In a previous post, we discussed creating and executing a successful territory plan. After you have completed your TAM Analysis, now you need to assign a quota to the team to hit your company-wide goals.
From the Sales Rep’s perspective, they would never accept a role at a company without knowing how they can make money. Your Sales Compensation plan is vital to attract and keep your talent. It is so crucial to get your organization’s sales compensation right. You not only want but need the best people to accept a position on your sales team and stay with your company long-term.
Do not fall into a trap and create a complex plan. What is in the best interest of the rep & the company is to keep the plan simple, with a focus on meeting the financial goals that have been set. Those of us who have built and manage compensation plans know how smart our Salespeople are and how good they are at finding and exploiting loopholes in the compensation plan. So, keep it simple and fair and look at the variables you select to ensure you are distributing your resources appropriately.
Customer acquisition cost (or CAC) must be part of the plan review and it should include all the cost assumptions it takes to get a new customer signed. To evaluate this cost, you would add up your sales and marketing expenses. With this analysis completed, you will find that the sales compensation costs are a primary contributor to CAC. You should always consider this in setting the targets.
We will begin with definitions that are part of designing and building a sales compensation plan.
Sales Compensation: Is the amount of money you pay to a salesperson or plan participant. This may vary from company to company, but in this post, we will focus on the plans that include a base salary, commission, and other monetary SPIF’s (a Sales Performance Incentive Fund).
Sales Compensation Plans
A good sales compensation strategy design will support and drive a sales team’s performance, which should result in increased revenue to the Company. It needs to incentivize specific behaviors and actions that suit the needs of both the company and the customer.
Understanding this, you need to design a strong sales comp plan that will motivate reps to hit goals that grow the company while keeping a profit margin. The plan should include the details on all aspects of the salesperson’s earnings and includes salary, commission, and any other bonuses or incentives that the salesperson may qualify for.
To reinforce the above, a sales compensation plan’s purpose is to drive specific clear-cut behaviors across your team. The Plan will set expectations and standards for compensation for all plan participants, and drive results to achieve overall team and organizational goals. The structure of a sales compensation plan varies by your business. In most cases, this is based on your organization, your resources, and your goals. For this blog I am only going to focus on 3 of the most used plans for a SaaS business, “Relative”, “Absolute”, and “Territory” plans.
The plan design should reflect an individual goal for each participant, which rolls up to the overall team and company goal. When designing your plan look at factors such as their role, experience, length of the sales cycle, average deal size, and the type of deals they engage in. Other factors to consider in the sales compensation plan:
- What are the revenue goals?
- What are your current resources?
- What is your company budget?
- What is your competition paying by region?
- When do you pay commission, monthly/quarterly?
- What type of plan will you use/need? Is the plan flat rate, tiered (what formula will you use to calculate achievement)?
- How is it tracked?
- What bonuses or SPIF’s will be used?
- What is a participant’s Quota?
Different types of compensation plans.
The following examples include only the three most common types of sales compensation plans. Each example has a different structure, so you will be able to tailor your plan to your specific sales team and business based on your needs, resources, and goals.
Relative Commission (recommended plan)
The most common sales compensation pay structure is the base salary plus commission. This plan supplies the rep a fixed annual base salary as well as an incentive commission. This provides they get the safety of a steady monthly income with the financial incentive to sell. This plan is more common than other plans, as it permits finance to budget your expenses (since there’s more predictability) and the opportunity to attract and retain highly motivated, competitive salespeople. Additionally, since you are supplying reps a base salary, they can be required to complete some non-selling tasks such as ongoing management of new customers.
With the Base plus Commission, your overall commission percentage paid will be lower because of the base salary. To determine what an equitable base-variable (or fixed) compensation split should be, consider the following:
- What is the average length of your sales cycle?
- How complex is your product?
- How complex are your sales processes?
- How self-sufficient should your reps be (do they need other teams to support the sale, i.e. technical demo’s…)?
- How significant is Industry experience?
