Hypothesis: “The sales compensation plan for your first sales hire attracts the wrong person and motivates the wrong behavior.”
On the most recent episode of the #TheScienceOfScaling podcast, I explore this statement with Nick Dellis, VP of Revenue at Mercury, one of the FinTech unicorns in the recent class of growth startups. Using this compensation strategy, he has established strong cultural foundations upon which to instigate scale. I left the conversation with more conviction to lean into best practices on early-stage sales compensation that I teach at Harvard Business School and in the Science of Scaling playbook.
Rather than utilizing a traditional sales commission plan for the first sales hires, instead pay them 80% or so of their market OTE and give them an equity stake appropriate for their role and the stage of your startup. Here are the reasons why a traditional sales commission plan is wrong at this stage:
(1) It attracts the wrong candidate. A traditional sales compensation plan attracts a coin-operated salesperson, which can yield high-performing sellers but only when the company has the foundation in place to make them successful. The most important value this first hire brings to the company is not necessarily the first wave of customers but, more importantly, a massive influx of feedback generated by dozens of sales conversations each week. To unlock this value, we need an individual who is almost half product manager and half seller.
(2) At this stage, we are usually in product-market-fit discovery mode, requiring frequent reflections on feedback from the market and rapid iterations on our product value proposition and ICP. However, sellers on a commission plan are more short-term revenue-focused and will be motivated to sign up any customer rather than instigate necessary product pivots and build a foundation of the right customers.
(3) The north star metric for the entire organization at this stage should be the Leading Indicator of Retention (#LIR), not maximizing ARR or ACVs. The traditional sales commission plan misaligns the seller with this north star, incenting them to sign up any customer for as large an ACV as possible, which could lead to an unrecoverable churn/contraction issue one year later.
I do believe a sales commission plan should be implemented during the scale stage, but after PMF is achieved and during the Go-To-Market-Fit phase. But Nick is proving that theory wrong. It's quite an intriguing case study. Have a listen here. https://lnk.to/TSOS!mr
Cosmetic Product Development Manager at Credo Beauty
5dGo Dawn!