Creating a competitive compensation plan will allow you to attract and retain top talent. However, designing that winning plan can be challenging for the RevOps teams it falls to.
Your compensation program will determine employee salaries, impact company culture, and contribute to bottom-line revenue. And with 56% of sales reps who leave their role saying inadequate pay was the motivating factor, it’s important to get it right.
This article provides an in-depth look at compensation planning for your sales team, including:
- What a compensation plan is
- Why compensation is important
- Why RevOps should own compensation planning
- Factors that affect compensation planning
- Navigating the compensation planning process
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What is a compensation plan?
A compensation plan is a document that outlines the pay for each member of your sales team. This usually includes their base salary, their quota, and the reward for hitting their quota (commissions and bonuses).
Typically, this document excludes benefits that all employees receive, such as health insurance.
Compensation plans must be simple enough that sales reps understand how they’ll be paid while capturing the nuance and complexity of their role within your business.
Well-structured compensation plans should motivate and incentivize your sales team to hit their targets which contribute to your business’ goals. In turn, this will allow your company to hit its revenue targets.
Defining key terms
Compensation planning can be complicated enough without decoding jargon. In this section, we take a moment to define a few key terms in compensation planning.
Base salary: How much a salesperson earns, regardless of their performance.
Commission: Typically a commission is a percentage of revenue paid to the sales rep who closed the deal. For example, a sales rep might earn 8% of all revenue they generate.
Bonuses: A set amount of money paid out for meeting certain criteria, such as excellent employee performance. For example, receiving $500 for hitting 100% of the target.
Payment rules: Details of how often and why a salesperson receives a commission or a bonus. For example, getting paid commission on the last day of the month following a closed won deal.
Clawbacks: This is where money is recovered from a salesperson if their bonus is paid but the deal doesn’t go through, or the client fails to pay in a certain amount of time. These conditions should be stated clearly in the compensation plan if they apply.
Quotas: The expected results or target for an individual rep over a certain period. This is usually a revenue amount.
On-target earnings (OTE): The full salary a sales rep will earn if their targets are met.
Chloie Brandrick
Why is compensation planning important?
While it may seem obvious why compensation planning is important, we thought it best to highlight a few key reasons why an effective compensation plan is essential for your business growth.
Such as:
- Employee retention
- Incentivizing the right behavior
- Boosting revenue growth
Employee retention
Pay is important for all your team members, so it’s no surprise that compensation planning is important for hiring and retaining your sales reps.
Poor compensation is a major contributor to sales rep turnover. If you don’t nail your approach to compensation, you may be at risk of losing your top talent.
Rewarding your sales team with competitive pay and setting them realistic quotas, keeps them happy and motivated to perform. If quotas are too high, you risk demotivating your reps.
Communicating this information is equally important. Your sales reps want transparency around their pay and what they have to do to receive their commission or bonus. Without effective communication, your sales team may feel frustrated or confused about their compensation.
Incentivize the right behavior
The structure of commissions and bonuses incentivizes your sales team to hit their quotas and sell certain products. If you structure your compensation plan to incentivize the wrong products or sales activities, you might struggle to hit your revenue targets.
On the flip side, a well-balanced compensation plan will incentivize reps to overperform and increase revenue flows.
Brett Kelly, GTM Business Planning Lead at Amazon Web Services, shares how he would incentivize the right behaviors:
“Tie it to revenue, and manage the leading indicators in the field. No matter the behavior or activity, provide meaningful, actionable, and easy-to-consume reporting.
“The behavior is, and always should be, ‘show me the money!’ For most salespeople, they know this is what they signed up for and it's what they expect.”
Boost revenue growth
What does paying your sales team have to do with boosting your revenue, we hear you ask. Well, quite a lot actually, let us explain…
If your quota is set too low, your sales team may decide that hitting the target is good enough for them. This may result in lost revenue as your reps could be closing more deals if there was more incentive to do so.
By setting up your sales quota and compensation plan just right, you can maximize revenue potential and growth as your reps are motivated to work hard to close deals and earn their rewards.
Daniel O’Dowd
Why should RevOps own compensation planning?
Now we understand what compensation planning is, which department should own this process? Finance, HR, or maybe sales leadership? While these may be options, we argue that RevOps is uniquely qualified to own compensation.
Compensation planning requires:
- Historical sales data
- Insights into high-profit/low-churn customer demographics
- Product roadmap knowledge
- A good working relationship with the sales team
- Data analytics and reporting knowledge
Revenue operations tick all of those boxes, whereas finance, HR, and even sales only tick a few. This leaves RevOps in a great position to create an effective compensation plan.
Brett Kelly adds that compensation planning should sit with RevOps because:
“Planning has to marry the nuances of operational processes, compensation system constraints, sales priorities, territory design, and seller profiles. Most of those items live within sales and business/sales operations.
