James MeinckeThe process of hiring an account executive (AE) into your organization can be a struggle. There’s no shortage of top talent these days, but attracting them can be difficult – it’s a candidate-centric market, after all.
One of the trickiest parts to attracting, then successfully hiring, a high-performing AE can be crafting a compensation plan. The plan has to be good enough to interest those talented AEs, and it has to work for your organization. With many variables to balance and important responsibilities needed to be performed, you need to know how to design a good AE compensation plan.
We’re going to show you how to do that and give you an example compensation plan template.
What an AE compensation plan shouldn’t be
When designing your compensation package, it can be tempting to go with the straight-salary option for new hires. i.e., give them $50,000 and see how they do their first year.
Although this is the easiest route, it’s a bad idea. Why? It doesn’t take into account a few key things that AEs do:
- They retain clients;
- They grow accounts after closing them; and
- They have a direct effect on organization profitability.
All of those things fall under the purview of an Account Executive’s responsibilities. Not only do AEs close accounts – which, based on that fact alone, should earn them commission – but they proceed to grow those accounts, eliminate competitive threats, and work to maintain and improve customer satisfaction. All of these things directly affect the bottom line.
That said, there a few things every compensation plan should have.
The essential requirements
A good compensation plan is easy to implement and benefits everyone. When designing them, you should:
- Keep it simple. When you summarize the plan it should only be a one-page document.
- Show cause-and-effect. Compensation should be a direct result of the effect you want. I.e. the more they hit quotas, the more they earn.
- Keep it short. The time between your AE achieving the goal and them being compensated for it should be less than 60 days.
- Be fair all around. It has to be fair all around. All things equal – relevant experience, skills, results, etc – two AEs should not be compensated differently.
- Keep it easy. It should be simple and easy to track and implement.
5 steps to a compensation plan
Step 1: Align your goals
First, start by aligning the goals of your compensation plan with your organization’s objectives, coupled with the AE’s responsibilities. For the former, take into account your company’s overall strategic market plans when it comes to things like profit, revenue, customer acquisition, and customer retention.
The latter part should be pretty easy to do – what do AEs do in your organization? Acquisition, retention, account growth, etc.
Step 2: Create role tiers
Next, create tiers, or levels, based on experience. This can be complicated, so start with just 3. For an AE, that could look like:
- Entry-level: <2 years’ experience
- Established: 2-5 years’ experience
- Top-performing: 5+ years.
By doing this, you can define the difference between untested employees and those with experience. Plus, as an AE grows in experience, you can give them a mini-promotion to the next role level, with accompanying adjustment in compensation.
Step 3: Set base and variable earnings to get OTE
The 3rd step is to figure out total On-Target Earnings. OTE is what the AE will be paid annually and is made up of two things: base salary and sales incentive – otherwise known as variable pay, or commission. This can vary by geography and industry.
To determine your OTE, you need to break it down into its two elements. The goal for variable pay should be to develop a performance-driven culture. But to do that, you need to find the right balance, also known as leverage.
A high variable, low salary plan is called highly leveraged.
A low variable, high salary plan is called low leverage.
There are pros and cons to both. A high-leverage plan looks good to many leaders as they pay for only the performance. But, high-performing AEs might not be interested – banks tend to penalize those whose income is made up in large part by commission.
And conversely, if you have a low-leverage compensation plan, your AE has little motivation to deliver on quotas.
Step 4: Set quotas
Depending on your organization’s business model, you’ll set your target quotas in different ways. The main things to consider are your financials, whether you receive recurring revenue, and how you charge for your product/services.
Step 5: Onboarding + other details to include
Some AEs may want compensation beyond their base pay while they ramp up in your organization – an AE making $8,000 a month is going to have trouble with making any less than that for your ramping period.
The methods you can use to address this are beyond the scope of this article, but here a few examples you can draw from:
Other details you need to include are:
- Payment– Are you going to pay monthly, quarterly, or otherwise? When will you pay out commission following closing a sale?
- Compensation caps – are you going to apply a cap? Include that clearly.
- Override policy – Outline a policy in the case of an ambiguous, unknown situation, giving license to override the compensation plan.
- Fair compensation – Strive to be equal. Consider creating a board that reviews compensation quarterly to ensure all performers are being compensated fairly for their work. Doing so can help you avoid a lawsuit.
Example AE compensation plan
Conclusion
Once your compensation plan is completed, the next step is to create a contract and get a mutual commitment from the candidate. Designing an AE compensation plan doesn’t have to be difficult, but it does deserve some of your time. Take into account your organization’s goals, the responsibilities of an AE at your company, and find the appropriate degree of leverage between base salary and variable pay.
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