What would a 10 percent increase in annual sales mean to your organization? According to Gartner, companies will miss at least that amount in “lost opportunity” revenue. This is dollars left on the table due to ineffective processes for “defining, assigning, and managing territories, quotas, and incentives and compensation plans.”
Compensation plans need to evolve with organizational objectives and sales strategy. An effective comp program helps drive specific behaviors of the sales organization. Whether or not change is required depends on whether the current plans are driving desired performance.
Have you made any adjustments to your 2019 comp plan for sales development reps? To help you get started, we’ve created a guide: 6 Steps to Designing a Sales Development Compensation Plan.
This brief set of sales compensation guiding principles underlie our 6 step guide. Compensation plans should:
- Be consistent with overall corporate strategies and financial objectives.
- Pay for directly-controllable performance, inclusive of effort and skill.
- Be as simple as possible. For example, strive to pay on no more than 3 metrics.
- Attract and retain the best talent.
- Allow 70% of associates to meet or exceed quota.
Step 1: Determine On-Target Earnings (OTE)
OTE is total cash compensation, inclusive of base salary plus variable commission, paid at 100% quota attainment.
Start by understanding the local market benchmark since national averages can be highly misleading. If you do not have access to premium salary benchmark data, utilize GlassDoor to look up salary information. Table 1 shows average salaries for the job title “Sales Development Representative” on GlassDoor in several major US metropolitan areas:
(source: GlassDoor; October 21, 2018)
Next, adjust up or down from the average based on these five factors:
- Prior experience: Candidates with strong academic pedigrees or longer prior work experience will expect higher OTE.
- Job complexity: The more complex the job function, the higher the OTE. For instance, SDRs who conduct discovery calls will expect higher OTE compared to those who primarily book meetings. Similarly, outbound SDRs tend to earn more than inbound SDRs since it requires more skill to engage less-receptive prospects.
- Product complexity & price: This is a special subset of job complexity for SDRs. Generally speaking, engaging customers to discuss expensive, complex products requires a greater level of skill and commands higher OTE.
- Intrinsic benefits: If you have strong intrinsic benefits – a great brand, a strong culture, an outstanding training program, clear career progression – then you may be able to get away with paying lower OTE.
- Target attrition: Even with the best product and the most inspiring culture, companies that want lower attrition will need to pay above average OTE. Place higher importance on low attrition when hiring costs and training costs are high.
Step 2: Choose the target pay mix
The target pax mix is the percentage split of OTE between base and variable compensation. The benchmark average (see Table 1) appears to be 73/27. We frequently see all of the following: 60/40, 65/35, 70/30, and 75/25; mixes of 50/50 and 80/20 are rare; base percentages below 50% or above 80% are extremely rare.
Pay mixes skewed toward a higher variable percentage tend to attract more aggressive, risk-loving candidates. You may think of this sales personality as a “Hunter.” Roles offering higher base compensation that is more certain are more quickly filled, as most humans value low risk – high reward opportunities.
If you are just building out your sales development function, select a higher base percentage since you do not yet have good data and can easily end up underpaying or overpaying.
Step 3: Select variable performance measures
Consider the simplified sales funnel shown in Figure 1. An SDR engages in a cadence of activities such as phone calls, emails, social touches, etc. These activities, when effective, lead to a booked discovery (or demo) meeting. If the meeting is held and the prospect is deemed qualified, then an opportunity is created. Assuming the stars align, an AE wins the business.
Compensation Tied to Funnel Stages
Let’s explore the implications of tying compensation metrics to each of the stages in the funnel.
Activities: We do not recommend paying on activities. While activity volume is almost completely within an SDR’s control, few companies use activity as a pay metric because (a) paying on activity volume prioritizes quantity over quality and (b) activities are too far removed from business results. If an SDR’s job required almost no skill, then it would be suitable to pay on activities. It might also make sense to pay on activity volume while an SDR is ramping, but even that practice is very rare.