“Additionally, because most marketing ops functions reside within RevOps, an inclusive view of the entire customer journey is difficult to articulate from the outside.”
3 factors that affect compensation planning
Business goals
The first factor to consider when compensation planning is your organization’s goals. The best plans align with your business goals to promote revenue growth in the right areas.
Depending on your goals you can incentivize different behaviors with your compensation strategy. Let’s take a look at some examples:
Increase new customers: Incentivize outbound work, new customer meetings, and closed won deals with new accounts, by having a higher commission rate for these activities.
Decrease churn: Reward salespeople for selling to customers statistically less likely to churn or for upselling to happy customers.
Drive longer contract terms: Bonuses for converting monthly agreements to year-long contracts, or even multi-year deals would incentivize this change.
Compensation structure
There are a few different structures of compensation that can be used to reward your sales team. Here are four plans to give you an idea of how commission can be structured.
🤑 Salary plus commission
This structure is the most common for sales reps. It combines the predictability of a base salary with the incentive structure of a commission – the best of both worlds. This compensation structure focuses on revenue generated by a rep.
💰 Gross profit margin
Instead of focusing on revenue, this compensation structure revolves around profit margins. If they sell an item for $3000 that costs you $500, then they earn their percentage commission from $2500.
Pro: Deters heavy discounting.
Con: Encourages reps to only sell high-margin products.
📏 Straight line commission
In this structure, commission is tied directly to their quotas, 60% quota equals earning 60% commission. Or if they overperform, 120% of the quota turns into 120% of their commission.
Pro: Simple way to calculate variable compensation.
Con: Uncapped commission may eat into your budget, and unmotivated reps may be content only hitting 80%.
📊 Tiered commission
Reps earn a percentage from each deal they close, but this percentage rate varies in a tiered structure. For example, the first $20000 might earn them 5% commission, then they’ll earn 8% up to their quota, and exceeding their quota will earn them 2% commission.
Pros: Encourages reps to keep performing and saves your budget.
Cons: More complicated to calculate.
Team role
A salesperson's role and job description can impact their compensation structure and pay. Some roles have more or less involvement in the sales cycle and therefore will be rewarded differently.
As Brett Kelly puts it, “Do your sellers have a progressive variable mix as their contribution and impact increases? If not, something ain't right!”
Sales development reps and business development reps (SDRs and BDRs, respectively) are typically junior members of the sales team. Their roles usually involve research, reaching out to prospects, qualifying leads, and booking meetings.
For that reason, most firms reward SDRs and BDRs with incentive pay for qualified opportunities and a small percentage of revenue on won opportunities from those leads.
Account executives (AEs) are typically involved in the full sales cycle. It’s their job to take meetings and close deals. This role may see a commission structure with accelerators to incentivize overperformance and decelerators to disincentivize underperformance.
The base salary to variable compensation ratio of an AE is usually around 50/50.
Account managers (AMs) are often responsible for onboarding and customer management after the deal is closed. Their goals are to reduce churn and upsell products.
Commission for AMs tends to be based on the revenue from upselling to customers. An AM can expect a base salary to variable compensation ratio between 65/35 and 70/30.
Sales managers are responsible for managing their team, but often still close some deals themselves. Most companies choose compensation plans that reflect that by rewarding managers with commissions on deals they close and bonuses based on the sales team’s performance.
Debbi Varela
Navigating the compensation planning process
Since you’ve considered the key factors that affect the planning process, it’s time to actually create your compensation plan! Let’s dive into the key steps involved.
Defining the quota
Once you understand the business goals, you can start thinking about quotas. The first question to ask is, how many reps do you want to regularly hit quota? This varies around 60-90%.
Using this, you can look through historical sales data and see what quota would allow your sales team to attain at that level.
Another approach to setting your quota is to multiply reps OTE by some factor. The SaaS industry standard is five times, but this depends on revenue, industry, and role.
Communicating with stakeholders
A key aspect of maintaining good working relationships with your sales team is communication. You are controlling their earning potential so it’s crucial to communicate changes well in advance and with compassion.
Ensure each rep understands why the changes have been made and how this impacts their expected earnings. You may also wish to involve your enablement team to help train team members in their weak areas, to increase their performance.
Brett Kelly offers his advice for communicating with the sales team.
“Early, often, and personal.
“Some of my most memorable moments in ops so far have been building a 'path to plan' with reps. Illuminating them with their data on how their territory, funnel, and revenue forecast impact their compensation, is what really engages and informs reps.”
Gathering feedback and iterating
It’s unlikely you’ll get the compensation plan right the first time. The key is to keep listening to feedback and discover where improvements are needed. This will allow you to iterate and resolve some problems to keep your sales team happy.
If you’re struggling to collect honest feedback, consider using an anonymous survey. This may encourage more honesty when the reps know they won’t be picked on for their views on pay.
Just remember to keep the team informed about new changes to their compensation!
