In enterprise sales, not all compensation plans are created equal. When sales leaders get it wrong, they don’t just risk losing their most valuable players. A sales compensation plan should consider that wrong implantation can also result in decreased morale and additional turnover—not to mention lost revenue. The wrong comp plan can also impact your organization’s ability to hire experienced sales professionals, meaning you may be setting yourself up to miss quotas for several quarters down the line.
In this article, we’ll help you avoid these (and other) costs. A sales compensation plan should consider established best practices so you can build a comp plan that motivates your team to perform at their best.
Base and bonus: getting it right
Creating a firm’s sales compensation plan should consider incentivizing the right behaviors for the team and striking an optimal balance between risks and rewards for the enterprise. Striking that balance begins with base salary, and that largely depends on your market and product.
“CROs should pay all that they can bear given the benchmark for the cost of sales in the industry,” explained Peyton Smith Jr. Prior to founding marketing automation and digital strategy consultancy Magna Marketing, Smith built a career as an enterprise sales leader in the SaaS and telecomm industries. “And industry structure is largely what dictates this cost—for example, it’s far more expensive to sell an airplane than it is to sell SaaS. Commission structures are reflective of that.”
For 99 percent of enterprise sales roles, a reasonable base salary is part of the territory—and for good reason. Otherwise, you risk hiring one of two types of bad hires: those who can’t land any other type of sales job, and those who (for whatever reason) don’t need the stability of regular income. Do those sound like the kind of value-added contributors you want on your team?
Of course not. That’s part of the reason base salary is sine qua non in enterprise sales. But what, exactly, constitutes a reasonable base salary?
As another recent piece we wrote on sales comp pointed out, base salaries vary widely depending on the role, the product, and where the role is located.
In Austin, for example, LinkedIn’s Salary Insights tool tells us that enterprise sales execs make somewhere between $111,000 and $256,000. That’s not exactly insightful, especially when you note that it’s based on a whopping four total responses. And it still doesn’t solve for industry or seniority. Meanwhile, based on 11 responses, enterprise sales directors in San Francisco can enjoy total compensation ranging from $128,000 to $372,000.
That’s why we recently kicked off our Enterprise Sales Salary survey, in an attempt to get better, more accurate info on comp structures for enterprise sellers specifically. We’re running the survey until the end of this week, and giving survey participants a chance at a $500 Amazon gift card.
While the exact appropriate salary number may vary, a good rule of thumb is that the base should be enough to cover all essential living expenses—without diminishing the commission and bonus as the dominant motivators for closing new business.
Beware of pay caps and retroactive pay structures
Capped commissions are increasingly relics of the past. And that’s good news, because this pay structure never made sense to most people in the field.
After all, competitive self-starters tend to be great in sales roles—and to many of them, the idea that employers would limit their earnings when their performance goes above and beyond expectations might seem, well, counterintuitive at best.
“You should hire a commensurate amount of salespeople with the market opportunity,” Smith advised. “If you have too many folks and too few leads, your chance of having multiple reps making $300,000-plus decreases. Having people like that on your team motivates others by demonstrating the kind of earnings that are possible. Without them, you’re losing a key motivational lever.”
But there’s another, far more operationally significant rationale for abolishing pay caps: they can actually incentivize sellers to hit the brakes on potential deals. Why? If sales reps can effectively stall in such a way that a deal stretches into Q1 instead of Q4, then they’ll get a much larger payout by strategically avoiding hitting their pay caps from the previous quarter. It’s simply in their own best interest to do so.
The slightly less polite term for such a practice is “sandbagging.” And let’s not build sales comp plans that reward sandbaggers.
Meanwhile, retroactive pay structures pose similar risks.
What are retroactive pay structures? These are comp plans in which higher commission rates take effect for all sales—back to the first dollar sold—after a certain level of bottom-line performance has been hit. In other words, once a rep achieves a certain baseline performance target, commission increases from, say, four to six percent, even on sales previous to that achievement.
