Inside sales research from ZS and Reality Works found that 40% of large technology companies plan to increase their inside sales headcount. However simply hiring new sales reps, even if they are all-stars, does not garuntee a significant growth in revenue for your sales organization. Rather, one of the most effective ways to motivate sales reps to be their best is to provide them with the right compensation plan.
An effective compensation plan can turn your sales team into a true revenue-generating machine. Not surprisingly, one of the most common questions within sales is how to properly structure an inside sales compensation plan. Unfortunately, there is no simple answer. The best compensation plan for your sales organization depends on your team’s selling methods, structure, and even goals. The way you lay out your comp plan can even vary depending on each sales reps’ experience and role. For example, a plan that works perfectly for your first-year SDR right out of college will be completely ineffective for an all-start account executive.
Common Sales Compensation Challenges
Many organizations face the same challenges when creating a sales compensation plan:
How to Set the Right Sales Quota
The ZS and Reality Works study found that 79% of tech companies and 90% of non-tech large companies use quota-based sales compensation plans. In order to properly utilize a quota-based comp plan, you must find a delicate balance. Quotas that are too aggressive will lead to high turnover or a lack of motivation. If quotas aren’t high enough, reps just will simply not be driven to be their best. Accurate quota setting requires reliable sales forecasts and detailed activity reports. To make accurate sales forecasts, you must track the right predictive analytics. Use your sales forecasts, activity reports, and predictive analytics to predict pipeline and set accurate quotas.
Compensation Balance of Base vs. Bonus
Comp plans need the right weight of base vs. bonus. Base salaries are important to provide reps with a sense of their security (they won’t get evicted if they have a slow month). Commission, however, is what drives most sales reps. A bonus needs to sufficiently inspire reps to sell at their best. Placing a cap on a rep’s bonus will correlate with a cap on their motivation to sell for your company. In sales, the sky should be the limit.
The Rising Cost of Hiring Reps
Good sales reps are in high demand, and companies looking to hire them face a lot of competition, especially for reps with track records of success. One way to give yourself a competitive advantage is to create a compensation plan with great rewards. Without a competitive comp plan, great reps will surely land elsewhere.
A result of this extremely high competition, many companies hire reps with less experience, often right out of college. Therefore, companies need to know how to structure compensation plans that appeal to less seasoned reps.
In order to overcome the challenges associated with creating compensation plans, we’ve compiled some of the best compensation plans designed for various roles. Whether you are hiring outbound SDRs with no sales experienced, or heavy hitter AE’s, these comp plans will help you motivate all your reps to be top-performers on your team.
Outbound SDR Sales Compensation Plan Example
Sales development reps (SDRs) are reps that are tasked with lead generation and appointment setting. They almost never actually close deals, instead they hand deals off to account executives. SDRs are often fresh out of college. As a result, they look for plans that offer a lot of structure and security. Our joint webinar with OpenView Venture Partners reveals some tips that can help you structure compensation plans that are ideal for SDRs.
Keep It Simple for SDRs
In order to keep comp plans simple for reps that are starting in sales, we recommended separating comp plans into three sections:
- Base: The regular amount that reps see in their paychecks that is unaffected by performance
- Bonus: The additional amount reps receive based on meeting various goals.
- Kicker: Any additional bonus that is tied to closed won deals or competition
Base Vs. Bonus
Since SDRs are concerned about meeting their basic needs, 70% of their total compensation package is the base and 30% is the bonus.
How to Calculate the Bonus
When calculating the bonus, many of OpenView’s portfolio companies are using a 40/60 rule: 40% of the bonus is tied to appointments set and 60% is tied to actual opportunities. Another powerful way to motivate SDRs is by offering a kicker (extra pay) for opportunities they drove that actually end up closing. This motivates reps to not simply source opportunities, but source great ones.
Inbound Sales Rep Compensation Plan Example
Inbound reps (sometimes known as lead qualification reps or marketing qualification reps) are tasked with following up with leads that call as well as leads that fill out contact forms or download content.
