Sales compensation plans using competitive on-target earnings (OTE) as their foundation is one of the best ways for SaaS companies to motivate their sales development representatives to create more sales qualified leads for their sales team. And if they do, their sales team will be more likely to close deals which, in turn, means more revenue for the company.
The thing is, the sales development representative commission requires a unique approach since, unlike sales reps, the activities of sales development representatives don’t necessarily generate revenue directly. To understand why this is, it’s important to appreciate what a sales development representative's role is.
Based on this understanding, you’ll be able to create an effective sales compensation plan for your sales development representatives. So, in this post, we’ll look at the sales development representative position in more detail and show you the aspects you’ll need to consider when developing a sales compensation plan for your team.
What is a Sales Development Representative?
In a career overview of any sales position, you'll often find that many sales reps start out as sales development representatives. In fact, the SDR role is generally considered an entry-level sales position and many view it as a perfect entry into the sales industry.
Yet, despite its perceived entry-level nature, SDRs still play a crucial role in developing the sales pipeline for any SaaS company. This is simply because SDRs focus on prospecting and winning quality leads for the rest of the sales team.
To do this, SDRs will perform in-depth research about a prospect before making contact with them. As such, they typically have all the tools to make this process easier. They'll also have an understanding of their industry, the sales process, and a SaaS company's competition.
Based on their research, they'll make contact with prospects with the sole goal of generating sales-qualified leads (SQLs). They'll then book meetings with these prospects and pass them on to the sales team who will close the deals. So, in other words, the SDR role revolves around getting and qualifying leads that sales representatives can close.
As a result, their performance is measured based on Key Performance Indicators like qualified opportunities or SQLs and not the number of deals closed.
What's the Difference Between a Sales Rep and a Sales Development Rep?
Earlier, we mentioned that SDRs focus on bringing in sales qualified leads while sales reps focus on closing deals. Let's look at this difference in approach a bit closer.
SDRs aim to reach out to new leads created either through inbound marketing efforts or through outbound prospecting. Their role then involves qualifying these leads and setting appointments for sales reps.
To excel in this role, SDRs should have extensive knowledge about their prospects. This means they should understand what challenges these prospects are experiencing and how the SaaS company's products can solve these problems for the customer. This, in turn, requires knowledge about the products they're selling.
Conversely, sales reps focus on turning qualified leads into customers. In other words, they aim to close deals from the leads they get from SDRs. To do this, they'll demonstrate the product to prospects, provide them with quotes, and negotiate with them. Also, to excel in this role, sales reps need to have in-depth knowledge about the products they sell and their use cases.
The differences between SDRs and sales reps don't stop there, however. There is also a significant difference between these roles in the way they're compensated. Typically, sales reps will be compensated based on a base salary and the quota they've achieved.
For example, if a sales rep's on-target earnings (OTE) are $120,000 with a variable component of $50,000 and a quota of $500,000, that sales rep will earn $120,000 for a given year if they're able to achieve sales of $500,000.
With SDRs, the position differs somewhat because their activities don't necessarily directly lead to monetary gain. In other words, the meetings they schedule as a result of inbound marketing or outbound prospecting don't necessarily lead to revenue for the company.
What Does an SDR Do?
We've already outlined what an SDR does in the paragraphs above. Let's look at the SDR role a bit closer.
Generating and Qualifying Leads
SDRs work at the beginning of the sales pipeline where they generate new leads for the company. As mentioned, they'll make contact with prospects, either through inbound or outbound channels.
Another crucial component of the role is lead qualification. Here, the SDR will consider how the prospect compares to the company's ideal buyer persona, what challenges the prospect is likely facing, and whether the company's products can solve the prospect's problems.
The goal of the qualification process is to determine whether the prospect and the company's products are a good fit. If they are, a sales rep will be more likely to close a deal and generate revenue for the company.
Once the SDR has identified a lead, they will make contact with the prospect. This contact could take place through social media, cold emailing, cold calling, a combination of them, or other methods.
The SDRs research will help them personalize their messaging to best make an impact on the prospect and generate a lead for the sales reps.
