Taking the Guesswork Out of Sales Team Compensation
November 4, 2011
As most CEOs at the expansion stage eventually find out, sales team compensation can be tricky. There are myriad questions that must be addressed to flesh out compensation plans that are fair for each position within your sales organization.
For example, should your entry-level inside sales reps be given more salary and smaller bonuses? And what about a VP of Sales — how can you compensate them in a way that centers around an equity stake in the company’s overall results, increasing their motivation to drive revenue? Then there are lead generators. What outcomes or transition points should correlate to their compensation? And how frequently should their bonuses be paid out?
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Here’s the short answer to each of those questions: At the expansion stage, the more you can leverage compensation to results, the better off you’ll be in the long term. As the CEO, that means allowing your sales employees — whether they’re a VP of Sales or a field sales rep — to earn more from their sales results than they can from their salary.
The problem with salary-heavy compensation, of course, is that it decreases motivation and makes it virtually impossible for a small company to scale. Commission or bonus-focused compensation plans, however, provide tremendous upside for growth and allow CEOs to truly leverage their people. And we’re not talking about a unitary system here that’s only good for the company. Bonus-heavy compensation is ultimately better for everyone, providing ample opportunity for each member within the sales team hierarchy (and the company itself) to make more.
The truth is, when it comes to your sales team, every startup or expansion-stage CEO should want to “show them the money”. Because if compensation plans are structured properly, the distribution of wealth usually means that those people are being paid relative to the value they bring to the company. And in that scenario, everyone stands to benefit.
VP of Sales and executive compensation
What exactly should factor in to a VP of Sales compensation package?
It depends a little bit on your company, its industry, and the products it sells. But in most expansion stage software companies, a VP of Sales should be 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.
In the end, they’re an executive — not a manager, director, or glorified field rep. As such, their compensation package must revolve around an equity stake in the business. And, as a recent VP of Sales compensation study by Phone Works revealed, that means factoring in things like:
- Meeting sales goals
- Meeting profit targets
- Achieving key corporate objectives
- Efficiently scaling and on-boarding sales team members
- Hitting personal MBOs
The bottom line is that sales executive compensation needs to be a confluence of salary, commission, and bonus — all of which reward those team members on the revenue results of the entire organization (or, in the case of a sales manager or director, the performance of their specific organization).
Now, that doesn’t mean you have to skimp on compensation. Ultimately, you want to create an environment that encourages everyone to perform better and drive revenue. If they succeed in doing that, VPs of Sales and their team members should make a lot of money. You just don’t want to make the mistake of giving it to them before they do anything to warrant it.
Inside sales reps and lead generator compensation
Compensating reps and lead generators is another fairly common problem that CEOs at startup or expansion stage companies face.
Pay too little, and you remove any motivation or sense of urgency to close new business. Pay too much, and you harm your ability to scale and attract the wrong kind of sales talent to your business (the kind that expects to make $400,000 per year on blue bird deals, for example).
The simplest way I can explain the resolution to that problem is this: When it comes to inside sales or lead generation compensation, the goal should be to leverage your employees and give them the opportunity to make more money from sales results than they do from salary.
Of course, there’s no uniform salary-to-commission ratio that will work for every company or sales role. Here are few other things to consider when deciding how to best compensate your inside sales and lead gen teams at an early stage sales organization:
- Inside and outside sales: Leading indicators (number of appointments, new opportunities in the funnel, pipeline management, etc.) should determine a salesperson’s salary. Their performance against revenue expectation should dictate bonus and commission.
- Lead generation: Their salary justifies the number of calls and conversations you expect them to make and the activity that drives the pipeline. Their commission, on the other hand, should be based on the outcomes at the various transition points of sales, the number of appointments they schedule at large enterprises, and the appointments that turn into real opportunities.
- Quarterly or monthly: That depends on the makeup of your team, but young salespeople (who typically have no savings and college loan payments to make) often need to be compensated more frequently. Sales managers, directors, and executives, on the other hand, should receive their bonuses quarterly.
- When to cap commission: Never. It’s as simple as that. Capping commission creates a bad culture and kills morale. If your compensation plan is set up correctly, you’ll be rewarding for results that bring significant value and revenue to the company. And in that scenario, you can afford to spread the wealth.
The bottom line is that sales compensation — whether it’s for a new lead generator or an experienced inside sales rep — is about rewarding efficiency, effectiveness, and results. The value that you place on certain performance measures or types of sales will vary, but the idea is to create an environment that rewards urgency and provides upside for over-performers.
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