In this ever-evolving landscape, understanding the do's and don'ts of sales compensation is crucial for SaaS companies aiming to attract top talent, drive performance, and ensure long-term success. Join us as we unravel the strategies that will shape effective SaaS sales compensation in the coming year, helping you stay ahead of the curve and optimize your team's efforts for maximum impact.
As we step into 2024, SaaS sales teams face unique challenges and opportunities. As we dive into this blog post, we'll explore the latest trends, proven methodologies, and potential pitfalls or mistakes to avoid. Whether you're a sales leader, compensation analyst, or a RevOps leader, this article is tailored to provide actionable insights that align with the current market dynamics, ensuring your sales compensation plans are not only competitive but also foster a motivated and high-performing sales team.
The 5 Do's of Sales Compensation
1. Design a compensation plan such that it has something for everyone
Typical teams are made up of Underperformers (20%), Core performers (60%), and overachievers (20%). Overachievers are almost always self-driven, but 80% of the team are not stars, and moving the needle on them can bring significant upside. Using multi-tier plans and bonuses makes sure that you are tapping into that potential too.
2. Give tools that enable them to estimate earning potential
If reps can estimate how much more they can earn by closing additional deals which are in the pipeline, it allows them to align personal financial goals. You want them to think about which deals should I close to be able to buy the latest iPhone!
Also, having the ability to simulate the construction of a deal (ACV vs payment terms vs multi-year) and see what combination maximizes their incentive earnings, can be hugely powerful.
3. Provide (near) real-time visibility into earnings
If you’ve run a 10K road race, you will know that race organizers have volunteers at every milepost telling runners what their time is. And seeing that nearly every runner pushes harder when near the marker striving to beat their personal best time.
The key learning here is that more information leads to a better result, and sales management and distance running both share the quality that more frequent information about performance drives to a measurably better result at the end.
4. Ensure commission payouts happen within 60 days of the outcome
Behavioral psychology explains that you must shrink the amount of time between an action and its consequence to motivate behavior. That's why we learn to avoid touching the stove, we did it once and got burned. Very quick feedback, lesson learned. The lesson for Sales here is that the sales reps should see the result of their effort in the nearest possible paycheck.
5. Balance incentives with contests and recognition programs to motivate
Beyond a point, the law of diminishing returns starts to apply and incentives start to lose their ability to influence sales behavior i.e. don’t throw the incentive as a solution to all sales management problems. Instead, for all non-revenue objectives (like forecast accuracy, CRM Hygiene, etc.) running contests with non-cash prizes, awarding badges, and certificates, and instituting President’s Club, etc are equally powerful to get the right sales behavior and creating the right culture early.
The 5 Sales Compensation Pitfalls You Should Avoid
1. Don't over-simplify plans. Focus on alignment
The best plans are aligned and simple. But faced with a choice, prioritize alignment over simplicity. For sales compensation plans to be effective, they need to be aligned with the behavior the business wants to reinforce.
Consider these scenarios:
Scenario 1: 10K from 1 customer who churns after the first year.
Scenario 2: 10K total from 5 customers. 3 of these will renew, 2 will buy more, and 1 of them will become an advocate (give case studies and testimonials).
An over-simplified revenue plan would equate to them whereas the value of scenario 2 to the company is infinitely more than #1.
2. Don't have a high base pay
A high fixed component in On-Target Earnings (OTE) could promote mediocrity by giving performers a reason to stay; it also demotivates achievers as there isn’t much of a differentiation. For Sales, the pay mix should be between 50:50, 60:40, or 70:30 (the more mature your product is, the higher the variable component).
3. Don't change plans mid-year
Please don’t make the critical error of changing the compensation plans mid-year once they are handed out. That is the easiest way to demotivate reps and destroy trust.
4. Never ignore historical data while designing incentive plans
Factor in data points like conversion rate, average deal size, sales cycle, average contact length, and qualitative inputs like ideal time/effort allocation, and secondary KPIs into the plan design to ensure the plan is aligned with your business context. If that’s not the case, your incentive spend will become more of an expense than an investment.
5. Don't get your territories and quota wrong
The fastest way to see your sales team stress out and burn out is by setting unrealistic quotas. Current pipeline or historical revenue performance should have little or no bearing on future quotas. Lead quantity and quality (conversion rate), sales cycle, and average deal size are good basis.
FAQs
What is sales compensation strategy?
Sales compensation strategy is a structured approach to rewarding and motivating sales teams based on performance. It involves designing incentive plans, commission structures, and bonuses to align with business goals, drive desired behaviors, and attract and retain top sales talent.
What are the three sales compensation methods?
The three sales compensation methods are salary, commission, and a combination of both (salary plus commission). Each method has its advantages and is chosen based on factors like industry norms, business objectives, and the nature of the sales role.
What is the compensation structure for SaaS sales?
The compensation structure for SaaS sales typically includes a combination of fixed salary and variable components such as commissions and bonuses. It aligns with subscription-based revenue models, motivating sales teams to drive customer acquisition, retention, and overall revenue growth in the dynamic SaaS industry.
What is a good commission rate for SaaS sales?
A good commission rate for SaaS sales varies but commonly ranges from 10% to 20% of the Annual Contract Value (ACV) or Annual Recurring Revenue (ARR). The rate depends on factors like deal size, sales strategy, and company policies.
What is an example of a sales compensation strategy?
An example of a sales compensation strategy is offering a tiered commission structure, where sales representatives earn higher percentages as they surpass predetermined sales targets. This motivates increased performance and aligns compensation with the achievement of specific sales goals.
What are the disadvantages of sales force compensation?
Disadvantages of sales force compensation include potential discontent if structures are perceived as unfair, a focus on short-term gains rather than long-term relationships, and the risk of incentivizing behaviors that might not align with overall business objectives or customer satisfaction.
What are some drawbacks of sales compensation design?
Drawbacks of sales compensation design include potential complexity leading to misunderstanding, resistance, or miscalculations. Poorly aligned incentives may encourage undesirable behaviors, and frequent plan changes may disrupt sales focus. Regular review and clear communication are crucial to address these challenges.
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