Compensation plans are one of the most challenging aspects of running a sales organization. To help sales and HR leaders in our portfolio navigate the complexities, we held a virtual workshop on sales compensation strategies featuring Mike Heilmann, a Norwest senior advisor and founder of ScaledRev.
Here are some of the key takeaways from the workshop.
Market Trends Drive Changes in Sales Comp
The changing market for technology companies – marked by stronger headwinds, delayed IPOs, and stricter capital availability – is having an impact on sales compensation. These are five of the most consequential trends we’re seeing:
- Draws are becoming less of an expectation. Sales personnel must wait for deals to close and revenue to start flowing before realizing rewards.
- Variable incentives are more focused on revenue outcomes than on activities. While this has always been true for direct sellers, sales- and business-development representatives (SDRs and BDRs) are seeing a diminishing portion of their compensation tied simply to activities.
- Rewards increasingly emphasize quality over quantity. High-quality, high-value, long-term deals are prized, especially for businesses with recurring revenue models such as SaaS.
- Incentives stress “expand” over “land”. While it’s always important to add new accounts, actions that grow recurring business from established accounts often produce greater long-term value at less cost.
- Clawbacks are more common. Management today monitors company performance more closely than ever and will quickly act to rein in costs – even if that means draws must be pulled back.
10 Elements of an Effective Sales Compensation Plan
Despite whatever market challenges a sales team may face at any given time, these 10 fundamental principles – the first three of which are non-negotiable – will set your sales compensation plan up for success.
- Simplicity. The easier a plan is to understand, the greater impact it will have. Don’t make people spend their valuable time trying to figure out how they make the most money.
- Consistency with company goals. No matter how good a plan is, it won’t meet its objectives if it isn’t tightly aligned with company goals and strategies. Never incentivize people to do anything that doesn’t move the company in its decided direction.
- Challenging yet achievable goals. If it’s too easy to exceed targets, sellers may lose motivation. The corollary is also true: if goals are unattainable, they may start to think “why try?”
- Tiers and/or accelerators that reward overachievers. You never want to discourage anyone from pushing beyond their quota.
- Annuity payments that reward multi-year deals. Just as the company benefits from long-term contracts, so should the people making them happen.
- One-off rewards to acknowledge extraordinary effort. In cases where a salesperson skillfully navigates an unusual circumstance or exhibits outstanding work, a creative or specialized reward can be appropriate. Just be selective in how you award these.
- Flexibility. You can be certain that things will change, and you need to adapt.
- Rewards for all members of the team. While specific amounts may vary, all contributors to a successful team – not only direct sellers but the dependent roles such as SEs as well – should be rewarded. This will drive continued collaboration.
- Equality. Even the perception of unfairness or favoritism can be fatal to a fruitful relationship.
- Transparency. Always be open, up-front, and honest, especially when you need to have hard conversations about necessary changes or a downward turn in circumstances.
What Are the Right Numbers for Your Sales Comp Plan?
Sales, finance, and HR executives always want to verify that the numbers in their sales-comp plans are at market rates. While every company is different – and industry norms can change significantly in even a few months – a 2023 survey of 236 B2B SaaS companies revealed numbers that closely matched our benchmarks in dealing with Norwest portfolio companies and other young businesses.
The survey captured data from companies ranging in ARR from $5 million to $1 billion. Not surprisingly, dollar amounts grow with the size of target markets. For example, the average OTE for an account executive at a company targeting enterprise customers is around $330,000, while it’s about $200,000 and $150,000 at companies targeting mid-market and SMB firms, respectively. At the same time, the split between fixed and variable compensation is consistent across all markets: roughly 50/50.
As the size of a target market grows, so do performance expectations for AEs. At companies targeting SMBs, the ratio of pipeline goal to OTE is in the range of 5-8x, while it is 10-15x for mid-market and 15-20x for enterprise accounts.
Account managers, predictably, have a different ratio of fixed-to-variable compensation, roughly 60/40. The same ratio generally applies to SDRs, whose average OTE ranges from $70,000 at companies targeting SMBs to around $110,000 for those serving enterprise accounts.
The comp plans for early- versus later-stage companies differ but not as much as you might expect.
The comp plans for early- versus later-stage companies differ but not as much as you might expect. The 2023 survey defined early-stage respondents as having $50 million or less in ARR and later-stage companies as having more. Across all positions, company sizes, and target markets, the difference in OTE and targets between early- and late-stage companies was generally 10 percent or less.
As for choosing metrics for sales targets, sales-qualified leads (SQLs) were the most frequent measure for SDR goals (74% of companies use them), while marketing-qualified leads (MQLs) were used by 39 percent of respondents and pipeline dollars by 34 percent.
Key Takeaways
When developing or adjusting sales comp plans, you will have many factors to consider. The takeaways below offer high-level guidance that will help you make sound decisions:
- Make your comp plan simple to understand, consistent with company goals, and challenging (but realistic).
- Conditions will change, so be willing to make adjustments to your plan.
- If you are asked to add headcount, apply a fact-based assessment of the request by measuring where you currently stand on key measurements against your quotas.
Sales compensation is just one of the challenges that Norwest’s Portfolio Services team helps leaders tackle. We work side by side with companies as they develop and execute strategies to overcome common hurdles related to sales, marketing, and HR issues.
