One more quarter has just passed away and some CEOs or VP of Sales are realizing that sales compensation is a delicate game of balancing the odds.
If you pay too much, you will be struggling to scale your sales, as a result your growth can decline and reciprocation of the strategy will never help you in the recruitment of top sales performers. Further, you may also have issues to retain those who ramp up quickly and drive revenue to your organisation. Salestools care about its customers and is happy to help you set up a compensation plan for your upcoming quarter.
Do you want your sales team to achieve 100% of their goals? This is when a fair compensation plan comes into play and creates a direct impact on reps and company revenue. However, you need to be aligned with your plan and make sure it is based on the right metrics. Not only to ensure that your sales team is highly driven and motivated, it’s also your key responsibility to gauge that the team is heading in a right direction.
To build the right compensation plan for your company, many interconnected variables have to be taken into account. The best approach is take a look backwards and analyse what you have tried before. This is how you can identify the spots, that will help you to establish your priorities and set right parameters accordingly.
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Base Salary / Variable Split: Find out the best ratio in between
Start laying out your plan by settling up the base and variable salary for each role.
- Base Salary: Amount that you pay a rep each month no matter what
- Variable Salary: Amount depends on meeting specified goals
1 – Decide the base salary according to the following:
- Level of autonomy
- Level of difficulty
- Experience required
Higher those variable level are, the larger the base salary should typically be.
2 – Calculate the variable split based on your specific answers to the following questions:
- How complex & long is your sales cycle?
- How much influence each reps exerts on the buying decision?
- Which market approach do you adopt: inbound or outbound?
- Is the focus of the role primarily Hunting (outbound), Farming (growing existing business), or Catching (inbound)?
The chart below highlights where certain sales role may fit on the Base salary / Variable compensation spectrum!
Base Compensation Elements
When you have a sharper idea of the total target compensation for each specific role, you then want to determine the elements that will drive your compensation model.
- Standard Commission Rate: Sales Reps receive their target earning when they reach their quota. Use Standard Commission unless your business characteristics require organically another model.
- Sliding Scale: Sliding Scale is a very appropriate model for high volume transactional sales. It helps to accelerate sales up front by increasing reps commission rate once they achieve a certain amount of deals/revenue.
- Step Function: The step function incentivize reps to reach various intermediate steps in order to achieve the big goals. At each steps the reps receive a bigger commission rate.
Salestools Tips: Use a Standard Commission Rate unless your business characteristics require another model.
Limiting Elements: Floor & Ceiling
The next main decision you should take is whether or not you want to impose a floor or ceiling in your sales comp plan.
- Floor: Flooring the standard Commission Rate is a method used to incentivize reps to pass a certain step. This method is usually used for high transaction sales.
- Ceiling: Ceiling means having a maximum in the variable split. According to salestools, ceiling should not exists. Why capping sales performance? If a reps wants to earn more money for the organization and himself, then the company should always encourage it.
Setting up the right Over-Performance strategy is critical for a great compensation plan if you want to avoid your reps to hold back deals or become less motivated.
- Bonus approach: Reps go beyond their quota and get a lift.
- Accelerator approach: When reps hit a certain goal, then their commission rate increase. The accelerator approach is great to avoid employees to hold back deals once they reach their quota. The main problem regarding this method is that companies can pay out disproportionately more commissions than revenue generated. Once a rep passes a certain threshold, his or her commission rate will increase.
- Retroactive Accelerator: Retroactive accelerator is a great way to avoid SDR holding back deals as soons as they hit their quota and is a very powerful motivator. Once a rep surpasses quota, then the company retroactively gives them a higher commission rate.
Set-up & Balance Your Comp Plan Priorities
Designing your compensation plan is a crucial moment and you should always keep in mind your bigger sales goals. SaaS sales departments have always various goals so called primary goal and secondary goal. Goals depends of your specific business attributes, your company vision and what you, as a CEO or VP sales, want to prioritize.
Most common primary goals for Account Executives (AE) concern the Monthly Recurring Revenue (MRR) and/or number of deals won. Common Sales Development Representatives (SDR) primary goals are numbers of lead generated and/or demo booked. The second goals exist to push salesperson to introduce quality metrics in the compensation plan or to highlight another important dimension in the reps work. Most common secondary goal are to increase profitability by lowering the average discount or rewarding high term length contract.
Example of compensation plan with MRR primary goal and lowering average discount as secondary goal.
- – Base salary on MRR attainment and a bonus if exceeding 100% of MRR quota.
- – Base salary on MRR attainment and basing bonus on average discount given by the reps (e.g: >10% average discount).
- – Base salary on MRR attainment with an accelerator based on extended term deals. (for every 3-year deal, reps get an extra 50%).
The key point of having a compensation plan based on two different metrics with one determining the base and the second one influencing the bonus is to offer you a great way to incentivize reps to commit for the secondary goal without deprioritizing the primary one.
Always be careful if you implement a decelerator while building your compensation plan as you do not want to claw back commissions. Usually decelerator impact the commission of the next month or quarter.
Keep in mind that your compensation plan has to be aligned with your business and sales strategy. Your salespeople should be motivated to work hard on the metrics that count the most for your company. Do you want to drive more revenue? Are you focus on customer acquisition? Is your sales strategy focus on long term? You first need to know where you want to go and accordingly build your Sales Compensation Plan.