If that sounds like a strong motivating tactic, think again. The essential problem is that it’s actually an incentive for sales teams to plateau. For instance, in organizations with these comp structures in place, you’ll often discover that, month after month, the majority of the sales team hits the defined base-level target—and then simply flatlines.
That won’t do. For the lean, adaptable, and successful enterprises of tomorrow, that lack of performance is simply unacceptable.
Simplicity is the secret sauce
Enterprise sales teams are no strangers to wonky, overly complex comp plans. Take it from us: If the sales comp plan at your company in any way resembles this infamous diagram, something has gone terribly, terribly wrong.
Overly complex comp plans—often riddled with clauses for differing commissions for given features or services—generally de-motivate even the best sellers. And in a worst-case scenario, these can even result in sales teams squandering a lot of time doing tedious calculations to understand and maximize how they’ll be paid, often to the detriment of the revenue function.
Unnecessarily complex plans also pose strategic and operational problems. After all, the whole point of the sales comp plan is to drive the right behaviors. And anyone who doesn’t have a clear understanding of their comp plan doesn’t know what those behaviors are.
So make sure every member of the team understands not only how their compensation is tied to each goal, but how much weight each goal represents. For example, inbound sales reps often get 60 percent of their total compensation from base salary, with the remainder representing commission and bonus.
And the bonus usually consists of multiple metrics, like accepted opportunities, opportunity revenue, and SLAs, which are themselves weighted differently. Sales reps who understand these differences will, in turn, prioritize their work appropriately, and that will go a long way toward their success in the job.
Transparency = more collaborative, happier teams
Alongside simplicity, there’s another mandate for best-in-class enterprise sales comp plans: transparency.
As Peyton explained: “The most de-motivating thing in sales is to feel that you aren’t getting as many ‘at bats’ as the next guy who has a similar skill level. Of course, proven top performers are always going to get slightly preferential treatment—they’re already highly motivated, and most likely, well compensated.”
Why, then, is transparency so important? Because there are any number hand-offs that naturally occur in the complex, multiphase enterprise sales cycles. So everyone needs to understand, and be on board with, the way these hand-offs affect compensation.
For example, let’s imagine a sales rep has been working for months on a huge opportunity. Unfortunately, however, after some initial progress, it seems like the deal is at risk of stalling. At this point, a more senior executive will often be brought in to partner with the rep and, hopefully, help overcome the barriers to progress.
But this only works when all members of the sales team are aligned and clearly understand how the new arrangement is going to translate to greater yields—for both the senior and junior seller—when the deal ultimately moves over to the closed-won column.
Similarly, while it isn’t necessary for SDRs to know the compensation structure of account executives down to the last dollar, they should certainly be aware of accelerators or bonuses that are built into the comp plan, because these will likely influence the way account executives are prioritizing or approaching qualified leads. That knowledge should help the SDRs work more effectively on a day-to-day basis—and provide aspirational motivation for them to move up the ladder via exceptional performance.
Timeliness, too, goes hand-in-hand with transparency. “Pay as promptly as possible, and if you cannot pay quickly, at least communicate accruing commissions regularly and accurately,” Smith urged. “Good salespeople are typically more impatient than your average corporate citizen, so this will go a long way.”
In sum, transparency around comp plans enables sales teams to be more trusting and collaborative throughout the sales process—and that, in turn, should help everyone on the team get closer to achieving their bonus goals.
While your comp plan is essential to the success of your sales teams, getting it exactly right can be tricky. And the consequences of getting it wrong are often far reaching, with implications not only for revenue goals but also talent retention. Given that so much is on the line, is it even possible for your sales comp plan to simultaneously support your revenue goals, align with your company’s culture, and equip all of your team members for success? According to our enterprise sales heavy hitters, actually, it is. But you’ll need to carefully roll-out the right mix of incentives, and strategically balance risks and rewards, if you hope to build a best-in-class sales function.