Sales Compensation Plans That Optimize For Growth
Designing a sales compensation plan requires a little bit of art and a little bit of science. I’ve seen sales compensation plans that were too complex for any salesperson to understand. And I’ve seen others that incentivized the wrong behavior. Regardless of whether you work in a startup or a large enterprise, here are some guiding principles for building compensation plans for Sales Development teams and Sales teams.
Sales Compensation for Sales Development Teams
Sales development teams are responsible for outbound campaigns and for following up on inbound leads. Compensation plan design should be guided by the behaviors you are seeking to encourage. These behaviors should be directly tied to the key performance indicators for the sales organization. For example, if you seek to generate as many meetings as possible, you should consider compensating Sales Development Reps (SDRs) not just on the number of meetings, but also, the type of activities you know are aligned to booking the most meetings possible.
My favorite model for compensating SDRs is on a per-meeting basis. By per-meeting, I mean a first meeting completed with a person with the correct job title in a company that fits into our ideal customer profile. I like this method because it is the simplest approach, the easiest to measure and it means that your SDRs are compensated only for things that are 100% within their control.
That said, there are several alternatives, that we have seen implemented successfully:
When the SDR books a meeting, the AE will assess the prospect’s business and determine if there might be a fit. If the AE determines there’s a fit, then s/he estimates the deal size. SDRs should be measured on pipeline generation each month or quarter and they should not be penalized for deals that go to closed lost (provided adequate controls are in place to ensure AEs are entering realistic pipeline amounts). Beware that SDRs may lobby for more pipeline to be attributed to the meetings they book. Oversight by the SDR manager and their leader is essential to ensure compensation based on pipeline generation is not “gamed” in any way.
It may seem like sales activities (cold calls, emails, etc.) are the essential job function of the role and you shouldn’t have to compensate them based on activities. You may think compensating on activities is draconian or wreaks of micro-management. If you thought this, you would be dead wrong. The fact is, if you don’t provide any parameters on HOW you want your SDRs and AEs to do their jobs, they will all take the path of least resistance. Meaning, if you expect them to make phone calls (because calling still is the most effective way to book meetings, generate pipeline, and close business) but don’t structure the comp plan in a way that encourages them to make cold calls, then you will have a sales team that hammers away at the keyboard all day sending emails and your sales floor will be quiet… dead quiet. One effective approach is to create a weighting on the comp plan such that activities are weighted at 25-33% of their variable comp payout.
When an SDR books a meeting with a target account, apply a multiplier to the compensation. This helps them focus on a particular niche or specific vertical.
After the first meeting, you will have a better understanding of the prospect’s fit to do business with you. Including this in the compensation calc helps ensure good fit up front.
Reserving some of the compensation for closed deals gives the SDR a stake in ensuring the sales rep is supported throughout the sales cycle. It helps if you are planning to promote your SDRs into sales people and want them to give them exposure to the sales cycle.
Keep it simple initially and then start to use the additional methods of compensation for when you need to course-correct or incentivize particular behaviors.
Sales Compensation Plans for Sales Teams
If compensation for SDR teams seems tricky, wait until you start to build one for a team of Account Executives. Compensation for revenue is complex because the term revenue so ambiguous. For example, you have to understand terms like:
The total value of contracts you have sold – including recurring revenue, once-off fees, services revenue, and multi-year deals.
Annual Recurring Revenue (ARR):
The total amount of annual recurring, or subscription revenue your sales team has booked.
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How and when you customers are contracted to pay you – on a monthly or annual basis, in advance or arrears.
Contracts that are not renewed after their expiry date.
Additional bookings or ARR at an existing customer, which may happen shortly after the first contract is signed or as part of a renewal.
All our contracts are annually paid in advance, so to keep it simple, I build all compensation plans around Annual Recurring Revenue (ARR). Your company will already have a strict definition of that for reporting purposes. Paying compensation based on that eliminates a lot of arguments and incentivizes annual contracts over pilots and short term deals.
Advanced Sales Compensation
Once you master the terminology and build some basic sales compensation plans, you can start to investigate some more complex approaches. Here are some of the pros and cons of including them in your plan.
This is when you increase the compensation percentage per deal once a sales rep closes a certain amount of revenue in the period (month or quarter). This eliminates the practice of sandbagging, where a sales rep holds off on closing a deal if they have closed enough already in that period.
This is where you set a floor for the amount of revenue a rep needs to bring in order to get any commission. For example, specifying they need to be above 50% of quota before being paid any commission. While some managers live by this approach, don’t expect it to make you very popular. It works best when you’re in high-growth mode. If your business is cyclical and some months are better than others, it may end up pushing people out.
As suggested by the name, this involves capping the commission paid for a particular period. So no matter what a sales rep closes, they max out at a certain dollar amount. My only advice here is to never do this unless you have some cash flow constraint that limits what you can pay.
While you may run your business on a quarterly cadence and you might assume that commission should be paid on a quarterly basis, don’t underestimate how much of a difference monthly payments can make, especially at the lower end of your salary scale. Payout frequencies are a great way to motivate your team and to use as a bargaining chip when hiring entry level reps.
Finally, and saving the best sales compensation trick for last, one of the most effective compensation tactics I’ve used in my career is the concept of mini-promotions where you give your sales reps or SDR a percentage increase in base salary each quarter, assuming they are on quota. Doing this creates a path for your team to higher earnings, removing the temptation to jump ship prematurely and meaning they will always come to you before considering another offer seriously.
Sales compensation can have a dramatic impact on sales performance. While it is important to be aware of the components of sales compensation plans, you shouldn’t need all of them to get started. Use the guide above to make sure you’re avoiding the ones that drive the wrong behaviors.
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