Meetings Booked: We also do not recommend paying on meetings booked. If one pays on meetings booked, then SDRs lose the incentive to do what is necessary to ensure prospects attend meetings. Without best practices in place, 20% to 30% of prospects will no-show. With the right reminders, including rescheduling, the percentage of prospects who go completely dark will be closer to 8%-12%.
Meetings Held: Meetings held is the first reasonable metric to consider. If SDRs are given accounts and contacts, pay them up to 100% of variable compensation on meetings held. This keeps them engaged when they lack control over what happened upstream or what will happen downstream. If they are given accounts but are responsible for sourcing their own contacts, then it is a judgment call as to whether or not to pay on meetings held. If they are given neither accounts nor contacts, then do not pay on meetings held since it creates too much incentive to inject garbage into the pipeline.
Opportunities Created: Opportunities created, also known as sales qualified leads (SQLs) or sales qualified opportunities (SQOs), is by far the most common SDR variable compensation metric. It represents a healthy balance between the company’s performance and what is controllable by the SDR.
Note: If you link SDR pay to opportunities, we only recommend linking to opportunity creation following the first meeting. Tying some or part of compensation to opportunity advancement beyond this stage is a non-starter. This practice demoralizes SDRs since they don’t have control over opportunity progression. Moreover, small numbers of opportunities generated by a given SDR advance during any given month. Therefore, you’d have a set a low quota which would expose the company to uncomfortably wide swings in compensation.
Closed-Won Business: Many companies pay SDRs on closed-won business – often in the neighborhood of 1.0% to 1.5% of annual recurring revenue (ARR). Paying on ARR aligns SDR pay with company performance and creates strong incentives for SDRs to focus on “good” prospects. However, paying a percentage of ARR is fraught with the following problems:
- SDRs have very little control over opportunities after AEs take over.
- With typical 3 to 6 month (or longer) B2B sales cycles, there is an extended gap between activity and reward. This gap not only lowers incentive-driven motivation but also complicates compensation management.
- Two SDRs might get paid very differently for the same work because one SDR had the “luck of the draw.” Meaning, they were given a better account or handed an opportunity to a better AE.
A Novel Approach
At SalesLoft, we have applied a novel approach to this. Each month we pool a fixed percentage of ARR and distribute ‘shares” based on each SDR’s portion of total opportunities created. We acknowledge and accept the fact that new SDRs benefit from the earlier work of more tenured SDRs (and even from SDRs promoted into new roles). This is a small price to pay. Plus, tenured SDRs got to benefit from this when they were new, so all’s fair. This approach fosters teamwork and dramatically simplifies compensation management.
What is the net-net? For most organizations, we recommend paying 100% of variable compensation on one metric: qualified opportunities created. However, Figure 2 below provides a more complete decision-making guide. Paying on closed-won business is noticeably absent from the decision guide since it is a ‘nice to have’ not a ‘need to have.’ Should you decide to pay on closed-won business, strongly consider the pooled approach described above.
Step 4: Set quotas
Set targets such that ~70% of SDRs meet or exceed quota in any given month. This ensures two things:
- The company will perform as if every SDR hit 100% since the SDRs who overachieve should more than make up for those who underachieve.
- SDRs stay motivated by a goal that is challenging yet attainable.
A nearly universal rule of thumb is that outbound SDRs should be able to schedule 20 meetings per month or 1 per business day. Even after rescheduling no-shows, assume 10% of prospects will go dark, leaving 18 meetings held per month.
Concerning qualified opportunities created, things get tricky because every company has different qualified criteria. According to The Bridge Group’s “Sales Development 2018” report, the average number of opportunities generated is 10. That is a pretty darn good starting quota.
By way of example, let’s say you had a $70K OTE and a 70/30 pay mix, or $50K base and $20K variable. Moreover, assume the only compensation metric is sales qualified opportunities. Throughout the year, each SDR would need to help generate 120 qualified opps. Hence, each opportunity pays $20K/120 = $166.66.
