In this week's MBA Monday, a look into structuring sales compensation plans, with real-world data from GitLab (see a previous post on sales efficiency at GitLab).

Incentives matter. That's why sales reps are compensated differently than software engineers. Let's look at the variable compensation for a new sales rep at GitLab.

Sales reps aren't immediately productive in their first few months of onboarding to a product – even more true when it comes to complex enterprise sales. GitLab attempted to solve this with a "ramping super rate" for the first few quarters. This essentially doubles the commission that sales reps earn until they hit their OTI, before dropping back down to the normal commission rates.

Let's look at a graph of sales vs. OTI for a new sales rep at GitLab with data I took out of their handbook last year.

You can see that sales reps earn more as they sell more. Looks good right? Let's look closer at the incentive structure, looking instead at the commission rate vs. sales.

A much different story. Let's assume it takes more effort for each dollar of product you sell.

If you're a sales rep where would you be likely to stop putting in effort?

Goodhart's law should always be in the back of your mind when thinking about sales plans and comp structure:

When a measure becomes a target, it ceases to be a good measure

You can be sure that your best reps are trying to figure out how to game the plan. But what does the data tell us?

Here is a graph of quota attainment by new sales reps at GitLab. Quota is defined as the target sales number for each rep. Overall, GitLab had a company goal to have 70% of reps hitting quota. (Peter Levine of a16z gives another great lesson on why you want this number to always be 100%). The industry average for B2B SaaS is about 70% quota attainment. You can see that most new reps are grossly underperforming their expected quota. Why?

Well, my hypothesis is that they took a good look at ramping super rate graph and decided it wasn't worth the effort to go past the doubled commission rate. The lesson?

Always make sure that your incentive structure for sales reps is monotonically increasing (i.e., always going up).