In this article, we will walk through some simple examples with some basic numbers to better understand what your B2B Sales Compensation plan could look like. RevenueHire will help you and your sales managers create a customized compensation plan based on their organization revenue goals, but the compensation ideas outlined in this article provide a great starting point for how to structure a compensation plan. We will cover the ratio of base pay to commission, a real world example for a particular open sales req, plus creative ways to offer bonus compensation on top of the base salary and commission.
OpenView labs, a company that provides research to startup software developers, provides some tips for compensating for every role. They break out sales roles as: Sales Executives, Inside/Outside Reps, and BDR/Lead Gen reps.
OpenView argues, and we agree, that you should never use commission caps. If reps are encouraged to only meet their quota and stop after that, then this is exactly what they will do.
What should the ratio of base pay be to commission for meeting quota, plus other bonuses?
In this section, we will discuss the ratio as it pertains to Inside/Outside sales reps. As we discussed above, Sales Executives like CROs and VPs of sales will have different models based on overall revenue targets, and BDRs/Lead Gen specialists will usually have team-based bonuses and a larger base pay
If you are unsure of the right ratio, it would make sense to start with a benchmarking ratio of some kind, like 60/40, 50/50 or 40/60, and increase the ratio of base pay or compensation based on how well your inside/outside sales reps are able to meet their quotas and how much churn you are seeing from reps who give up in frustration. Of course, you might find you have hired some reps who overinflated their numbers and ability to perform with low base pay, which is something RevenuHire can help you avoid. That said, if you find that you are consistently churning and burning through inside/outside reps, then your compensation plan might not be the right ratio for the type of market you are trying to penetrate.
A purely commissioned based role is going to make your sales team very much a kind of “Wolf of Wall Street” environment. Every man or woman for themselves might rapidly inflate numbers, but you will have almost no cooperation among reps, and most reps will burn out quickly and leave. RevenueHire has placed commission-only roles, but they are highly transactional ones where leads are provided. Of course, it is helpful to contact us about your particular open reqs and sales roles for us to get a better idea of the type of compensation structure that will work for your team.
At the other end of the scale, as the above article points out, if you have too much base pay, and too little incentivized salary, your reps will not be hungry enough to hunt or even farm. Having an 80-90% base pay ratio might make sense if your reps are going to be acting more like Account Managers for existing clients where any cross-selling/upselling is merely a nice bonus. For this type of role, RevenueHire often places roles that will be more inside sales rep-type roles, and specializes in helping you find the right people for these roles through a rigorous assessment process.
This leaves us with a range of base salary being anywhere from, say, 30% to 70% in most cases. The maturity of your business and lead pipeline might help you make some decisions about how much base salary you want your inside/outside sales reps to have.
For example, if you are managing a sales team at a relatively new company or one that is moving from a purely transactional/self-service model to selling enterprise services, you might want to consider a higher base pay for Inside/Outside sales reps. You probably won’t have enough data yet on how your lead pipeline will be built and maintained, if you have any qualified leads at all. While it might seem intuitively correct to place a higher commission and lower base on your inside/outside reps’ compensation package, you will find yourself churning through many frustrated reps who can’t meet their quotas each month while the pipeline matures. Of course, any rep who is coming into this kind of role should be expected to do as much of their own prospecting as is required to meet their numbers, but the rep will be penetrating a brand new market and effectively smiling and dialing for a large chunk of the time that he or she should be focused on working qualified leads to close.
If you are rebuilding a sales team where the company’s penetration into the market is more established, the service offerings have some cache in the target market, and a well-oiled pipeline building machine is already in place, you should consider lowering the base pay percentage in the compensation ratio to encourage more efficient closing on sales accepted leads and existing opportunities. Also, the hunting portion of the rep’s job will be much easier in a market where your company and its service offering is known.
