Show Me the Money! A Guide to Creating a Scalable Sales Compensation Plan
Listen to the post below.
We’ve all heard Tom Cruise’s famous line from Jerry Maguire, but showing your sales team members the money is often a complicated equation. In this guide, you’ll find tips for designing sales compensation packages that yield results and actually scale.
As most CEOs have discovered at some point, sales compensation is very often a delicate balancing act. Pay too little, and you will never be able to recruit (or retain) the kind of game-changing sales talent that fuels growth. Pay too much, however, and you will struggle to scale your sales organization as that growth occurs.
The key, of course, is to find the middle ground — the point at which every employee who makes up your sales organization feels fully motivated to deliver results that fuel smart growth.
And while there’s no secret formula that will help your business find that middle ground, there are some best practices that can help expansion stage companies design sales compensation packages that incentivize optimal performance from every sales function.
Salary or Bonus-Heavy Compensation: Which Model is Best?
Here’s the short answer to that question: At the expansion stage, the more you can leverage compensation to results, the better off you (and your sales team) will be in the long term.
Commission or bonus-focused compensation plans provide tremendous upside for growth and allow CEOs to truly leverage their people — all while those people are given ample opportunity to make significantly more money than if their income was largely dictated by a fixed salary figure.
Simply put, if your compensation plan is largely tied to your sales organization’s ability to achieve specific objectives and targets, then everyone will be incentivized to perform the kinds of revenue-driving activities that yield those results. The value that you place on certain performance measures will vary, but the idea is to create an environment that rewards urgency and provides upside for over-performers.
Ultimately, that model won’t just help you appeal to (and retain) A-level sales talent, it will also make it easier to scale because your up-front investment in additional sales headcount will be less expensive.
For a more thorough breakdown of the primary compensation elements and how to choose the right plan for you, see “Choosing the Best Compensation Plan for Your Business”.
Tips for Compensating Every Sales Role
Of course, there’s no blanket approach that expansion stage companies can use to fairly and effectively compensate every single member of their sales organization. Lead generation or business development reps (BDRs) will obviously need to have their performance measured and compensated against different leading indicators than inside sales reps and sales management may need to be compensated based on an altogether different set of metrics.
So, as you begin to build or evolve your compensation model to promote efficient growth, be sure to keep these compensation tips in mind for each level of your sales organization’s hierarchy.
Sales Executives (VP of Sales, Chief Revenue Officer, etc.)
In most expansion stage software companies, sales executives are charged with all aspects of the company’s sales distribution model, the relationship and accountability of the sales and marketing departments, and driving (and ideally exceeding) quarterly targets. As such, sales executive compensation should be based on meeting specific sales goals and profit targets, as well as a manager or executive’s role in helping achieve key corporate objectives.
Ultimately, that compensation needs to be a confluence of salary, commission and bonus. The breakdown of those three components will vary greatly depending on who you hire, what that person is motivated by, and what your company is trying to accomplish, but the point is that sales executive compensation should be greatly tied to the entire sales organization’s performance against objectives.
Inside and Outside Sales Reps
Because these members of your sales organization are responsible for closing new business, their compensation should accurately reflect their ability to accomplish that objective. For instance, their salary may be based on leading indicators like number of appointments, new opportunities in the funnel, pipeline management, etc., while their bonus and commission is very simply a reward for their performance against specific revenue targets. The goal here is to reward efficiency, effectiveness, and results.
To encourage teamwork, companies should consider tying at least part of a rep’s variable pay to team-based metrics and objectives, as well. That being said, it is important to maintain individual performance commission and bonus incentivizes so that individuals are incentivized to work hard and follow best practices.
BDR / Lead Generation Reps
If you have already formed a lead generation or outbound prospecting team, you know that it can be an exhausting role that requires reps to endure constant rejection. Making matters worse, these reps are not responsible for actually closing business, so structuring a bonus or commission program for them can be difficult.
That being said, you should still tie some part of this role’s compensation package to results. For instance, 30 percent of a lead generator’s income could be based on the number of appointments they set and the number of opportunities they create.
Commission Capping and Payout Frequency
Regardless of how you structure your sales team’s bonus or commission structure, you should never — under any circumstances — place a cap on the amount of variable compensation someone can earn.
Because if your company’s bonus and commission payouts are indeed tied to results, then why would you want to encourage reps or managers to stop performing once they have reached their payout limit? Unfortunately, that’s exactly what a commission cap will do. Worse yet, by removing any real incentive or reward for going above and beyond the call of duty, you could also kill team morale and create a poor company culture.
As for how often each of the roles above should receive their commission, McDonald says that it is important to consider the context of each person’s situation. Lead generation reps, for example, will likely be fresh out of college and living month-to-month, so you may need to pay out their bonuses monthly. VPs of Sales, on the other hand, are much more likely to be financially secure, in which case tying their variable compensation to annual goals or company equity is perfectly acceptable.
Understand and Tie Compensation to Your Goals
The bottom line is that startup and expansion stage leaders must first understand their growth potential and where they want their organization to go if they hope to design a sales compensation plan that can help them get there.
To do that, simply start with your revenue goals and objectives and work backward. For instance, if you want to bring in $1 million in new business, how many deals will you need to close to get there? How many opportunities will you need to actually close those deals? How many leads will you need to generate those opportunities?
Lastly, for your employees’ sake, try to keep your sales compensation plans as simple to interpret as possible. You want to clearly illuminate their path to financial success. If you are unable to do that, it may cause your sales organization to focus on the wrong activities and objectives, or spend an inordinate amount of time thinking about how reach their targets — and both scenarios are recipes for disaster.
7 Compensation Mistakes to Avoid
Here are seven common mistakes that can set your team up for failure, provided by sales strategy consultant Michael Hanna:
- Making it Complicated. When designing a compensation plan, the tendency can be to go overboard getting really detailed and trying to address every possible scenario. Don’t get bogged down. The goal should be to keep it simple and make it easy for reps to clearly see where they stand at any given point.
- Failing to Align Metrics with Business Goals. Your plan should be tailored to incentivize behaviors that are really going to move the appropriate needles for your company’s particular business model and stage of growth. For example, since startups often need cash flow, compensation might be focused on promoting up-front payments.
- Treating Your Plan Like a Contract. The goal shouldn’t be to confuse, intimidate, or bore your sales reps to tears. Do everyone a favor and treat your comp plan like a marketing asset, instead. Again, make it clear and keep it simple.
- Using Metrics You Can’t Track. Nothing kills a plan quicker than basing it around metrics that are difficult or impossible to actually measure. Whenever possible, avoid metrics that are dynamic (something that changes over time like pipeline), estimated, subjective, or incomplete.
- Not Providing Real-Time Visibility. Even with the most simple plans, it’s important to provide a way for reps to calculate how much money they can make and where they stand in relation to their quota. Not only can having a clear dashboard boost motivation, it can also alert managers to who needs help and coaching.
- Not Preparing for Staffing Challenges. Turnover in sales is typically high. Be sure to take it into account along with ramp-up time for new hires and other potential challenges you’re not anticipating. In short, always incorporate some wiggle room.
- Not Reserving Room in Your Budget for Ad-Hoc Spiffs. Give yourself flexibility to launch quick contests and campaigns. You never know when you’ll need an extra boost.
Just like the best politicians craft a compelling vision for the future and take the public along for that journey, sales leaders can do the same for their teams and customers.
Stripe’s former Head of Revenue and Growth explains how his team enables developers to try the product before they commit to a contract.