How to Set SDR Compensation Plans
Sales Development Representative Compensation Guide
On-target earnings (OTE) are a great way to motivate sales development reps (SDRs). This policy will help them perform better and generate more sales-qualified leads. If their base salary and variable pay depend on performance, they’ll work hard to meet their goals.
You must consider several factors for a sales compensation plan to be effective. Failing to do so risks demotivating or depressing your SDRs—which could hurt profits and employee retention.
However, when done right, SDRs can become productive and motivated and create more sales opportunities.
But what goes into effective commission plans? What should you consider when developing yours? In this post, we’ll look at these questions in more detail and give you the steps you’ll need to follow to build your company’s sales development compensation plan.
What makes commission plans effective? What should yours include?
Here are some ideas.
Why Have a Sales Development Compensation Plan?
Before discussing how to create a sales development compensation plan, let’s review why you would want one to begin with. These are the main benefits of having a well-thought-out sales compensation plan.
- Incentivizes SDRs
- Increased transparency
- More structure
- Easier planning and budgeting
Now that we understand why let’s look at the how.
Building an Effective SDR Compensation Plan
Some of the following steps may vary based on your specific needs. Some businesses may not need all the steps, while others may need more.
Determine On-Target Earnings
On-target earnings (OTE) are an SDR’s annual base salary plus on-target commissions (OTC). Consider national, local, and regional average SDR OTE. Glassdoor and PayScale can help you calculate an accurate price estimate.
From there, you can adjust the OTE based on the following factors:
- Job complexity
- Benefits gained
- Employee Attrition rate
Decide Upon Pay Mix
Pay mix is an SDR’s base salary to variable pay ratio. This reflects the risk of earning the OTE. For instance, some SDRs could perceive a 40/60 base salary/commission pay mix as too risky.
If your base salary is too low, SDR motivation and company performance will suffer. If your base salary is too high, your SDRs won’t gain if they hit their goals. Keeping SDRs productive requires the right pay mix. Like OTE, you can check national, regional, and local averages to compare prices. In the Tech and SaaS world, we find that 65 – 75% base is fairly common.
Measuring SDR Performance
After determining OTE and pay mix, decide how to measure SDRs’ performance. On what metric will your quotas be based? Finally, focus on revenue-generating activities for these metrics.
Focusing on a metric like call volume emphasizes quantity over quality. For example, an SDR can make 50 calls per day without generating a single sales opportunity. Therefore, it’s better to use a metric tied to quality, such as sales qualified prospects (SQO) and sales qualified leads (SQL).
As an example of setting quotes, we’ll look at the SQO metric.
SDRs, on average, usually generate seven SQOs per month or about one every three working days. You can set quotas and adjust as necessary from this average, depending on your company.
When setting quotas, ensure they’re realistic. According to research, 68% of SDRs meet their quotas. With that in mind, you should aim for an achievable quota between 60 and 70% of your SDRs.
Thresholds and Accelerators
Using thresholds and accelerators can improve SDR performance. They can recognize high-achievers and motivate low-performers.
Thresholds are minimum performance levels below which an SDR does not earn any commission. Typically, this threshold would fall between 40 and 50%.
On the other hand, Accelerators motivate SDRs by increasing commission rates once they meet their quota. Say an SDR’s quota is nine SQLs per month, and they’re paid 70/30. With accelerators, you can increase the commission for high performers.
Establishing a Performance Period
After tackling the above tasks, determine the period over which you’ll measure SDR performance. SDRs can achieve results faster than sales reps whose commissions depend on closed sales. Usually, this will be monthly, with commissions calculated at the end of the month.
Testing Your Compensation Plan
After planning, you can execute. But it’s a good idea to test your plan before implementing it on SDRs. This will show you how well it works and if you missed any issues when developing the compensation plan.
Use historical data to test your plan’s parameters. If historical data is not available, try using hypothetical SDRs. After getting the results, you should be able to determine if your pay is competitive and sustainable.
The One-Size-Fits-All Problem
In short, one size does not fit all.
As good an idea is to research what other companies are doing and paying, copying them may not work well. Instead, it would help to consider individual factors such as your business’s size, market maturity, product maturity, and customer segmentation.
More importantly, as your sales teams and company mature, you should be prepared to tweak your SDR compensation plan to keep ahead of the game.
A Plan In Action
Depending on the scale of your business and the number of SDRs you have, you may find it challenging to keep up on all the calculations at first. That’s why it’s essential to have your plan laid out in advance, tested, and adjusted where necessary.
The result should be a satisfied SDR crew who are motivated to work on developing your sales and who feel encouraged by upper management.
If you need help assembling a sales team that fits with your compensation plan, let Rainmakers help! Start browsing for applicants now!