Another factor to consider is the educational curve that your inside/outside rep will need to undergo to successfully sell your company’s services. If you offer a highly-technical software solution to developers or IT people, your reps will need to spend a lot of time becoming educated about the solution in order to create helpful conversations during their demos and appointments that lead to opportunities. Likewise, if you offer a solution that is perhaps not for a highly technical audience, but requires a fair amount of education and discussion with prospects to assess their needs and give them a good understanding of how your solution can help them, your reps will also require a much more in-depth education process than perhaps some other solutions that are more easy to grasp and assess. If this is the case, then you will want to err on the side of a larger base salary to attract reps who are motivated not only to sell, but to become self-educated beyond the product training they are provided. You would probably want to start with a 60 base/40 commission + bonus compensation plan.
An example to work through with numbers
One approach is to decide what the specific role is for the open sales req. For a “hunting” type role, you can start with a 50/50 split for base and commission, and work backwards based on your sales cycle, average deal size, newness of the territory, quota size, etc. For account managers and other roles that handle growing business from existing customers, you can start with a 0/30 split
Another approach is to start by offering a base salary that is competitive in your market. As stated above, if you are trying to attract reps who can digest large amounts of technical information and explain it during many rounds of in-depth discussions with various prospect stakeholders, then you know that you are competing for top sales talent.
Of course, the cost of living where your company is based must be considered. While it is always acceptable to hire remote reps who will only periodically be in your office, your internal team will be the source of building a sustaining sales culture. It isn’t in the scope of this article to address, but in most cases, we don’t recommend creating a sales team of reps who are working entirely remotely.
Since RevenueHire is a B2B Sales Recruiting company in Austin, Texas, we will take a brief look at the market for B2B SaaS Reps and derive our compensation plan from the market average.
According to Salary.com, the average base salary for an Inside Sales Rep in Austin, TX is $44K/annually. A single sales rep or a rep who is contributing to a two-income family could find an acceptable home or apartment to rent with this salary, but $44K/annually alone won’t be enough to motivate top talent to join your team.
For simplicity’s sake, let’s say that you hope your new team of Inside Sales reps will be tasked with meeting new logo revenue of $10 million over the next fiscal year. You have been given a hiring budget to hire five new inside sales reps. Assuming each of the five reps are bringing similar levels of experience and salary expectations to the table, you will look to offer them more or less the same base salary and compensation package.
Let’s add that each new logo will add an average of $20K in new revenue during the fiscal year. Of course, there will be many other variables to consider in terms of recurring revenue, setup fees, average life of customer, etc., bur for this exercise, we will keep things simple. Each of the five new inside reps will be tasked with bringing in $2 million in new logo revenue, which means that on average, they will have to close 100 new logos over the course of the year, or about 8 new logos/$160K in new revenue each month.
If you decided to pay each rep 5% commission on new logo revenue, they would hope to make an extra $8K a month in commissions alone (before considering any team or organizational bonuses), which means an extra $96K a year of income, putting their BASE/BONUS ratio at 30% base, 70% commission.
Depending on your organization’s overall strategy, this might seem quite high or about right–it depends on whether you are in a high growth stage of development, and new logos are extremely important to the company, or if you are in a profit stage of development, in which case, paying out such a high commission on new logo revenue would make little sense.
Also, if your base pay is $44K for each new inside sales rep, then a 30% base/70% commission structure may be too aggressive for them to meet. A 3% commission on new logo revenue in our simplified scenario delivers an annual commission of $57600, which give us a nice 40/60 ratio for BASE/COMMISSION. It also keeps the percentage of commission paid out against overall new revenue under 6%.
More creative sales compensation solutions that agilely anticipate a rapidly evolving pipeline and market.
What we have described above is a rather standard and basic approach to deriving commission structures for teams. You can, of course, become more creative in how you derive your compensation plans.
You could, for example, hire a team of five outside sales reps who are much more commission-based, who receive higher commissions from their sales, and who work more independently; while also hiring a team of inside sales reps who work more closely with your BDRs and whose bonuses and compensation are tied directly to the work of the entire team.
Ultimately, your B2B Sales Compensation plan will be custom tailored to make sense for what works for your vertical market, your service offering, your company’s culture and revenue goals, and your mix of reps and BDRs. If you contact us, you can receive a more customized compensation plan for your team. This article is meant to give you some starting points and general rules of thumb for a B2B Sales Compensation Plan.