You want to encourage your sales team to close the biggest deals that have the greatest business impact — and how you compensate them can make that happen.
But, there are a lot of factors that go into the creation of an inbound sales compensation plan: You need to ensure that you’re incentivizing behaviors that contribute to your company’s long-term success, you need to be competitive within your industry and you need to provide your reps with challenging-but-still-attainable goals.
Here are five steps for creating an inbound sales compensation plan.
1. Identify The Goal of The Sales Role
The first step to developing an inbound sales compensation plan is to identify what outcomes you want from each individual role. For example, the goal of the sales development rep (SDR) role is to create new pipeline for sales reps and help accelerate closing that business.
After defining the goal of a role, then you need to determine what behaviors and actions someone in that role should be taking in order to achieve their goal. Those actions and behaviors are what you should be incentivizing through your compensation system.
For an SDR, one of the required actions is booking meetings, so their goal could be to book a certain number of meetings and to influence a certain amount of revenue.
2. Turn the Goal into a Quantifiable Quota
Take the broad goal you’ve defined for each sales role, then turn that into something quantifiable based on the overall company goal.
For example, a new business sales rep’s broad goal is to close business that’ll lead to high-quality clients. To determine exactly how much revenue you want each individual to be responsible for, you need to work backward from your company’s revenue goal.
- How many deals does your company need to close in order to reach that revenue goal?
- How many sales reps are contributing toward reaching that revenue goal?
- What’s the difference in performance expectations between a senior and junior sales rep?
Using that information, you can determine what the quota of each sales rep should be. Additionally, you should take into account the length of your sales cycle to inform the cadence of your payment schedule. If it typically takes two and a half months for a deal to close, paying out commission on a monthly basis might not make sense for your team — a quarterly performance incentive payout would probably make more sense.
3. Consider Leading Indicators
What does it take for a sales rep to hit their quota? Based on win rates, how many opportunities need to be in their pipeline for them to close enough customers to reach their goal? How many discovery calls do they need to have in order to generate that number of opportunities?
You want to ensure that your compensation system incentivizes behaviors that lead to long-term success, and that can entail more than rewarding success in a given pay period because you want that success to continue into future pay periods too.
The goals for sales reps should be distributed across where you want them to focus. Sales have very unstructured schedules, so you need to help your team prioritize the way they spend their time.
4. Ensure You’re Incentivizing Desired Behaviors
As you’re finalizing your sales compensation plan, you need to also ensure that you’re not inadvertently incentivizing behaviors you don’t want sales team members to have.
For example, if you have capped commission, reps might intentionally push out deals once they hit their goals since they won’t get paid out for them. Since you don’t want to disincentivize reps from closing business sooner, it might be better to have unlimited commission.
Clawbacks are a common way to ensure you’re not incentivizing actions that’ll hurt your business long-term. For the overall health of your company, you don’t want to just bring in a large amount of revenue — you want to bring in high-quality revenue with long-term recurring potential. If you incentivize just revenue, your team might focus on the easiest deals to close even if those aren’t the best fits.
To prevent that from happening, clawbacks hold sales reps accountable for the fit of the customer for a period of time after the deal has closed. If a customer churns within the first month after closing, for example, then the sales reps who sold to them wouldn’t receive their full commission.
Another way you can incentivize specific behaviors is through the use of accelerators. For example, if you want reps to close as much as possible, you can pay them a higher commission rate for all the deals that close after hitting 100% of their goal for a given time period. Doing so will encourage reps to not just hit their goals, but also to exceed them.
You can also use accelerators and bonuses to change behaviors to align with your company’s growth trajectory. For example, you can increase the commission rate for specific products or specific ICPs to encourage your sales team to focus on those areas.
5. Conduct Industry Research
To determine your commission ratio, you need to conduct market research to understand what’s the standard for companies similar to yours.
What is the on-target earnings you want sales team members in each role to make? What’s the industry standard for the ratio between base and variable compensation?
You also need to take into account how your pay schedule compares to the market data you’re analyzing. A reasonable ratio for monthly or quarterly performance-based pay might not work if you follow an annual bonus schedule instead.
The way you structure your compensation plan will impact your recruiting abilities along with your team attrition rate. So, you need to align your system with what’s expected in your area and your industry so that you can appeal to and retain quality talent.
There’s no perfect blueprint for a sales compensation plan. Factors like your sales cycle, industry, product offering and growth trajectory will all impact what your system should look like.
However, once you set up your system, you shouldn’t drastically change your core model for compensation. You might change accelerators and bonuses throughout the year to adjust where your team focuses, but you shouldn’t be regularly changing the fundamental way people are getting paid.
Doing so can interfere with your team’s ability to receive their on-target earnings, and it can cause reps to focus more on how they’re getting paid than how they’re working toward their goals and your overall business goals.
So, unless you’re seeing negative results from your current compensation model, you shouldn’t be frequently overhauling it.
This post was originally published July 30, 2015.
Beth is a Sr. Manager of Revenue Operations at New Breed and specializes in optimizing the way processes and platforms support revenue growth.