than negotiating in a vacuum, you should have a clear idea of what your cost of sales is in your current position and what the “market” is for cost of sales as ultimately that is what drives your “worth” in terms of base and OTE in the eyes of the hiring manager across the desk from you.
So what is percentage cost of sales when it comes to sales people?
The simplistic* version is that it is the cost of your total comp (OTE) viz a viz a reps sales output in revenue terms. I did a quick poll of 20 clients (CRO and SVPs of Sales in venture backed SaaS firms – generally marketing, sales, commerce and enterprise tech) and, keeping things simple* (avoiding overhead costs) their target cost of sales ranged from 16.5-25% with an average of 20.5%.
A hiring manager that tries to maintain a consistent percentage cost of sales will increase quota in a linear manner when OTE increases as shown in the example below (using 20% cost of sales target as an example).
One of my favorite comp plans that I have seen is from a customer of mine who makes this totally transparent. His negotiation stance is simple – “You want a bigger base? Sure, but you get a bigger quota and it takes you longer to get to accelerators”. He paid 10% commission up to quota and 20% thereafter. This is what it looked like in reality:
“100k base candidates have $1m quota. Hit quota and you make $200k. If you do $1.2m in sales you make $240k. 120k base? Sure. But you get a $1.2m quota. If you hit quota you make 240k. The catch? If you only hit $1m on a 120k base, you get fired!“
Interestingly, when I surveyed the sales leaders if they ever gave their reps choices in base and quota only 25% said yes and 75% said no, Not everyone is ready to be that transparent on comp, it seems, but more transparency is coming: On a scale of 1-10 the sales leaders said they were at a Level 6 on average with current comp transparency amongst peers on their sales teams but expected to be at a Level of 7.5 on average in 5 years from now.
So, how does this apply to your sales negotiation?
Here are some tips on finding balance and not overstepping your bounds:
Remember – your outcome for base and OTE negotiations is going to be partially tied to a cost-of-sales formula. You need to make the company you work for money and what you ask for is going to be part of an equation tied to quota. If you are too expensive relative to what you bring in, you will ultimately not be there for long. If you ask for too much you may lose credibility in the process and ultimately may lose out on the job.
Say, in your previous role, you were on a 100k base and 200k OTE and you did 50% of quota of $1m, that means your prior cost of sale was a 150/500 or 30%. That is high and means you didn’t really prove your value at that current salary level.
That basically means you are not in a strong position to ask for an increase to, say, $125k base and 250k OTE. If you still end up getting that salary increase, be prepared to accept a quota of $1.25m in the knowledge that you haven’t proven your ability to sell beyond 40% of that higher number.
Quite simply: Be careful what you ask for! Be logical in your ask.
2. Don’t just focus on base.
It generally doesn’t make sense for hiring managers to give sales people more than 50% of their OTE up front – especially at 100k base level and above. (When surveyed 90% of the sales leaders said they never go higher than a 50/50 split. The outliers were 55 and 60% respectively and both had very long deal cycles). You still need to prove your worth so they rightly want to hold back enough commission to incent you to close business. Again, if you ask for a big jump up in base. expect the OTE to be double the base and the quota to be somewhat extrapolated from the OTE based on the target Cost of Sales. If you don’t think you can handle the quota that comes with the base you ask for, ask for less base when you are asked about comp expectations.
3. Ask about average deal size and reverse engineer how many deals you need to make quota:
If the deal cadence or deal complexity doesn’t match your prior history, you might want to reduce your comp expectations a bit to reflect the risk to you, and to them of taking you on.
I hope these tips help you find that balance in comp negotiations so that both sides are happy at the end of the hiring process and, perhaps more importantly, so that both parties feel like they struck a fair deal when they look back at it 1-2 years from now.
* The caveat here is that this is overly simplistic. Other factors can come into the final cost of sales number negotiated with each rep. One Sales Leader (cheers Jake!) gave me his additional factors. They were:
– years of experience in exact industry
– years of total work experience
– skills from current and previous industries
– overlap in connections on LinkedIn (connectedness)
– tenure at previous companies
– experience within specific skill set or discipline (e.g. mobile, video, data, etc)
– City of business (not where they live)
– average sales within industry for someone with that title
– factored ramp-up of role at company (realistic)
– factored longevity of company/brand in that exact market