Setting Up Compensation Plans for SDRs Effectively

Aug 17, 2022
Collin Stewart

There’s a lot of content out there about compensation plans for salespeople, but not as much on how to compensate your sales development representatives (SDRs).

As the Chief of Staff at QuotaPath, Graham Collins built out the SDR function, led a team of 40 reps, and conducted more than 300 compensation plan strategy calls. He joined the Predictable Revenue podcast to discuss how to set up effective compensation plans for SDRs.

Designing effective compensation plans for sales development reps

There are two main factors to balance when deciding on compensation plans: benefit to the sales development rep and benefit to the company. 

Older commission models compensated reps based on the number of cold calls they made, which was within the rep’s control but produced no real benefit to the company. On the other hand, revenue-based compensation plans often rely on factors outside of the rep’s control. 

Other alternatives include compensation plans based on the number of opportunities (or qualified opportunities) generated. 

Which sales development compensation model is best for your company?

There are advantages and disadvantages to each model, and the best solution depends on your company, outbound sales function, and target market. The first factor to consider is how much of your outbound sales process is under the SDR’s control. 

Sales cycle length and SDR involvement

If SDRs play a large part in your outbound sales process or you have a very short sales cycle, a revenue-based plan might work best. This ensures that compensation is tied to a variable that directly benefits the company.

In some companies, however, SDRs are only responsible for scheduling meetings. After the meeting is scheduled, the prospect is handed off to an account executive (AE), and the SDR’s work is done. The sales development rep has little control over whether or not the deal closes. 

In this case, revenue-based compensation plans wouldn’t make sense. The SDRs should be compensated based on the number of opportunities generated instead. One thing to keep in mind with this model is that a larger number of opportunities only benefits the company if they’re qualified opportunities. 

Stage of growth

If you’re an early-stage company and your ideal customer profile (ICP) isn’t well defined yet, the number of meetings booked and attended might be a good outcome metric for your compensation plans. As the company grows, it may become more relevant to switch to a revenue model.

Target market size

If your company sells to everyone, you may not care who your SDRs book meetings with. But if you have a very small market, every opportunity needs to be qualified. 

In this case, you might decide that SDRs should be compensated only if the prospect meets certain parameters. You could define your ICP into different buyer personas, industries, or titles. For example, only meetings booked with a director of communications can be considered qualified.

If you need help defining your ICP, reach out here to book a free discovery call. Our coaches can help you find the right prospects, so you only spend your outbound sales efforts on the most qualified leads.

How to handle compensation plans with multiple buyer personas

If you have multiple buyer personas, consider a weighting system to rank the value of each. Just be careful not to make it too complicated. 

For each opportunity type or buyer persona, consider the contract value, average close rate, and closing time. Remember that small deals are still worth pursuing if they have a higher close rate or shorter sales cycle. If you make one buyer persona worth significantly more in terms of compensation, reps are unlikely to pursue other types of deals.

What most companies get wrong with compensation plans

The most common mistake with compensation plans is making them too complex, so sales development reps aren’t even sure how their commission works. Simple is always better.

The second mistake is that target numbers are pulled out of thin air, or set based on past top performers. Targets need to be fair, achievable, and easy to track. The target number of opportunities should be based on real data. 

For example, if your average contract value is $100,000 with a close rate of 10%, that gives an average of $10,000. If you pay your SDRs $70,000 and want them to generate a 10x return on investment, then you need them to each generate $700,000 in revenue. That works out to 70 qualified opportunities per year.

If nothing else, you need to consider how much your SDRs are costing you, and what type of return you’re aiming for. Graham suggests somewhere in the range of 6-12x their salary.

How better compensation plans lead to better organizations

Well-designed compensation plans lead to seamless integration between outbound sales and marketing because both functions are aligned on their goals (qualified opportunities or revenue generated). 

SDRs also benefit because they understand how their work contributes to the larger organization, and they also have a chance to learn what qualified opportunities look like as they move through the pipeline–paving the way for advancement into an AE position.

From a sales leadership perspective, strong compensation plans eliminate misunderstandings and payment issues around commission. 

SDRs frequently quit or lose motivation due to commission misunderstandings, and you could lose some of your top performers this way. On the other hand, a clear, well-designed compensation plan can be a great motivator.

Better compensation plans produce stronger sales teams

When it comes to compensation plans, transparency is key. Everyone on the outbound sales team should understand not just how the plan works but why it’s structured that way. There should be no question about how much people are being paid or why they’re being paid that amount. 

QuotaPath makes this easier to achieve than ever, by automating and tracking the entire commission process from start to finish. If you want to connect with Graham to learn more about effective compensation plans, reach out via LinkedIn or visit QuotaPath.com.

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