Compensation and commission are two of the biggest motivators for inside sales reps.
Today, getting sales compensation right is critical to the success of your operations. If you want to attract the best talent, drive their performance and keep them satisfied long into the future, you need to invest in them effectively. That means rewarding their efforts at the right time.
In this blog, we’ll take an insider look at how to manage compensation, your responsibilities as an employer, and how you can use commission to incentivize your teams.
What Is sales compensation?
Sales compensation is the amount paid to a salesperson each year. Typically, compensation includes a combination of base salary and commission. It can also include bonus incentives, based on performance against predetermined targets or responsibilities.
Compensation and commissions are usually part of a wider strategy known as a compensation (comp) plan. This is a structured program that determines how much a sales rep should earn, based on their performance.
The purpose of a comp plan is to reward sellers for working above and beyond their role’s outlined expectations. When used correctly, it encourages greater performance, drives results and sets standards for compensation across the team.
Why do I need to offer commission & compensation plans?
There are a number of reasons to use sales compensation programs. Its overarching purpose is to encourage positive behaviors and actions. Many businesses use comp plans to move toward revenue goals faster, driving performance through commission-based incentives.
Today, a comp plan is not simply a luxury. If you want to attract and retain the best talent — and then get the best return from that individual — you need to incentivize them in the right way. Plus, inside sales is like any other role within a business: There are standards and practices in place that are expected, either under law or by the industry.
In the following section, we’ll look at the main reasons to put a structured compensation strategy in place.
Legislation and industry standards
Compensation can vary based on location. It is often led by employee best practices and industry standards, or it can be an obligation under labor law. Compensation variations can be determined by things such as whether your state requires you to offer hourly- vs. salary-based packages, whether you’re in an at-will state or a state with different holiday periods, and so on. In the UK, for example, your payment must include a pension under the law. This is not the same in the United States.
Attracting and retaining talent
A generous compensation plan with attractive rewards gives businesses (particularly newer startups) an advantage in securing experienced talent. Candidates will always favour the highest paying job title. Similarly, once that talent is onboarded, updating their compensation in line with their performance and your results will give them a reason to stay, rather than to leave and hire on with a competitor.
Creates structure and progression model
Sales teams have some of the highest turnover rates of any sector. Sales compensation plans should discern between junior, mid-level and senior roles. This helps operations managers show that defined career progression for team members exists within your company. It creates another reason to stay, maximize performance and commit long-term to the business.
Incentivize individual rep performance
It can be challenging to motivate and incentivize reps, especially in larger sales teams. Knowing they could earn more by going above and beyond should help drive their performance to higher levels. Plus, additional culture bonuses may encourage reps to participate in extra training and hone their craft.
How do I set inside sales commission?
There is no sure answer for which compensation plan you should use in your business. It will depend on your team’s sales strategy, salary ranges, structure, targets and headcount.
Base salary is important, but paying commission for performance success is vital. The commission itself should vary based on the rep’s role and position in the funnel. This will display the control, visibility and influence they have over the sale and final deal value.
When you’re defining commission plans, of course they need to be aligned with the business’s revenue and margins. However, from the reps’ perspective, make it as simple and transparent as possible — and controllable by them. Your team should feel they can make a difference to their own personal earnings each day, and be motivated to do so. Align commission earnings to the role above all else; don’t naturally align it to the goals of the business.
At Harte Hanks, we break up compensation plans into top and bottom of funnel.
Top of funnel
If you’re a top-of-funnel rep, it’s likely you’ll have a higher average base salary and a lower commission. That commission isn’t driven by product sale value, the margin on that product or the number of years the contract has sold for. Top-of-funnel commission is more volume-oriented. It’s focused on creating MQLs, SQLs or SALs for another salesperson to take control of further down the funnel. Commission tends to be an 80/20–70/30 split, base to commission.
Bottom of funnel
At the bottom of the funnel, the sales cycle is longer and more complex. It’s more strategic, so you need a compensation plan that pays a higher level. It’s linked to the physical sale of the product. You might make this role more of a 50/60 base, the rest being commission. The commission will be higher than that available to top-of-funnel reps, since they are physically closing the deal. If that inside salesperson is converting or closing the sale, it could be as much as 40/60 or even 50/50.
Types of commision models:
As mentioned above, commission structures are usually dependent on the individual’s role in the funnel. Below, we’ve outlined how common sales roles usually have their commission set up.
Lead development reps (LDRs)
LDRs tend to service inbound inquiries: phone, chat, response. Since volumes are beyond their control, commission is usually set as a team bonus, rather than an individual bonus. This is normally related to service level agreement (SLA) achievement and the KPIs tied to it. The commission is generally tiered based on specific achievements across the team.
Sales development reps (SDRs)
SDR commission is usually based on lead development, lead triage and lead qualification. It will often be split into two parts: service level (the activity and speed) and conversion level (qualification and close).
Business development reps (BDRs)
BDRs are rewarded for appointments set and held. This is often a weighted score that is segregated into bands, incentivizing higher levels of performance. If a BDR exceeds their expected number of booked appointments, this will be rewarded as such.
Inside sales reps/field sales reps
End-to-end rep commission is usually based on a percentage of the sales value. Often, this will include accumulators. Commission may be based on the time it takes to build your pipeline, and staggered based on ramp and the expected time taken to begin meeting KPIs.
Compensation plan challenges
According to a Society for Human Resources Management survey in 2015, there are three main challenges in creating effective sales compensation.
Quota setting fairness
Sales quota-based compensation can be the linchpin for sales motivation and retention. If quotas are too aggressive, work rate will diminish. On the other hand, if targets are too low, compensation payouts will quickly exceed sales.
To establish competitive compensation and base-to-incentive blend, companies should benchmark each sales role against their competitors. Setting and testing quotas using a verified, comparable source adds an extra layer of confidence.
Experienced inside sales professionals are in massive demand. There’s so much competition that inside sales rep salaries and top performers’ commission plans have skyrocketed.
You get what you pay for. Not only are competitive salaries essential for motivation, they’re also critical for attracting the right talent. If you can’t compete with the pay offered by your competitors, this will reduce your competitive advantage when selling your product.
Sales forecast accuracy
Forecast accuracy is one of the biggest drivers of effective quota setting and sales rep motivation. A misjudged forecast with unworkable targets is the most common cause of ineffective quotas. This results in sales teams being underpaid, unengaged and poorly motivated.
Creating forecasts needs to be logical and thorough. It should pair market and pipeline data with historical performance and buyer data.
No sales compensation plan is perfect. It takes rigorous consideration and a great deal of ongoing analysis and data research.
Reps will always chase higher quota attainment to gain better commission, and — naturally — some will be prone to looking for loopholes in your program. In addition, your prospects are always changing their preferences and needs.
Originally from Iver in the United Kingdom, Christina has 25+ years in sales and operations, the majority of which has been at board level. Those who have met Christina would agree that she strives for operational excellence on a daily basis, consistently working in her role as SVP of Sales Services to develop the individuals and teams as a whole.