Base Vs. Bonus
Like most sales comp plans, compensation plans for inbound sales reps should be comprised of a base and a bonus. Like SDRs, 60-70% of an inbound sales rep’s total compensation plan should be base salary, with the remainder making up the bonus. Inbound sales reps, like SDRs are often early career — my first sales job was as an inbound sales rep. They will usually want to have a large enough base salary to pay rent (whether a particular month is fruitful or not.
How to Calculate the Bonus
Where inbound sales rep compensation plans differ from comp plans for outbound SDRs is how bonuses should be structured. Here’s what we recommend:
Accepted Opportunities- Tie 65% of an inbound sales rep’s bonus should be derived from accepted opportunities. It’s key that these opportunities are all “accepted” by sales. That way it helps account executives provide oversight into opportunity quality. The last thing you want is inbound sales reps handing unqualified opportunities over to sales.
Opportunity Revenue- 25% of the bonus should be tied to revenue that actually closes. We like doing this because it further incentivizes inbound reps to source high-quality opportunities and gives them a stake in your company’s wins.
SLAs- Finally, 10% of the bonus should be tied to hitting SLAs. These are the activities that are expected of inbound sales reps and should be clearly outlined in their comp plans. Some vital SLAs for inbound sales reps might include responding to every inbound lead within five, following up with every inbound lead at least eight times and more.
Account Executive (AE) Compensation Plan Example
Account executives (AEs) are inside sales reps that are tasked with closing deals. One of the most important differences between comp plans for AEs vs. comp plans for SDRs and inbound sales reps is that AEs comp plans should have a greater emphasis on commission. As a general rule 50% of an AEs salary should be base and 50% should be bonus. So if a an inside sales rep’s base is $56K, that rep’s on-target earnings (earnings when at 100% of quota) should be $112K.
A bonus threshold is a good way to simultaneously motivate reps and cover costs for your company. It means that reps aren’t paid out a bonus until they hit a certain % of quota. For example, you might decide that AEs should hit at least 80% of their quotas before being paid any commission.
Never Put a Cap on Commission
One of the most important things about AE comp plans is to never put a cap on commission. Why on Earth would you want to punish a rep for hitting 300% of her quota? In sales, the sky should be the limit.
You can’t always expect newly hired AEs to come out of the dugout hitting home runs right away. A ramp quota can keep reps from getting overwhelmed. A ramp quota can scale as reps become better at their jobs. As an example, if a rep’s full quota is $1 million a year, they’d normally be expected to drive around $83,333 each month. But to help them ramp up, you could set their quota at $20K for the first two months, $40K for months three and four $60k for month five and then full quota at six months and beyond.
SaaS Rep Compensation Plan Example
SaaStr Founder Jason Lemkin revealed an innovative SaaS comp plan he used at EchoSign. He started out using a pretty standard comp plan with a high quota, base salary, and commissions that equated to 8-11% ACV. However, he noticed some problems including:
- Not enough incentives to stay (i.e. poor retention)
- The relatively low commission didn’t inspire reps to stay with customers. Instead they were leaving the moment the contract was signed. This didn’t lead to a customer-centric sales organization.
- Mediocre reps were making too much while A-players weren’t making enough
As a result, revenue per lead fell dramatically. He was able to devise a new comp plan with the goals of maximize revenue per lead, maintaining simplicity and retaining A-players. Here is what his new inside sales compensation plan for SaaS reps looked like:
- Competitive Base Salary– However, reps are required to cover their entire base salary including benefits before they are paid any bonus.
- Double Bonus- After covering base salary and benefits, reps then make 2x as much in Commission. This leads to ACVs of 20-22%.
- Payment Upon Receipt of Cash, Not Contract E-Signing. This inspires reps to really take care of the customers and ensure that they receive fantastic experiences.
Lemkin was able to use this plan to reward his top reps and turn sales into a revenue center (laggard reps were no longer eating up sales resources). The real beauty of his plan is that new reps became highly motivated to perform at peak performance, since they saw those top performing reps driving in with M6 convertibles. However, resources were never being wasted on reps who weren’t paying for themselves. And mediocre reps would end up simply leaving the organization. For more information, we highly recommend reading Lemkin’s article.
For more ways to structure sales compensation plans that help reps win, check out our eBook!