Over the past 12 years, our team at Sales Talent Agency has been asked a lot of questions on the topic of sales compensation. Below is an amended transcript of a presentation by Sonya Meloff on the top 5 most popular questions. The original video is presented by MaRS Discovery District at the Mastering Talent: Startup Compensation event. Click here to view.
Do sales people care only about money?
This is a very important question because salespeople are typically the only employees within the organization who earn a commission. Therefore, it is easy to see how one may naturally think that this is all they are concerned about. Of course, salespeople do care about money, however, their needs are far greater. The true hierarchy of needs for a sales person includes much more. Specifically, they need: a clear value proposition, proof that their company has been able to help others, engaged support, realistic targets, a simple compensation plan, a ‘big picture’ vision of where they are going and where the company is headed as a whole.
If the company that they work for doesn’t have a product they believe in or the ability to deliver effectively on goods sold, they can’t make good money. Salespeople see themselves as the ultimate problem solvers; their goal is to understand their customers’ needs better than anyone. Ultimately, they must believe in their own company’s unique ability to solve a critical problem.
Being able to identify and close a sale with a customer is an incredibly valuable skill and we must appreciate that it is a rare skill to do successfully. A good salesperson is worth their weight in gold -or bitcoin- and salespeople are hyper-aware of their worth. As a result, they care deeply that they are being compensated appropriately. It is also important that their sales targets are achievable & reasonable and when not, reviewable.
What is the right balance of base and commission to pay?
95% of salespeople that we meet have a combination of salary and commissions or bonuses. There are 3 levers that you can use when structuring a compensation plan – salary, performance-based variable and equity. The right balance will incent what every company wants from their sales reps: to over-achieve on their target!
There are pros and cons of every possible structure, whether your job offering is 100% salary, or 100% commission. The best compensation plans are a thoughtful balance tied directly to what the sales person is responsible for. This is why having clearly defined role expectations is critically important as it must align with the overall business objectives. Adding new customers, setting up customer demo’s, increasing deal size, improving customer retention and selling products with better gross profit are all examples of this. Ideally, salespeople can track these metrics in real time through their CRM.
Typically, there will be a different commission structure for the salesperson that is bringing net new clients and the salesperson that is responsible for growing that business. In many situations, the same person is performing both of these tasks and they are paid with the same commission structure. As companies invest more in client success models, it may be cost-prohibitive to pay a rep high commissions for business renewal, especially if they have little involvement in that transaction. On the flip side, this could help retain a good person, so you need to consider multiple factors. Typically, a pure hunter, will be paid a 50/50 plan, meaning that if the base salary is $55K, their plan will allow them to make $110K on-target earnings (OTE).
Most junior reps are not ready for high commission sales roles. The pressure will often negatively impact their growth curve and in many cases, their family and friends may also discourage them. If you are hiring bright/driven new grads, you have to keep in mind that your $40-$45K base is competing against the $65K base salary that they are seeing offered by consulting and CPG companies straight out of university. The balance needs to be adjusted based on what roles you are competing against. If you can’t pay them the salary they want, you need to offer something else that is appealing such as an elite employment brand, high potential stocks, a leading marketing position or a healthy draw against commissions. Always consider the things you can put in play that make your compensation more attractive than the person sitting beside you.
There are still companies that think paying 100% commission is typical for salespeople. While this may lower your financial risk if there is poor performance, you are significantly limiting your candidate pool to sales reps that are either supremely confident or those lacking employment opportunities altogether. The argument made by all-commission employers is that salespeople will not perform unless financially incentivized to do so. Right or wrong, this strategy is flawed because it limits the quality of talent you hire in the first place.
