A sales development compensation plan using on-target earnings (OTE) is probably one of the best ways to motivate your sales development reps (SDRs). If you do, you’ll drive them to perform better and create more sales-qualified opportunities for your sales reps.
If receiving their full base salary and variable pay depends on how they perform, they’ll do everything they can to achieve their targets.
For a sales compensation plan to be effective, however, it needs to be well thought out, and you’ll need to take various aspects into account when developing your plan.
If you don’t, it could have unwanted results like demotivating your SDRs or reducing their overall morale. This, in turn, could negatively affect your bottom line.
Conversely, when you get it right, your SDRs will be more productive, more motivated, and they’ll create more opportunities for your sales reps to sell.
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 develop your company’s sales development compensation plan.
Benefits of Using a Sales Development Compensation Plan
Before looking at how you can develop a sales development compensation plan, let’s first recap why you would want to. In other words, what benefits can you gain by using a well-thought-out and developed sales compensation plan?
Increased Transparency
In the first place, well-thought-out sales compensation plans increase transparency of the entire commission structure. Because more business divisions like Sales, HR, and Finance are involved in the compensation process, this allows every stakeholder across the enterprise to have insights into the plan and to understand how it works.
More Structure
SDR comp plans can give teams more structure. Because of this, your SDRs can see that you differentiate between different levels of SDRs and in how much you pay them. This shows them that they’ll have opportunities to advance and earn more. In turn, this keeps them motivated and ensures that they stay productive.
Provides Incentives
As mentioned earlier, when SDRs can see what they’ll be able to earn, they’ll be more motivated and productive. As a result, your sales reps will, ultimately, be able to make more sales and your company will generate more revenue.
Better Planning and Budgeting
When you use comp plans with OTE, you’ll know exactly what you’ll need to pay each SDR if they achieve their targets. This makes it easier for you to plan and budget, with the result that your company’s finances are always under control.
Steps in Designing an Effective Sales Development Representative Compensation Plan
We’ll now deal with the steps you’ll need to follow to develop your company’s sales compensation plan. It’s important to keep in mind that although these steps are crucial for you to develop an effective sales comp plan, some steps may differ based on your specific needs and requirements.
Also for some businesses all the steps might not be necessary while others would need to incorporate further considerations. As a result, you shouldn’t attempt to follow these steps religiously, but rather use them as a guide when developing your plan.
Step 1: Determine Your On-Target Earnings (OTE)
The on-target earnings (OTE) is the total compensation you’ll be paying to your SDRs provided of course that they achieve their targets.
OTE is the sum of an SDRs annual base salary and their on-target commissions (OTC) or variable pay. With this in mind, it might sound relatively simple to determine your OTE.
On the contrary, it can actually be somewhat complicated and you’ll need to do research to determine your OTE. This is because your OTE should be competitive if you want to attract and retain top sales talent. That means you should look at what OTEs comparable companies and your competitors are offering to their SDRs.
You should also consider the average OTE for SDRs nationally, locally, and regionally. The best way to do this is by looking at sites like Glassdoor and PayScale, which will help you calculate the average OTE paid to SDRs. This will give you an excellent indication of what you can expect to pay.
Once you’ve done this, you’ll then need to adjust this figure based on one or more factors that can influence the OTE:
- Experience. As with any other job, generally, the more experience and qualifications an SDR has, the higher the OTE will need to be.
- Complexity. As the specific job increases in complexity, the OTE will increase with it. For example, if the job requires increased engagement, as is the case with outbound SDRs, the OTE will likely be higher.
- Product. You should carefully consider the complexity and price of your products when determining your OTE. Typically, complex and more expensive products are harder to sell than simpler and cheaper ones. So, if this is the case, your OTE will likely be higher.
- Benefits. Although financial benefits can play a role in determining the OTE, here we’re referring to the intrinsic benefits of working for your company. These include, for instance, opportunities for education, good prospects for career advancement, or a strong brand. If you have these, you’ll possibly be able to pay a lower OTE.
- Attrition. The sales industry is known for its high turnover rates among sales reps and SDRs. If you want to retain top sales talent and keep attrition low, you’ll likely need to pay a higher OTE.
Step 2: Determine the Pay Mix
Once you’ve determined the OTE, you’ll need to determine what your pay mix will be. Simply put, the pay mix is the ratio of an SDRs annual base salary to their variable pay. To illustrate the concept, let’s look at a simple example.
Let’s say you employ SDRs and you offer them an OTE of $80,000. If you use a pay mix of about 65:35, which is about the national average in the US, you’ll pay them a base salary of 65% of their OTE and commission of 35% of OTE. This means you’ll pay a base salary of $52,000 and a commission of $28,000
Why is it important to get the OTE right? Simply put, it determines the amount of risk involved in earning the full OTE. For example, if you work on a pay mix of 40% base salary to 60% commission, the risk is too high for SDRs.
Besides, if your base salary is too low, your SDRs motivation, and your company’s performance, will suffer while your attrition rates will increase.
Conversely, if your base salary is too high, motivation could also suffer because your SDRs won’t have that big of an incentive to gain if they achieve their targets. Ultimately, you must get the pay mix right to keep your SDRs productive.
Like OTE, you can also consider national, regional, and local averages to see what other companies are offering. Keep in mind, though, that you’ll need to adjust the pay mix based on your products’ complexity, price, and sales cycles.