It often happens that leads are not ready to commit to a meeting or demonstration after the first contact by an SDR. In this case, it's also the SDR's responsibility to nurture those leads until they're ready to commit. This, typically, involves further educating the lead about the company's product and how it can solve the lead's challenges.
Aspects to consider when Developing an Effective SDR Compensation Plan
From the above, it's clear that SDRs play a vital role in the success of a SaaS company. As such, their compensation is as important. This means you'll have to develop an effective SDR compensation plan that keeps your SDRs motivated and allows you to attract the best talent. Ultimately, when you're able to do this, you'll be able to generate far more revenue.
With that in mind, let's look at some of the aspects you'll need to consider when creating an effective SDR compensation plan.
The Right On-Target Earnings
As on-target earnings (OTE) forms the foundations of an effective SDR sales compensation plan, it's one of the most important considerations. As such, it's crucial that you get it right. If you don't, your OTE won't be competitive, and you'll struggle to hold on to the best SDRs. And that's not even considering the ability to attract the best talent.
To get the OTE right, you'll need to do some research. Here, you'll need to consider salaries other companies in your industry are paying to SDRs. The national average OTE is a good starting point, and you'll get a good idea from sites like Glassdoor what this average is.
Once you've established the national average, you'll have a valid baseline of what you should pay. You'll then adjust this baseline either up or down based on several other factors:
Qualifications and experience
As with any other position, the higher qualified the SDR is, the more likely you'll be to pay a higher OTE.
If your company is located in a region with higher living expenses, you'll typically need to up your OTE. This will also be the case when your region has a competitive job market. For this reason, it might be worth your while to, during your research mentioned above, also look at the average OTEs both regionally and locally.
In respect of your product, you should consider its price and complexity. Generally, more complex and expensive products will require more intricate sales processes to sell. In other words, these products are harder to sell. This, in turn, translates into a higher OTE.
You should also consider the complexity of the specific role when determining your OTE. When the role is more complex and the sales process requires more engagement, you'll likely end up paying a higher OTE. This is, for instance, the case with an outbound sales position compared to an inbound sales position.
If you want to retain the best SDRs, you'll typically need to pay a higher OTE. This is also the case when you want to attract talent. If you do, you'll increase your employee retention rates.
Determining the Right Base Pay/Variable Pay Ratio
You'll also need to give careful consideration to the ratio between base pay and variable pay. This is also known as the pay mix and is crucial as your goal with the pay mix is to drive results.
Although this might sound relatively simple, it can have a significant impact on your company's bottom line. Let's look at why this is a little closer.
This ratio is also commonly referred to as leverage. In other words, it determines the amount of risk involved for SDRs to achieve their OTE. As such, a compensation plan with a high ratio is referred to as a highly leveraged compensation plan. Now, you might think that a plan like this will serve as increased motivation. However, it could have some unwanted results.
For one, if the leverage or risk is too high, you'll struggle to motivate your SDRs which, in turn, means your company's performance will suffer. Moreover, you'll struggle to attract good talent and your employee retention rates will plummet. For this reason, highly leveraged compensation plans are most common in cases where there are high sales volumes of lower-priced products.
Conversely, if the leverage is too low, your SDRs might be less motivated to reach their quotas. In other words, when there's not much to gain by reaching their targets, your SDRs will be less likely to do so.
Another aspect that requires close consideration is your SDRs' quotas. Here, you have a few options:
Top-down target setting
With this approach, you'll start with the amount of revenue you want to generate. Based on this figure, you'll be able to determine how much each sales rep needs to sell and, in turn, how many meetings every SDR needs to set. The problem with this approach is that it doesn't give you insights into your past performance, so it's fairly unpredictable. In other words, you won't know if these targets are realistic.
Bottom-up target setting
With this approach, you'll use your company's past performance as a guideline to determine your SDRs' targets. For instance, you could use 80% of your best month to date to determine a quota for a specific SDR. Here, you could either use a sales rep's or SDR's performance to determine what the quota should be. The problem with this approach is that it doesn't take into account the increasing cost of sales. As a result, and depending on how far back your best month was, you could make significantly less profit or even a loss.