Some additional drawbacks of straight commission plans is that they can cause reps to be overly-aggressive. This can scare off customers and hurt your brand image. It often leads to extreme differences in pay, not just between employees, but also for an individual who may experience uncertainty in his/her commission value from month-to-month. Salespeople on straight commission may be less loyal and it might actually be less profitable to your company given that you typically have to pay higher commissions to the ones that are really good at what they do
What about straight salary with no commissions? A recent trend seen by some companies is to appear that they aren’t ‘selling’ at all. Hence, no need for “salespeople” to be paid the way that traditional “salespeople” get paid. Sales is a sleazy term in their mind, and they want to ‘educate’, not sell. In today’s B2B environment, all sales should be educational and consultative. You can call them whatever you want, if they are front-line and bringing in revenue, they are salespeople. Therefore, the best salespeople are more likely to jump to a new employer for the opportunity to increase their income with performance-based commission. I’ve heard impassioned advocates for this strategy, but I’ve never seen it work well in practice. The biggest disadvantage to a straight-salary system is that it takes away salespeople’s incentive to excel. If they are earning the same income no matter their volume or quality of sales, they may be tempted to settle into a routine that’s just good enough to keep their managers satisfied.
The timing of when and how to pay commissions is also a balancing act. The best plans pay salespeople their commissions the pay period after the company has successfully collected payment from the customer. This keeps salespeople happy and engaged. Many companies choose to pay commissions in the form of an annual bonus at the end of each year. The theory is that an annual bonus promotes retention among their employees, as they will turn down other job offers to collect on that big bonus that may be months away. Given that salespeople typically have lower base salaries, they may find it extremely hard to live the other 11 months of the year on their base-salary alone and this payout timeline may actually incent salespeople to leave at the end of the year once their bonus has been collected and you risk having a mass exodus going into the new year.
An annual incentive, based on factors like consistency or surpassing company targets, works well to help encourage retention as long as it’s a smaller component of their overall commission structure.
Am I paying enough?
You will know that you are paying enough if you are able to attract and keep good people. Period. Typically, the best candidates are NOT making average compensation, so it’s very important to understand what the market is paying and what they may leave for. Don’t make the mistake of benchmarking your compensation on what the average is making.
Over the past few years, we’ve seen many companies flock to Canada, leveraging their strong dollar and flooding the market with lots of high-paying roles. There has been record VC (Venture Capitalist) investment and there are now 2,500 startups in Toronto alone. The best salespeople are exposed to many options during their careers. As a result, they will be open to less salary with an employer at the top of their ‘wish list’, opposed to a company they are less inspired to sell for.
When hiring salespeople, it is important not to over inflate their on-target earnings. While you may get them in the door with the promise of a big performance-based incentive, once they recognize it is unachievable you risk a quick exit. The number one complaint we hear from candidates who have had a negative experience at a startup and the number one reason sales people leave their role in their first year, is because the compensation promised when they signed on is not realistic.
It is important to stay ahead of the compensation discussion. Keep an open-line of conversation with your sales team and be prepared to resize the salary if you find that you have a real star in your midst. At any given moment, salespeople typically feel that their base salaries should increase between 11-36%. So, if you have a BDR at $45K base, they may think they deserve an increase to $60K+. That seems high, but I have regularly seen jumps from $42k to $55K. If you are a rep with a base salary of $55K, there is a distinct possibility that you could find a similar role with a company that is willing to pay $74K for the same experience. As a company, you want to recognize your top performers and make sure they continue to be paid what they could get elsewhere.
While money isn’t everything, 95% of all offers at or below an employee’s current base salary level are rejected. If an offer is not 10-15% higher than a candidate’s existing base salary, you risk it being rejected. That means a candidate currently earning $50,000 would need to see at least a $55,000-$57,500 offer to have a likely close. While it may be unrealistic to outbid much of what is out there, it’s important to understand what you have to offer OTHER than compensation. If all you have to offer is compensation, then it better be very appealing to the candidate.
As an employer, a red flag to look for when you are interviewing is when the candidate asks for a lot more than you are offering. This may be an indicator that your current employees are vulnerable. The market is constantly changing, so assume that your other employees are getting the same offers.