- What volume of leads can your reps manage at any given time?
- What are the reps selling function, New business, Upsell/Cross-sell, Renewals?
You need to consider the level of impact the rep has on the customers buying behavior. The simpler and shorter the sales process and the cycle is the smaller the percentage of variable compensation should be. Your variable plan should focus on, “risk and reward”.
Most variable compensation plans are designed to reward the Hunters (those who are incentivized to find net new customer aka logo’s and new revenue) with a larger variable of 60%: 40% or 50%:50%. For farmers (those who support existing customers from upsell and renewal) would have a less aggressive ratio (70%: 30% or even 80%: 20%). This increased ratio of fixed pay drives then to spend more time with existing customers than finding new ones.
This plan should be designed to pay a commission against a predetermined target or quota. This target is normally based on the ACV of an order. This has a commission structure that pays based on the rep’s attainment against their quota. In almost every case it can be described as 100% attainment will pay 100% of OTE. You will need to communicate in your plan documents what the Reps OTE would be “at plan”.
This type of plan should also be designed to be a pay for performance plan, that rewards outstanding performance and should have a method to penalize inferior performance. You are not confined to a straight-line payout (75% attainment pays 75% commission payout). The most frequent use of this is with accelerators and decelerators. The advantage of this plan is that you can level your team payout where a Rep may have larger accounts than another rep who has smaller accounts where individual territories have varying levels of opportunity.
With a relative plan, you can give these two reps fair, but different, quotas that they will be rewarded for their effort. The other benefit is that the sum of the assigned quotas is connected to the company’s overall financial and operational targets. This will lead to alignment with your goals. The biggest disadvantage with this plan is that setting equitable quotas can be an arduous process, and your sales rep can passionately negotiate the quotas and rates with you.
Absolute Commission
This plan design will provide a base salary plus a pre-set bonus/commission compensation. This plan drives more consistent activity among your reps to meet their pre-set targets. This approach offers an important level of certainty for you and the Rep but still provides an incentive to close sales. The one thing you should consider though is when the total On Target Earnings (OTE) is meet there is no motivation to over-perform.
An absolute commission plan is based on some metric (normally financial) or even specific MBO’s, With this plan you to pay your reps when they reach a specific target, or meet a set objective. These types of plans work well with BDR’s or SDR’s but for Sales reps, this plan may not align to company objectives, rather drive the reps to just pursue the things that will make them money.
Absolute commission pay is easy for reps to grasp which can drive reliable results and since this plan is tied to salary, reps are usually highly motivated to perform. Additionally, you do not have to set a quota, rather, you can set targets and/or objectives. But the plan is only compensating reps for what is sold, or objectives that have been met.
The biggest challenge with this plan is that it tries to compensate the rep(s) equally. It can end up being unfair in the application, as an example, a territory may be small with limited opportunity versus a rep that has a larger territory and greater opportunity. Consider how this plan will drive the Reps behavior. Remember reps will do whatever is most beneficial for them financially, regardless of the company’s business goals.
Territory
This plan can be best suited to larger organizations where you have multiple reps selling different modules or products to the same customers. This type of plan is designed to compensate the team for all revenue generated from the territory. With a territory commission plan, your sales teams work with all of your prospects and customers in a defined region. Compensation for the rep(s) is based on the revenue generated in the territory and not based on a single prospect or customer sale. At the end of a defined period (usually quarterly), the sales for the territory are added up and the rep(s) are paid a set rate based on the ACV generated from within the territory.
This is best used where there is a well-developed territory, but if you are looking to expand to new markets and these new territories and teams are not balanced, you can foster antagonism between team members if certain members feel that effort isn’t equally divided.
The consideration here is the way you attach and keep high-quality reps working towards a common goal and focuses on a specific territory or region. If you use this type of plan I would also recommend your organization invest in the Challenger sales methodology, where each rep works towards a common goal and focuses on a territory-wide view of the sale.
In our next post, we will discuss the steps to create and implement a sales compensation plan.
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