Here’s another way to come up with the 120 qualified opportunities per year target. In fairness to SDRs and for ease of administration, set quotas to account for paid time off. Many companies offer ten vacation days, ten holidays, and five sick days. There are also about 104 weekend days. That leaves roughly 236 working days. If an SDR can average one meeting booked per working day and the ratio of opportunities generated to meetings booked is 50%, then they can produce 118 opportunities per year.
Calculated either way, setting quota at ten qualified opportunities per month means you do not need to adjust for seasonality, vacation, common illness, etc. (unless otherwise legally required).
An advanced consideration is what to do during SDR ramp. According to TOPO, SDR ramp time to full quota is three months. There are three common approaches to accounting for ramp time.
- Some companies make no adjustments, which means SDRs earn less during ramp. Instead of lowering quota, they have minimum performance expectations such as 0 opps in month one, and 5 opportunities in month two.
- Other companies adjust the payout. For instance, they might pay 100% of monthly variable compensation in month one then scale up the per meeting commission until quota achievement. Above the reduced quota, they usually go back to the standard rate.
- A third option, which we have not observed ‘in the wild,’ is to spread the reduced productivity during ramp across the year. For example, a fully-ramped SDR might be expected to produce 120 qualified opportunities over 12 months. A new SDR might expect to have 0 opportunities in month one and 5 in month two. Therefore, they produce 15 less over 2 months, or 105 annually. That would translate into a goal of 9 (rounded up from 8.75) instead of 10.
Step 5: Set thresholds and accelerators
Most companies want to limit compensation for underperformers and ramp it for overperformers. Thresholds and accelerators, respectively, accomplish those goals.
A threshold is a minimum performance level, below which no commissions are paid. A standard threshold is 40% to 50% of quota. So, continuing our example, if quota is ten qualified opportunities per month, then a threshold of 4 or 5 would be appropriate. If you have good data, set the threshold at the bottom 10th or 20th performance percentile depending on how aggressively you want to weed people out.
Accelerators are wise since they drive performance and reward for over-performance. The math behind choosing accelerators is all about knowing your desired SDR compensation cost of sale (CCOS).
Let’s say that each SDR, on average, is ultimately responsible for creating opportunities that lead to $700K in closed-won ARR. With a $70K OTE, their CCOS is 10%. Building on the example above, the $700K in ARR came from 120 opportunities. The implied value per opportunity is $700K/120 = $5,833.33. Hence, you could maintain the 10% CCOS by paying $583 per opportunity over target.
However, most organizations (and their investors) want their CCOS to decrease as revenues increase. The $583 is a ceiling. The floor is the $166 SDRs earned up until quota. Anything in between is fair. We typically see a 25% to 50% accelerator per qualified opportunity over target. In our example, that would mean paying $200 to $250 per qualified opportunity over target.
Side note: SDRs often find it motivating to know how much revenue each call generates for the company. Assume an SDR makes 300 dials per week or 14,400 per year. If that generates $700K of ARR, then each call is worth almost $50 to the business!
Step 6: Set the performance period and payout frequency
The performance period is the term over which you measure performance to quota. For SDRs, that is almost always monthly. Such short performance periods are appropriate for SDRs since their results (meetings and opportunities) follow shortly after their activities.
It isn’t necessary that payout frequency match the performance period, but it usually does. If you have a monthly performance period, it makes sense to adopt a monthly payout frequency.
A Final Thought
There is an ever-present tension between what SDRs want to be paid for (activities) and what the business wants to pay for (money in the bank). When designing compensation plans, repeatedly ask yourself two questions: (1) What is simple? (2) What is fair?
If you have any questions, the folks at SalesLoft are happy to help!
Have you made any adjustments to your 2019 comp plan for SDRs? To help you get started, 6 Steps to Designing a Sales Development Compensation Plan.
Looking for more on what top performing sales professionals are doing to succeed? Don’t miss this new TOPO research!