Since we published The Definitive Sales Salary Guide – salaries in some categories have jumped 20%+. Therefore, the market for sales positions is rapidly changing, don’t ignore it.
Should commissions be capped?
If you are going to incentivize people through a commission-based structure, you can’t cap it. One of the most important compensation factors for salespeople is that their income should be uncapped to allow them to truly earn as much as their skill and drive allows and reflect the value they bring to the organization.
The number one reason that salespeople claim they will leave their role is for more money. The way to push them towards leaving is to cap their commissions, so avoid this at all costs. Greater flexibility and a more convenient location were reasons two and three.
We have all seen salespeople with bumper years – 200% to 400% of target. That means, at a target of $2.5M they brought in $5M in sales or more. Since most SaaS companies are valued at 6-12 times their annual recurring revenue (ARR), this means that if the sales-rep was tasked with bringing in $15M in value (6x of $2.5M), they actually brought in $30M of value (6x of $5M). That, however, would not have happened if the commission plan was capped at 150% of target.
Sales compensation is referred to as an ‘at risk plan’. With at-risk plans, individuals agree to risk, or sacrifice, a percentage of their total compensation if they fail to reach their goals. As part of this agreement, they accept a lower base salary with the understanding that, in return, the company will offer upside potential for overachievement. While it’s prudent to use caps for no-risk compensation plans, you should never use them for sales plans.
What are the best SPIFFs?
Similar to commissions and bonuses, SPIFFs are a great way to motivate salespeople to maximize revenue for your business. I couldn’t find an actual definition, but a SPIFF is the practice of paying a small, immediate bonus for a sale. It’s a great way to encourage a salesperson to push one product or to achieve a very specific outcome in a specified amount of time.
SPIFFs are used as a quick ignite or power boost to complement a long-term strategy. If your company is looking to enter a new market or push a new product, a good SPIFF can help ignite that behaviour or desired outcome. Any SPIFF program should be built to have immediacy and little administrative burden. If they take too long to achieve, they can be forgotten. They should be structured to take place over days and weeks, not quarters.
At Sales Talent Agency, we wanted to increase the number of reference letters that we had from our customers. So, as a SPIFF, we offered everyone over the course of a month $100 dollars if they got a reference letter from a client. In that first month that we launched the SPIFF we received nearly 50 reference letters! This may have cost us $5,000, but today we have pages of amazing reference letters that continue to help us grow our business. We’ve kept this one going over the years because it’s been so popular.
Make sure that your SPIFFs are well thought-out and that you know your expected ROI. Keep them short, infrequent and limit the cost to about 5 percent of your incentive budget.
Accelerators, or overachievement commissions are another variable component that I want to touch on before ending this article. An accelerator is when a higher commission rate kicks in after quotas are met. For example, your salesperson may make 8% commission on all sales up to 100% of their target, then 10% commission on all sales above that. Or $25/demo for the first 20 each month, and $35/meeting for anything above the monthly target. This keeps salespeople pushing to the end as they have the opportunity to make great money and it may help make up for others on the sales team that fall short.
To conclude, I want to highlight a common misconception about commissions; that they will drive a salesperson’s work ethic. This isn’t true. If you have a hard-worker, they will work hard and if they are lazy, they will not. Commissions will direct their self-motivation, which is why self-motivation and drive is so critical in sales. The right commission plan will tell your salespeople exactly what you want them to focus on and will align their pay to the effective execution of that plan. Outside of compensation, the simpler the plan, the better. Ideally, salespeople should be able to easily equate the amount they earn on every deal.
I hope that this article has provided you with insight on how to motivate and retain top performing salespeople to your organization. According to experts, a better sales compensation plan may be the secret sauce to boosting sales. If you can attract a top performing sales rep to your team, it’s the best asset of a company and you’ll be a rockstar all day long.
If you have other compensation questions, contact us today!