Sales Compensation: Is Your Team Motivated to Excel or Do Just Enough?
A few years ago, when I was working as a principal at Insight Venture Partners in New York City, I was asked to help one of the firm’s expansion stage portfolio companies examine and reevaluate the way that it structured its sales compensation plan.
The business had a handful of issues that needed to be resolved and it was personified, quite simply, by the ridiculous compensation that its “top” salesperson was earning.
That rep, who was benefiting mostly from what are known as “blue bird” deals (the kind that close through happenstance more than hard work, flying in through the window and falling in their lap), was making $400,000 per year. And it wasn’t because he was some inside sales stud that outworked and outperformed his peers. He was lucky more than he was talented, yet he was being compensated like he was an absolute rock star.
So, when we restructured the company’s compensation plan to reflect the things that really matter (leading indicators to determine salary, and performance against revenue expectation to determine bonus and commission), that rep was looking at a total comp package of about $100,000 — a number that better reflected the value that he actually brought to the company. Was he happy about it? Of course not. But he quickly realized that he had benefited from a poorly structured compensation plan in the past and it forced him to change the way he approached selling.
I share that story because it’s a fairly common problem that CEOs at startup or expansion stage companies face.
Pay too little, and you remove any motivation or sense of urgency to close new business. Pay too much, and you harm your ability to scale and attract the wrong kind of sales talent to your business (the kind that expect to make $400,000 per year on blue bird deals, for example).
The simplest way I can explain the resolution to that quandary is this: When it comes to inside sales or lead generation compensation, the goal should be to leverage your employees and give them the opportunity to make more money from sales results than they do from salary. Of course, there’s no uniform salary-to-commission ratio that will work for every company or sales role. As Elizabeth Wasserman writes for Inc.com, you need to factor in things like the role of the salesperson (what influence did they have on the sale?), the type of selling involved (new accounts or upselling existing ones?), and the sales cycle of your business.
Here are few other things to consider when deciding how to best compensate your inside sales and lead gen teams at an early stage sales organization:
- Inside and outside sales: As I mentioned above, leading indicators (number of appointments, new opportunities in the funnel, pipeline management, etc.) should determine a salesperson’s salary. Their performance against revenue expectation should dictate bonus and commission.
- Lead generation: Their salary justifies the number of calls and conversations you expect them to make and the activity that drives the pipeline. Their commission, on the other hand, should be based on the outcomes at the various transition points of sales, the number of appointments they schedule at large enterprises, and the appointments that turn into real opportunities.
- Quarterly or monthly: That depends on the makeup of your team, but young salespeople (who typically have no savings and college loan payments to make) often need to be compensated more frequently. Sales managers, directors, and executives, on the other hand, should receive their bonuses quarterly.
- When to cap commission: Never. It’s as simple as that. Capping commission creates a bad culture and kills morale. If your compensation plan is set up correctly, you’ll be rewarding for results that bring significant value and revenue to the company. And in that scenario, you can afford to spread the wealth.
The bottom line is that sales compensation — whether it’s for a new lead generator or an experienced inside sales rep — is about rewarding efficiency, effectiveness, and results. The value that you place on certain performance measures or types of sales will vary, but the idea is to create an environment that rewards urgency and provides upside for overperformers.
“A compensation plan (should) reward closing business. The way that Balihoo’s compensation plan was set-up and delivered creates a true sense of urgency. These folks aren’t going to ultimately make the level of income that they expect to make if they don’t immediately figure out how to close business.”
Sounds pretty simple, right?
As most CEOs know, sales compensation is a little bit more complex than simply hanging a carrot in front of your staff’s face and telling them to close deals if they want to get it. But, in the end, it’s really all about establishing a strategy to your reach growth potential and then compensating in a way that helps you get there.
If you try to make it more complicated than that (or pay too much or too little to reach those goals), you’ll inevitably hinder your ability to get to where you want to be.