Business-case target setting
With this approach, you'll use your expenses to determine what the quota should be. So, for example, if your entire team costs the company $200,000 per year, you'll need to generate sales of more than this in order to show a profit. From this figure, you can then determine how many sales your sales reps need to make and how many meetings your SDRs should set.
No matter what method you use to determine the quota, you should also compare it to industry averages to see if it’s realistic. Based on these averages, you can adjust your quotas up or down to arrive at a quota for your SDRs.
The most important aspect when it comes to setting your quotas is making sure that they're achievable. Generally, you'll want your quotas to be achievable by about 60% or 70% of your SDRs.
If it's not, your SDRs' morale, motivation, and performance will likely suffer which means you'll make fewer sales, and your revenue will feel the impact.
Deciding on the Right Performance Period
The next aspect you'll need to consider is when you'll pay commission for your SDRs. In other words, you'll need to decide on the right performance period during which you'll measure your SDRs' performance and payout their commission.
Here, shorter is almost always better and you'll likely won't want to make this period longer than 60 days. Fortunately, with SDRs, this is entirely possible because the period between an SDR's activity and the results is typically shorter.
So, for SDRs, this period will usually be monthly but, in some cases, it could be longer. Also, you don't necessarily need to pay out the commission in the same cycle as your performance measurements, but it makes sense to do so.
Compensation During Onboarding
You should also, when creating and implementing an SDR compensation plan, consider what compensation you'll pay during onboarding. This is simply because new sales development representatives will likely not generate much pipeline during their first few months with your company when they undergo training and onboarding.
During this period, you’ll typically pay what is known as draws. These draws are basically advanced payments against an SDR’s commission. Depending on your specific circumstances, you might want to implement different types of draws.
For one, you can implement non-recoverable draws. As the name implies, you won’t recoup any of the commission you pay and these draws are typically used as a goodwill gesture during, for instance, the time the SDR undergoes onboarding.
Conversely, you can choose to implement recoverable draws. With these, you’ll pay commission in advance to your SDRs, and you’ll recover these advance payments from the commissions your SDRs earn in the future.
Accelerators and Thresholds
Ideally, you’ll want to incentivize higher performance for your best performing SDRs while, at the same time, limiting commission for your underperformers. This will not only motivate your highest-performing SDRs to perform even better but will also motivate your lower-performing SDRs to do better.
The best way to do this is by implementing accelerators and thresholds. Thresholds are minimum performance levels you set below which an SDR will not earn any commission. Likewise, accelerators are performance levels above which you’ll increase the commissions for your SDRs.
To illustrate these concepts better, let’s look at a simple example. Let’s assume you pay a sales development representative an OTE of $70,000 with a commission component of $25,000. Also, the SDR’s quota is 10 sales qualified opportunities per month.
If the SDR meets their quota, this means, you’ll pay them a commission of about $208 per sales opportunity. You can then, in order to motivate higher performance, increase this amount for SDRs who exceed their quota. For example, for any opportunity above their quota, you can pay your SDRs a commission of $230.
As mentioned, when it comes to thresholds, you can determine a level as a percentage of the quota under which you won’t pay any commissions. Typically, this level is about 40% or 50% of an SDR’s quota. This means that an SDR won’t earn any commission if they achieve lower than four or five sales opportunities per month and they’ll only earn their base salary.
As is the case with the OTE, quotas, and pay mix, you could do some research to determine how much the accelerators and thresholds should be.
The Bottom Line
A sales development rep can play a vital role in any SaaS company by creating valuable, qualified leads for sales reps who can then, in turn, close more deals. Hopefully, this post helped illustrate the sales development rep role in more detail, showing you what an SDR is and what they do.
More importantly, we hope this post helped show you the aspects you should consider when you develop and implement an effective compensation plan for a sales development representative. By taking into account these aspects, you’ll ensure that the plan motivates your sales development reps to perform better and increase your bottom line.
Once you’ve created this plan, you’ll need to calculate your SDRs’ commission. And this is where Performio comes in. We simplify commission calculations by automating your commission management. Ultimately, this allows you to focus on more important work. To learn more about our platform and how it can help you, why not request a demo today.