How to Design Strong Sales Compensation Plans

By: Mainsail Partners  |  January 5, 2021
Perspective Best Practices

As we kick off the new year, executive teams are building their company’s strategic goals and budgets for the year. For sales leaders, this means finalizing their sales compensation plans based on those business goals.

How do you create a compensation package for various sales positions that is fair, motivating and achievable?

To provide guidance, Phil Stern of Mainsail Partners welcomed Graham Collins, Head of Growth from QuotaPath to discuss best practices for creating successful compensation plans for sales teams.

Elements of well-designed compensation plans

The most successful compensation plans are:

  1. Easy to understand — Not overly complex or confusing; could be explained in one to two sentences or written on a post-it note.
  2. Logical — Make sense to everyone involved, from sales to finance.
  3. Motivating — The goals should feel achievable and realistic. Collins recommends setting goals that aim for 80% of reps to hit their quota.
  4. Aligned with company goals — Is the company focusing on acquiring new business? ARR? Retention? Consistency? What are the ideal size and segment of new deals? These answers should guide what you incentivize your sales team on and how you build your comp plans.

Who creates sales compensation plans?

Sales compensation plans should not be built in a silo. By involving the right cross-functional team, you allow for better checks and balances, and help create more successful plans.

Involve the following departments:

  1. Sales Leadership: Represents the sales team. Ensures the plan will effectively motivate the team.
  2. Sales Ops/Revenue Ops: Provides context and historical data to ensure the plans are realistic based on past performance (e.g., how new product and pricing increases have historically impacted close rates, average contract value, etc.).
  3. Finance/Accounting: Represents the Board’s financial targets and ensures customer acquisition cost is considered. Helps determine hiring goals for the year.
“Don’t create your compensation plans unilaterally. Work to find the perfect balance between taking care of your people, ensuring sound unit economics and driving the right outcomes. When you look at the plan, you should be able to look your team in the eye and say, ‘We’ve done our best to achieve this balance,’ that’s when you have the best plan possible.” – Phil Stern

Three points to consider as you build comp plans

  1. Once you set your comp plan, you likely won’t adjust it that year. You should, however, always review it and consider how you may change it the following fiscal year. Keep in mind that if you change compensation plans, the behavior of your sales team will change as well. So if you want to drive a specific outcome in one specific quarter – like building a larger and higher quality pipeline – consider adding sales performance incentive funds (SPIFs) or a quarterly bonus instead of adjusting the foundational structure of your compensation plans.
  2. Keep tabs on your compensation plan in real-time. Your plan should be simple so sales reps, finance, and you can calculate compensation quickly and spot any weaknesses or issues with your comp plans as each month and quarter progresses. Because it often takes hours each month to calculate, audit and confirm sales compensation, tracking results in real-time can help you spot any issues before you get caught up in the month-end reconciliation.
  3. Compensation plans impact personal cash flows, so pay people quickly. If you’re on a quarterly quota, pay monthly if you can. If you’re on annual quotas, pay quarterly.

Working through the nuances

Creating compensation plans isn’t easy, especially when it comes to nuances like bonuses, claw-backs, and SPIFs. Here’s how to think about these components and when to use them:

Bonuses: This is compensation based on achieving an outside target—it should not be expected or “regular”. Bonuses can motivate team members to think beyond their quotas, or reward employees who go above and beyond. Bonuses don’t always have to be in the form of cash. Collins recommends getting creative and using items such as scratch-off tickets, gift cards, or lunch with the CEO as small bonuses to reward and recognize stellar salespeople.

Claw-Backs: Claw-backs are common in sales plans, especially when customer churn is high or customer lifetime is short. Keep your claw-back period to within 90 days of the initial sale—long enough to ensure a new customer has had the chance to onboard completely before leaving, but short enough that it’s clear the churn was at least partially caused by a salesperson.

It’s critical to know when losing a deal is on the salesperson (i.e., overselling) or context (e.g., bankruptcy). Claw-backs can add complexity to your plans, but they can also be effective and communicate that you want your sales to add quality customers above all else.

SPIFs: SPIFs are similar to bonuses, but they’re used to drive specific behaviors without large financial commitment. SPIFs should be small but meaningful, time-based, and tied directly to an outcome. SPIFS should also be paid out as closely to the campaign you run as possible.

Stern, for example, wanted to get his sales reps to book more meetings earlier in the month, so he created a mid-month SPIF for sales reps who booked 50% of their meetings in the beginning of the month. The SPIF? A $150 Amazon gift card.

“SPIFs are useful when you’re trying to drive a specific outcome or behavior that’s not in the compensation plan but is critical to a company or team KPI” - Phil Stern.

