You need to build a solid sales team to lead your business, and one way to attract top sales performers is offering the right sales team compensation plan. If it’s your first time setting up a sales team, however, it can be difficult to determine which incentives to offer your team.
By breaking down the different incentive categories, you can devise an attractive compensation package to motivate your sales team and drive optimal performance.
The first incentive category to focus on when creating your compensation package is what you will provide the individual account executives. Each individual account executive sales plan should include five key components: a base salary, commission rate, quota, on-target earnings, and variable pay.
A compensation package should always start with a solid base salary. In fact, whether you’re dealing with VP sales compensation or the salaries of CROs or other C-suite sales leaders, your top sales executives will not be impressed with their commission or other incentives if the base salary isn’t up to par. Carefully research what other SaaS companies are offering account executives for a salary so you can make sure you’re offering a competitive rate.
Once the base salary is established you can move onto the commission rate. Most industries have a standard commission rate you can reference. For example, SaaS products typically have a 10 percent commission rate for sales reps. If an account executive closes a deal worth $10,000 in annual recurring revenue, then the commission for that sale would be $1,000.
When determining the quota, you set for your sales representatives it’s important to set a goal that is realistic. To start, look at the performance of your best sales rep then analyze sales and conversion rates. Using this data, you should be able to put together a quota that is attainable for at least 60 percent of your sales team. You probably won’t get the quota right the first time, but that’s OK. You can always make adjustments later.
A standard rule many companies follow is the rule of 10. They’ll set an account executives quota by making it equal to 10x the rep’s base salary. This means if you’re paying a sales representative a $50,000 salary, the annual quota for that employee would then be $500,000.
On-target earnings give account executives a goal to work toward. It lets them know just how much they can earn if they hit all of their quarterly sales goals. It’s relatively simple to calculate an OTE for an account executive, too. Essentially, the OTE is the sum of an employee’s base salary and on-target commissions. If you’re paying a sales rep a base salary of $50,000 and the on-target commission rate is $30,000, then the OTE would be $80,000.
Variable pay can be a great incentive to sales representatives and an alternative sales team compensation if used appropriately. The variable pay is typically compensation determined based on sales performance. There are three different types of variable pay companies provide, and it’s up to you to decide which option is best for your company and employees.
The three types of variable pay are:
The commission structure is essentially a tiered plan. As a sales rep closes more deals and comes closer to quota, they can hit new commission tiers. For example, you could have account executives start at a 7 percent commission rate but bump that number to 10% once they’ve hit $100,000 in sales.
Bonus are typically paid out a bit differently than commission tiers. A sales rep will receive a bonus after hitting a goal, but the bonus usually gets paid out quarterly or annually. Bonuses are also a fixed payment amount while the tiered commissions can vary between each sales rep. Finally, a management by objective variable pay option is very individualized. Employees can set goals that help them work toward their incentive pay.
Assigning territory areas to each sales representative is essential for avoiding sales conflicts and for optimizing coverage. A sales territory defines where an account executive can sell. There are typically three types of territory structures companies choose from when structuring territories.
Territories assigned by geographical location is a common structure used by SaaS companies. However, when structuring geographic territories, you should be less concerned with physical land size and instead ensure an equal number of leads is split between each territory. If territories are equally split in terms of leads, then sales representatives won’t be concerned about which territory they’re assigned.
A round-robin territory schedule helps equally assign leads to sales teams. This is done by distributing one lead to a sales representative then moving onto the next account executive until everyone is assigned a lead. Once everyone has been assigned a lead, the process begins again at the start of the assignee list until all of the leads have been divvied out. As new leads come into the sales funnel, the next representative in line will receive the new lead. This structure is popular with smaller teams who don’t have the resources to maintain a geographical territory map or a sales vertical.
Another territory structure implemented by SaaS companies is industry verticals. Verticals focus on a specific market sector instead of the whole industry. This is particularly useful when a SaaS product applies to very specific customers.
The total team quota for your sales team is known as the quota capacity. Your sales team should be able to attain 70 percent of their quota capacity. Calculating the quota capacity is quite simple. You just have to sum the quotas of each of your sales reps. For example, if you have four account executives with $100,000 quotas, then the team quota capacity would be $400,000.
If your sales team is already achieving 70 percent or more of their quota capacity, it’s time to start expanding the sales team. Of course, only expand if you have enough leads to keep new sales hires busy. Building a functioning sales team takes time and hashing out all of the incentive packages can take a little reworking before you find the right compensation package mix. Working with some of the numbers above, however, will start you out on the right foot and keep your account executives satisfied as you build the team.
Cowen Partners is a national sales leadership recruitment firm and has a strong record of identifying and recruiting sales leadership for fast-growing public and private companies. Contact us to talk to a 5-star sales executive recruiter who is ready to find top talent for your organization.
Our hands-on sales executive recruiters have experience working with private, public, pre-IPO, and non-profit organizations. Clients are typically $50 million in revenue to Fortune 1000’s or have assets over a billion. Successful placements span the entire C-Suite – CEO, Chief Operating Officer, Chief Financial Officer, and include vice president, general counsel, and other director-level leadership roles.
Check out our industry-leading retained search resources to see why Cowen Partners is a top sales and marketing executive search firm in New York City, Anchorage, Chicago, Seattle, Atlanta, Dallas, Los Angeles, and beyond: