Properly Evaluate Sales Reps
Properly Evaluate Sales Reps
Don't lose your best sales reps. And don't keep the bad ones.
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Sales Math
At the surface, the math behind hiring and firing sales reps seems simple:
If we hire X number of sales reps and the average attainment is Y% then we will add $XX in new bookings. If a rep has below X% of attainment for 2 quarters then fire them. Reps that hit 110%+ of quota go to presidents club and we give them the best territories.
Easy, right?
Well, it isn’t really that simple so let’s dig into what can cause this simplistic math to break…
Two Truths in Sales
Sales reps should count on two things always being true for growing and successful companies:
Territories will shrink
Quotas will increase
If things are going well at a company, then the number of reps will increase every year, which means that territories will shrink.
And as a company scales, quotas need to go up to make up for additional management layers and so the company can become more efficient at scale. Quotas theoretically can increase at scale because there is a larger base of customers, word of mouth is larger, brand is bigger, more products, etc.
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Ideal Company Quota Attainment
The decision to hire more or layoff sales reps because of over hiring is largely driven by overall rep attainment and GTM efficiency.
Companies have to find the goldilocks zone of rep attainment that keeps reps motivated and grinding hard while also weeding out the weak reps. If too low, then you are starving your good reps and they will leave. If it’s too high then you are probably keeping bad/mediocre reps.
There are a few different thoughts on what this ratio should be:
Some say 80% of reps at 100%
Team-wide quota at 75%
And many other versions of the above
But the reality of AE attainment has been much worse over the last couple of years…
The average attainment is down in almost every company segment. Some segments appear to be recovering…But is it because sales have picked up for smaller companies or is it because smaller companies were less disciplined / quicker to lower quotas during the downturn? If the latter, then their efficiency metrics are probably suffering.
If overall attainment is far below your targets, then you either have:
Too many reps (over hired)
Too many bad reps (poorly hired)
Lack product market/fit (no one wants it so you implicitly also over hired)
No matter the option, someone is probably getting fired. If growth isn’t terrible and attainment isn’t too low though, then many companies may choose to just put a freeze on net new hiring until overall attainment gets to acceptable levels.
The goal of the next section is to help companies better define what reps are actually underperforming compared to the rest of the company (and should be on the chopping block).
What Makes a Great Rep?
A Little Luck
No matter what some quota crushing reps may say, there is definitely some luck that plays into an individual’s sales attainment.
By far the biggest luck factor for reps is their territories. The reverse can also be true - back luck and getting bad territories. Examples:
How many companies fit squarely within the ICP (ideal customer profile)
How many companies have already been partially worked (how many deals are you getting handed to you on a silver platter)
The lucky rep may do really great for a couple quarters (maybe more). But as territories shrink and they close the easier deals, the bad/mediocre rep will start to struggle fast.
The good reps in the bad territories can be hard to spot — especially in a fire fast environment. But the really great reps still figure out how to close.
The Mendoza Line of Sales Performance
Mario Mendoza was a major league shortstop for 9 seasons (1974 - 1982). But unfortunately for Mr. Mendoza, he is famous for having such a low batting average that his low batting average was coined by his teammates as the “Mendoza Line”. The Mendoza Line is considered the minimum hitting percentage that a player must obtain to stay in professional baseball (i.e. the bare minimum requirements). If you are above the Mendoza Line then you feel safe, but if you are below then your days in the big leagues are numbered.
So how does this relate to sales?
Sales performance is often tied exclusively to a topline sales number (ARR, MRR, ACV, etc) and therefore the sales rep “Mendoza line” at the company is determined based on that.
If the average rep attainment is 80% and you are at 60% then you may want to start looking for another job. As I will explain below though, just a topline sales number may not be the best indicator of sales rep value to the company.
Don’t fire the wrong rep
Enterprise software sales reps are typically compensated on topline sales (ARR or ACV). If you were to only look at the attainment between Sales Rep A and Sales Rep B in the example below then you would be quick to conclude that Sales Rep A is significantly better with a quota attainment of 78% vs 67%. Sales Rep A brought in $100K more in sales and earned $10K more in commissions!
Time to fire Sales Rep B, right?
This is how most companies end up evaluating performance and drawing the sales rep Mendoza Line — Sales Rep A is above 70% attainment consistently so they are safe.
But wait….not so fast. Let’s look at the deal economics:
1. How much discounting was given?
The average sales discount for Sales Rep A was 25% while Sales Rep B only discounted 10%.
Reps' commissions are always calculated on sales net of commissions. But all else being equal, higher discounting means lower gross margins and less overall profits. The unit economics on the deal is worse the higher the discounts.
In the example above, Rep A discounted 15 percentage points more. Which on $600k in sales means $90k less in profits every single year!! That is huge.2. What is the customer life?
The customers from Sales Rep A also don’t stay customers as long — 4 year average life vs the 5 year average life of Sales Rep B.
So the company gets all the profits (which are 15% higher) from Sales Rep B customers for a whole extra year! Customer Lifetime Profits
Ultimately a company’s value will be determined on how much profits it can generate over time. The profitability of each individual customer is key to that. Topline revenue is only useful if it translates to profits.
Sales Rep B actually generated $600K more in customer profits than Sales Rep A! And I didn’t even layer on a higher expansion assumption — better fit customers expand more.
Discounting and customer life can have HUGE impacts on the long-term value of a company but are typically left out of sales rep performance evaluations.
The best reps discount less and close customers that churn less. These are the deals that companies want.
Bad Processes & Commission Plans
The above issues become very problematic at companies with a lack of processes and bad commission plans.
Show me the incentive, and I will show you the outcome. —Charlie Munger
If a company only incentives topline sales and there are no rules around discounting and customer fit, then things are going to get messy fast. This is frequently true at early stage, fast-growing companies.
Larger, mature companies usually have built out processes and controls so evaluating reps mostly on topline sales is a much better indicator of performance (even if not perfect).
Final Thoughts
Great sales reps easily pay for themselves but be careful how you compare sales reps because typical quota attainment can be misleading. Things to look for:
Sales discounting
Expansion opportunities
Customer life
If you aren’t a mature organization with good processes and controls, then consider how you are evaluating sales rep performance and how you define the Mendoza line.
Footnotes:
Check out Brex’s guide: “The future of B2B payments,”
Check out these free sales capacity planning or commission calculator templates
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My stone Fabio: thanks for the citation and one quick clarification. While I do so 80 at 80 (i.e., 80% at 80% of quota) is good, please don't forget the important point that, in enterprise at least, that needs to be on an annual basis. I think too many folks do these X@Y% rules without stating whether that monthly, quarterly, or annual. And the bar gets much higher the shorter the time period.
I always talk about the three T's of sales; Territory, Timing and Talent. A salesperson needs all three to be successful. If you have the right Territory and Timing you can be a lucky sales person and close a deal, even without the Talent. These are the reps that over discount or even over commit the product so the customer churns rapidly. But if you have all three a salesperson will be repeatedly successful and generate profitable customers.