Role-specific Plan #1: Account Executives

An AE is responsible for closing deals and may, or may not, be involved throughout the entire sales cycle. Here’s an example of a standard account executive compensation plan:

► ON-TARGET EARNINGS (OTE): $100k

  • Base salary: $50k
  • On-target commission: $50k

► QUOTA:

  • $125k per quarter ($500k/year, 5x OTE)

► COMMISSION:

  • 0-50% attainment: 4% commission on all sales
  • >50-75% attainment: 6% commission on all sales
  • >75-100% attainment: 8% commission on all sales
  • >100%+ attainment: 12% commission on sales above 100% attainment

► BONUS:

  • $2500 bonus if quarterly quota is hit

This plan includes both accelerators and decelerators. Collins recommends having 3-4 tiers of commission to keep compensation plans simple to understand.

This plan also avoids requiring 70% revenue to be attained prior to earning commission, which can be demotivating and can lead to reps sandbagging deals.

Role-specific Plan #2: Sales Development Rep

SDRs are responsible for net new opportunity generation for the business. When designing their comp plans, strike a balance between how much control the rep has on the deal closing (almost none), and the inherent value of a deal to the organization.

Depending on your sales cycle, average contract value, and the number of deals being closed, you’ll need to decide what to compensate them for. If you run a 200-day sales cycle, don’t pay out on closed revenue because, frankly, too much time will have passed between their action and the reward. However, if your sales cycle is only a few days, then it makes sense to pay on the revenue being generated.

► ON-TARGET EARNINGS: $70k

  • Base salary: $40k
  • On-target commission: $30k

► QUOTA:

  • 50 qualified opportunities per quarter (clearly defined) 5k
  • $125k of sourced revenue per quarter

► COMMISSION:

  • 2% of all sourced revenue

► BONUS:

  • 0-25 qualified opportunities: $50 per qualified opportunity
  • 26-50 qualified opportunities: $100 per qualified opportunity
  • 50+ qualified opportunities: $150 per qualified opportunity above 50

This plan skews more toward base salary but includes opportunities to earn. Once you’ve created your plan, clearly define your ideal customer profile and what a qualified lead looks like so there’s no confusion among your SDRs.

“The most important thing I consider is what the outcome is that I want my SDRs to drive. Often, it’s how much new, qualified pipeline they generate, so I build a comp plan on that. If I realize they have no control over the sales cycle once they’ve passed the opportunity on to the AE, then I don’t compensate them for closed won business, only opportunities generated.” – Phil Stern

Role-specific Plan #3: Account Manager

An AM is responsible for renewing existing business. There are many ways to compensate an AM (this is only one example), but because this is a “closing” role, make sure your plan is based on the 50/50 model.

► ON-TARGET EARNINGS: $120k

  • Base salary: $60k
  • On-target commission: $60k

► QUOTA:

  • 90% net revenue retention per quarter

► COMMISSION:

  • 0-50% net revenue retention: $0 per retention percentage point
  • >50-70% net revenue retention: $133 per retention percentage point
  • >70-90% net revenue retention: $167 per retention percentage point
  • >90%+ net revenue retention: $180 per retention percentage point

► BONUS:

  • $2,000 bonus if over 100% net revenue retention for a quarter

This plan lumps together upsells, renewals and cross-sells.

Because this plan is highly dependent on your business model, adjust it to meet your organization’s goals. If you have static business, this example is ideal. But if your business isn’t consistent, this is not the best plan—instead, have specific quotas and commission based on business performance. If your company has many expansion opportunities, focus on expansion and adjust the percentage of incentive.

This plan can change quarter-to-quarter if necessary.

Role-specific Plan #4: Sales Management

A sales manager manages a new business team. Below is an example comp plan for a manager:

► ON-TARGET EARNINGS: $150k

  • Base salary: $75k
  • On-target commission: $75k

► QUOTA:

  • $900,000 per quarter (8 fully ramped reps @ $125k/quarter, 10% buffer)

► COMMISSION:

  • 0-50% attainment: .5% commission on all sales
  • >50-75% attainment: 1% commission on all sales
  • >75-100% attainment: 1.5% commission on all sales
  • >100%+ attainment: 2.5% commission on sales above 100% attainment

► BONUS:

  • $1,000 bonus for each rep who hits their quarterly quota

With this type of plan, your sales managers will be motivated to hire, coach and retain successful sales reps who bring in business and hit their quotas.

Four keys to building effective sales comp plans

  1. Keep compensation plans simple and easy to understand; focus on driving the right outcomes for your business.
  2. Don’t build them alone. Creating comp plans should be a cross-functional exercise (team up with sales, finance, rev ops, etc.).
  3. Consider industry benchmarks as you’re designing your plan. After you draft your plan, run scenarios on it to ensure the plan isn’t demotivating or overpays.
  4. Ensure that your plans are motivating and energizing for your sales team. Your team members should see a path to both achieve their targets and meet their personal financial goals.

If you’re feeling overwhelmed or unsure of where to start, remember that building comp plans isn’t easy. It takes careful consideration, planning, modeling, and a cross-functional team to get it right.

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