Updated: Sep 15, 2021
Summary: Change compensation, change behavior.
If a client of mine has not heard me say, “compensation dictates behavior,” it means we haven’t worked together for at least 10 minutes. Compensation plans are one of the most powerful tools an executive has to influence the behavior of their company’s staff, and not just for sales staff. These plans work 24 hours a day and don’t require active management. In essence, you can set it and forget it.
Unfortunately, many companies get it wrong and end up wasting a lot of money, whether on base salaries that don’t leave people hungry for more or backfilling employees who leave because they literally can’t make a living on your plan. They can also inadvertently spur people to work really hard on activities that don’t sync with the company’s goals.
Sales compensation is a broad topic that deserves its own book, but for illustrative purposes, I will stick to sales development rep (SDR) pay so that we can go deep here with understanding the levers you can pull to influence behavior.
The raw ingredients for crafting an SDR compensation plan include both fixed and variable components that can get quite creative, but we’ll stick to the basics here.
A fixed base salary
Some sort of variable pay that encourages the right behavior to produce outcomes aligned with the company’s goals
Base salary is pretty straightforward. It should not be too high and incentivize people to coast, and it should not be so low they starve before hitting their sales goals. It also depends on their years of experience, the size of deals you are selling, and the geography you’re hiring in.
A good rule of thumb to start with is to decide what you think their total compensation should be if an SDR is performing well and making the base salary two-thirds of that total. If a successful SDR should be able to make $75,000 per year, you would make the base salary $50,000.
If you’re hiring a recent college graduate to sell deals that cost less than $15,000 in a geography with a low cost of living, you can expect to pay a base of $35,000-40,000. A high-end SDR role requiring someone with several years of experience, selling enterprise-size deals, living in a major city is going to pay a base of around $60,000.
Variable pay, however, depends on what you want to achieve. Variable pay for an SDR is typically paid on qualified meetings scheduled (or held) and sometimes a percentage of revenue they sourced that eventually closes. The caution I have here is that commissioning people on things they do not have direct control over (which deals close) can cause massive frustration if the people responsible for closing deals are not doing the job to the SDR’s satisfaction.
While SDRs are ramping up, you can also offer a bonus they either earn or not on activities like hitting minimum numbers of monthly dials, personalized emails, and conversations. This is particularly useful when they are not yet generating the number of meetings needed to earn a decent paycheck. You can incentivize them to perform the incremental steps needed to get to the outcomes you ultimately want.
You can also include temporary bonuses that encourage behavior needed temporarily to achieve a company goal or create a sense of fun competition because who doesn’t need a little extra fun on the job?
It Works Fast
Not every problem can or should be solved by adjusting compensation, but where a compensation adjustment is appropriate, the results can be very quick.
When I ran my tech services firm, I had a bunch of consultants on salary. No matter how much coaching I did, I could never get my profit margin much above 10 percent, which was typical for that industry at the time.
I created a new comp plan that incentivized my consultants to behave in the way that aligned both our interests. When I made more money, they made more money. I also put some technology in place that enabled real-time calculations and visualization of data in the service record database, so as soon as they entered their billable time in the system, they, and everyone else in the office, could see on a big screen in the workroom how that time entry impacted their monthly bonus. (They could also see what other people were on track to earn bonus-wise).
Within two months of implementing the new comp plan, my net profit tripled. High performers were making more money, I was making more money, and the lowest performers, embarrassed by their abysmal and very public performance, self-selected out of the company, opening the doors to more top performers.
Sample SDR Problems You Can Solve With Compensation
I have seen more than once in early-stage companies where everyone is wearing multiple hats, and then a relatively well-paid employee is tasked with making sales calls. If the SDRs are not generating the volume of meetings you’d like, especially if their activity numbers (calls, emails, social touches) are too low, lowering the base salary can create the kind of hunger that gets them more focused on the right stuff. It can also make them realize they aren’t that interested in the job and push them right out the door, which isn’t necessarily a bad thing, but weigh this option carefully.
