Almost every one of our clients has asked us for guidance on sales rep compensation: how to set it up, how to transition from a license model to a SaaS model, how to adjust comp levels, how to best drive results. It’s always a top-of-mind priority for our CEO’s and their investors.
Unfortunately, getting the results you want from your sales team is not as easy as dropping a coin into a vending machine and expecting peak performance to pop out the other end. The conundrum of sales compensation continues to vex leaders in all industries. According to a survey from Insidesales.com, one of every five sales leaders identified compensation as their top challenge.[1]
The most productive sales reps we know are motivated by a comp plan that rewards them for their contributions and gives them a fair chance to make real money. If they are satisfied with just a salary or a bonus tied to overall company performance, they are not the classic hunter or account development rep you should be hiring.
How to Develop an Effective Comp Plan
To develop an effective compensation plan that meets your objectives, you need to consider a variety of business and sales questions:
- How mature is your offering? If you are selling a new category product or service, you may need to pay a premium for the more difficult early adopter sales.
- What are you selling? Products, services and solutions all have different selling motions and require different comp models.
- Who are you trying to incentivize? Depending on your organizational objectives you may need to consider comp plans for lead generation teams, sales reps, sales managers, technical sales support people and subject matter experts.
- What are you willing to spend? Decide on the percentage of revenue you are willing to spend on commissions.
- What is your sales team and market makeup? You may have a mix of junior and senior reps. They may be selling to existing clients with a wide upsell opportunity and limited risk or to net new accounts (traditional hunter roles) with greater risk. These variables should be baked into your comp plan.
10 Compensation Dials to Drive Results
Once you have identified your main comp drivers, there are several compensation “dials” that you can adjust to drive your desired results:
- OTE – On Target Earnings is the combination of salary and variable compensation you want to pay for reaching 100 percent of a goal you have set for a specific sales role. OTE compensation typically varies depending on inside versus outside sales, seniority/capability and the segment your business occupies.
- Base/Comp split – The split refers to the percentage paid out at OTE for salary and variable compensation. If OTE is $100k and the rep gets a salary of $40k and variable payout at the assigned quota goal of $60k, he/she is on a “40/60 Plan.” This can vary based on type of selling role and skill level.
- Sales Quota – Typically quota represents the amount of business you require reps to bring in to achieve 100% of their bonus opportunity.
- Threshold – This is a minimum bar you set for reps to exceed before they start receiving commission.
- Curve – The shape of the payout curve reflects the aggressiveness of your compensation philosophy. The steeper the curve the more upside for the rep and the higher your payout on success.
- Accelerators/Cap – This establishes your extra compensation rates and caps for rewarding reps who achieve above assigned quota goals
- Draw – If your sales cycle is long and complex, you may have to consider setting up advance payments against commissions.
- Stock – Including stock options in the company as part of your comp plan can be an effective incentive to attract the best talent.
- Special Incentives – You may consider providing extra rewards for selling certain new product initiatives (e.g. moving to the cloud).
- Timing – Determine when and how you will release rep commission payments.
It’s critical that you understand how these factors will impact the performance of your sales team before you decide on your compensation philosophy. Having a strategic approach to the ways in which you reward your sales team is a crucial first step in enabling you to recruit and retain the most effective sales pros. Motivating the right team with the right rewards will ultimately drive the business results you need.
So yes, salespeople are often coin operated, but their drive to be rewarded for performance allows you to more closely link their actual output to results more than any other position in your organization.
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If you have feedback, questions or best practices you would like to share; we would love to hear from you. Share your experience in the comments below, or contact us to learn more.
[1] Top Challenges for Sales Leaders in 2018 – What Keeps Sales Pros Up at Night? By Gabe Larsen, Insidesales.com, April 11, 2018
