As the title says, how much new business should a sales exec close relative to total comp? If a sales person makes $100k, should I consider $500k in ARR a success? Should I hold the team accountable to 2x ROI, 5x ROI, 10x ROI?
1
What should be the ROI of an AE?
This is a fun question IMO.
One thing I am not sure about. In the way you ask the question are you trying to set compensation metrics or are you trying to just understand?
If you are asking from a compensation POV, I am not sure it’s wise to build a comp plan based on their costs. Comp plans have to be based on what the market will bear. And more specifically, what it will realistically bare, not what we think it will bare.
I am happy to adjust my answer if there is a different context to be considered.
As for ROI. I loathe the phrase, and here is why.
1. NOBODY every belives the number after the phrase ROI comes out. N.O.B.O.D.Y! —- Someone here could say, “Oh it.s 4.75397” and some CFO will question it.
2. One must decide ROI based on what? The ARR or the LTV? Meaning if a rep stays with a company 2+ years and the customer stays 5 years. Then isn’t the ROI of that rep even lower overall. There are now 3 years without any salary paid out.
Certainly that’s an awesome ROI, right? This goes back to #1.
A CFO may come with some (appropriate) accounting principles of why they cannot justify it that way. However, their accounting principles are not a salesperson’s concern.
Additionally, if the CFO is paid some bonus in years 3-5 when there is no rep because it counts to the overall goal of the company, then by all means, they should probably give it up since it “doesn’t really count.”
Watch them squirm when you say this to them.
So, instead of ROI, I would suggest the phrase, Economic Impact. And for me, that’s the break-even point. And even then, from where do you calculate that, the first date of hire or all the time in the interview process?
What’s the Economic Impact of having an empty seat? What’s the Economic Impact of the wrong hire and having to start over?
It could be a better way to ask the question is about aligning as contribution to margin.
But I am not an accountant.
Some will say Economic Impact is same as ROI.
Where I say it’s not is that when you explain it as Economic Impact, it now means people question their own belief systems about ROI, therefore they have to admit the ROI phrase is the wrong way to look at it.
I unpacked a lot here so feel free to redirect since there are so many concepts flying around.
Great response!!
There’s a lot of “it depends” here, but main things to consider are:
1) Is your revenue recurring?
2) What’s your customer lifetime value (LTV), if you know?
3) What’s historical average contract value (ACV)?
4) What is the historical customer acquisition cost (CAC)?
You may have to do some modeling and “what if” scenarios to find the right balance between talent/seniority (compensation), and gross margin.
But to answer your question, here’s a quote from this article written by the great @jacco: https://www.saleshacker.com/sales-compensation-plan-blueprint/
“…within the FedTech space, sales contracts can be established with 3 years of commitment. This allows for richer sales compensation plans than at companies in AdTech, where LTV is only nine months, on average.
With new products, where LTV is not yet established, we advise that you spend less than 40% of year-one revenues on the total OTE of your SDR, AE, and CSM. For the same reason, we recommend that businesses with LTVs of 2+ years spend less than 60% of year-one revenues.”
It’s not a simple math problem all the time. It also includes:
1. Sales cycle
2. ACV
3. LTV
4. Ramp Time
Now if you are asking for a fully ramped rep, it probably should be 5x in terms of covering overhead and profitability. This is my “hunch” — might be better to ask a CFO how they see things.