The other issue I see often with early-stage companies is that they miscalculated how many meetings the SDR should be able to generate, especially when hiring their first full-time SDR. While this solution is more about retaining the SDR you’ve now invested in training more than generating more meetings right now, sometimes it makes sense to recognize that what you’ve asked someone to do is harder than anticipated and increase the amount earned per qualified opportunity. This will buy you some time while focusing on making the SDR process more efficient and effective without losing your investment in the SDR.
If you have a relatively short sales cycle, and you’re trying to hit certain numbers for the quarter, you can offer short-term contests or a premium bonus for meetings scheduled during a specific period of time.
Meetings with bigger companies take longer to generate on average compared to meetings with smaller companies for two primary reasons. One, the bigger companies have more people prospecting into them, vying for the attention of the same decision-makers, fatiguing them and making them less responsive even to the best sales development approaches. Second, sometimes it is next to impossible to identify the right person to speak with from outside the company, so just identifying the right person to talk with takes more time.
A great strategy is to segment your sales development team into the size of companies they reach out to and pay higher base salaries to SDRs prospecting larger companies. Early in my career when I was reaching out to banks, I wanted to go after the bigger banks because I enjoyed the challenge. Had I not been receiving a higher base salary than the rest of the team, I would have refused, because, as you know, compensation dictates behavior. I would have focused on the smaller banks because they were easiest to schedule and maxed out my paycheck.
We decided to skim a population of bigger banks off the top of everyone’s geography and make them my territory. I spent the rest of my career there happily calling on the biggest banks because I felt like I was being compensated appropriately for the extra effort.
You can also offer a bigger bonus for bigger opportunities. For example, if you know the average initial deal size based on a prospect company’s size, you could keep everyone’s base salary the same, but offer a higher commission for viable opportunities with bigger companies.
If the percentage of meetings that close is too low or your initial deal sizes are too low, you can incentivize the SDRs to improve the quality of opportunities they develop by giving them a percentage of revenue generated through deals they sourced. For example, if you give them 75 percent of the commission on the number of qualified opportunities generated and 25 percent on deals that close based on a percentage of revenue, they will work to schedule meetings now with an eye on their eventual size and likelihood they will close.
I have one big caution here. When you commission people on activities they cannot directly control, like whether the sales rep they handed the opportunity off to is skilled or hardworking enough to close it, they suddenly become very interested in what other people are doing.
This can cause a lot of tension on the team, and needs to be managed carefully. When the SDR and the sales rep have a mutual respect relationship, this can work famously. If one SDR is supporting multiple account executives, they will want to hand deals off to the sales reps they know have the best chance of closing the deal because compensation dictates behavior. It can even impact which territories they will spend most of their time prospecting in.
As mentioned above, you may want to provide a ramp to incentivize the exact behavior you’re looking for in a new SDR by providing a bonus for hitting a certain number of calls, personalized emails and social touches. I have to caution you though that sometimes this can backfire, and you end up incentivizing quantity over quality, which doesn’t end up getting you where you want to go.
General Rules of Compensation
Provide a base salary that is neither so much it disincentivizes hard work nor so little that most people will starve before they start hitting their quota.
Commission people in a way that has them focused on the outcomes you want to achieve.
Be cautious when commissioning people on stuff they can’t control; it can create dysfunction.
Align compensation with the company’s most important goals.
Final Thoughts on Compensation
It’s important to experiment with this and optimize the compensation plan that enables you to achieve your revenue goals and get the best performance out of your team. In order to test a plan, your team needs to understand the reasoning behind the way it’s structured and get as close to real-time feedback on how their daily performance is impacting their paychecks, but reports and dashboards are topics for another post.
Compensation dictates behavior
Sales compensation plans should consist of fixed and variable pay
Experiment with different plans over time to optimize them