Here, if your products sell fast with shorter sales cycles, you could offer a lower base salary while the opposite is true for products with longer sales cycles.
Another important consideration when it comes to pay mix, and in a sense, quotas, is what you’ll pay new SDRs when they just joined your company. During this 1 to 3-month period, known as the ramp-up period, SDRs typically don’t have enough opportunities in their pipelines to achieve their quotas. Because of this, you’ll often need to pay a higher base salary during the ramp-up period.
Step 3: Determine How You’ll Measure SDR Performance
Once you’ve determined the OTE and pay mix, you’ll need to decide how you’ll measure your SDRs performance. In other words, you’ll need to figure out on what metric your quotas will be based. Typically, you’ll want to focus these metrics on revenue-generating activities.
Because of this, there are some activities you shouldn’t use as performance metrics. Let’s take the number of calls made by an SDR as an example. Although calls can result in sales if the prospect moves through the entire sales funnel, they don’t directly generate revenue for the company.
Also, when you focus on a metric like the number of calls made, you emphasize quantity over quality. For example, an SDR can make 50 calls per day and meet their target without one call generating a sales opportunity.
It’s thus far better to use a metric that’s not based on volume. Here, some examples would be metrics like sales qualified opportunities (SQO) or sales qualified leads (SQL) created, which is probably the most popular metric used in SDR sales comp.
Keep in mind, though, that your chosen metric should not depend on something out of the control of the SDR. If it does, they’ll become demotivated and their performance will suffer.
Step 4: Determine Their Quotas
Next up is determining your SDRs quotas or targets. But where do you start? Well, let’s look at some research. Here, we’ll use the sales qualified opportunities metric we referred to above.
According to the Bridge Group’s SDR Metrics Report 2021, SDRs, on average, generated 7 sales qualified opportunities per month or about 1 every three working days.
You can then use this average as a baseline and determine your quotas from there. If you do, you should adjust the quota based on your specific company. Here, many companies use historic performance to adjust the quota.
For example, if your SDRs have, on average, generated about 15 SQLs in the past, you can adjust the baseline up
It’s important to note, however, that you should also adjust the quota based on the prevailing market conditions. If you have no historical data available, you can use the baseline, but on a quarterly basis. You’ll then be able to adjust the quota throughout the year as more sales data becomes available.
The most important aspect when determining your quotas is ensuring that they’re achievable. Here, the research mentioned earlier shows that about 68% of SDRs reach their quotas. So, you should aim for a quota that’s achievable by between 60 and 70% of your SDRs.
If it’s any higher than this, you’ll likely overpay for performance. Conversely, if it’s lower and your quotas are too high, your SDRs’ morale, motivation, and performance will suffer. Besides this, if your quotas are too high, your SDRs will discount them accordingly. As a result, you must find a perfect balance.
Step 5: Determine Thresholds and Accelerators
If necessary to improve your SDRs’ performance, you can also implement thresholds and accelerators. They’re able to award high-achievers and motivate low-performers to perform better.
Thresholds are minimum performance levels below which an SDR will not earn any commission. Here, a typical threshold will be about 40 or 50%. This means, if we use the baseline above, the threshold would be about 4 or 5 sales qualified opportunities. If an SDR achieves lower than this, they’ll only earn their base salary.
In contrast, accelerators motivate your SDRs by increasing the commission rate once they exceed their quota. So, for example, let’s say an SDRs quota is 9 SQLs per month, and they work on a pay mix of 70:30. On an OTE of $80,000, the SDR will then earn about $220 per SQL as commission.
With accelerators, you can then increase the commission to a higher amount, say $250, for every SQL. Here, like with OTEs, the pay mix, and quotas, it might be worth your while to look at what other companies are offering their SDRs.
Step 6: Determine the Performance Period
Once you’ve dealt with all the aspects mentioned above, you’ll need to determine the period over which you’ll measure your SDRs performance. Unlike sales reps whose commissions depend on closed sales, SDRs can achieve their results much faster.
Typically, for SDRs, this period will then be monthly. So, you’ll track how they perform during the month and then calculate commissions at the end of the month.
Keep in mind, though, that you don’t necessarily need to pay out the commission in the month you track their performance, and you can adjust this based on your specific requirements.
Most companies, however, payout on a monthly basis. Besides, because you’re tracking performance monthly, it makes sense to payout monthly.
Step 7: Test Your Plan
Once you’ve developed your plan, you can implement it. However, it’s always a good idea to test your plan before you roll it out to your SDRs. This will show you how it works, and if there are any issues you’ve missed when developing the plan.
To test the plan, you can use historical data and apply its parameters to that. If you don’t have any historical data available, you can use hypothetical SDRs. Once you’ve got the results, you’ll then be able to gauge whether your compensation is competitive in the market.
The Bottom Line
Once you’ve developed your sales development compensation plan, and you’ve tested it, you’ll be able to implement it across your company. This means you’ll need to calculate commissions for all your SDRs.
Understandably, this could become very challenging very quickly, especially if you’re working with large teams of SDRs. In simple terms, sales comp spreadsheets are no longer good enough.
Fortunately, we’re here to help. At Performio, we make complex commission calculations easier. With our platform, you’ll be able to automate your sales commission calculations and get valuable insights from your sales comp data, all in one place.
To learn more about Performio and how it can help your company, visit our SPM software pagefor more details or to schedule a demo.
