Correlating Commissions with Happiness

When creating the compensation structure at Seneca Systems, we leaned on the advice and experience of many friends. Our recurring commission structure was borne from those conversations; a specific and sincere thank you to Liz Cain for her thoughts and contributions.

Now that we have the structure of the commissions, we needed to figure out how that relates to the total compensation package for a salesperson. This is commonly referred to as On Target Earnings (OTE) which is calculated as Base Salary + (Expected Business at Quota * Commission.) For example, if their base salary is $50k and they are expected to bring in $250k of new business at a 10% commission, their OTE would be $50,000 + ($250,000 * .1) or $75,000.

Our Formula

In the above case, commission represents a third (~33%) of the salesperson's total compensation. We'd heard examples of 100% commission-based compensation, many cited a 50-50 split, and a few in the 10-20% commission range.

Thinking about the behaviour we wanted to incentivize, we came up with a generalized formula to determine the percentage of OTE that we think should be commission based.

Commission/OTE = Fuck Yes Experience/TAM

TAM stands for "Total Addressable Market" and it is essentially the people or companies out there that could use your product. For Romulus, our CRM for state and local governments, our current focus is on representatives so our TAM is every elected official from townships up through state assemblies.

The "Fuck Yes Experience" factor is the subset of the total addressable market that love your product. Romulus is incredibly powerful, but not yet the right fit for every representative as we build out integrations and expand our functionality.1 We want to incentivize our sales team to only onboard customers for whom Romulus is a Fuck Yes Experience (FYE.)

It’s better to have 100 people [who] love you than finding a million who just sort of like you. Build your business one person at a time. Just focus on 100 people. If they love you, they will market the product for you and tell everyone else.

— Brian Chesky, CEO AirBnB

Compensation connects value and action, so our structure should encourage that behaviour. Commission is what you pay a salesperson for closing a deal, while base salary is the amount you pay a salesperson to not close the wrong deals.

If we believe, as an example, that Romulus in its current state is an FYE for 20% of representatives, we're basically saying that the salesperson should only close a randomly selected representative 20% of the time. There is an 80% chance that they are not a perfect fit for Romulus yet, so we would rather wait until they love the product than onboard them into mediocrity.

If we compensated them as 50% commission, we would be asking them to close a disproportionate amount of deals relative to the actual FYE market. We're incentivizing them, in order to make the compensation they expect, to sell customers that otherwise would not be a fit.

With a good understanding of our FYE market, we set base salary high enough that they are not pushed to close the wrong deals just to hit their numbers.

Define your FYE Market

How do we determine the Fuck Yes Experience market for Romulus? Romulus really shines in municipalities with Open311's GeoReport compatibility or teams spread across multiple district offices.

Many of America's largest cities — San Francisco, Chicago, Austin, Philadelphia, Baltimore, to name a few — implement GeoReport APIs. Enabling those representatives to push requests into 311 and stay automatically updated on their status is a huge win and our customers love it.

At the state and county level, many representatives have staff in local district offices as well as in the state or county capital building. The collaboration and centralized data of inside Romulus fits this use case really well, so they fall into our FYE market as well.

If these two represent 20% of all state and local representatives, our commission should represent 20% of on target earnings and we should pay a base salary to cover the rest.

At Seneca Systems, we're dedicated to building products that government employees love. Although we're infinitely more driven by our passion than by money, we recognize the importance of compensation in communicating value and incentivizing behaviour. Structuring our sales team's OTE around Fuck Yes Experiences is just one way we're building a better company and, in turn, a better government.

If you're interested in what we're doing, check out our careers page.

Footnotes
  1. We value [transparency](http://seneca.systems/values/transparency). It may be unconventional to admit your product isn't yet disrupting the world, but we prefer honesty over hype.