James MeinckeFormulating a compensation plan for SDRs is one of the most important tasks sales VPs perform, one which will play a major role in SDR recruitment and retention. It also impacts your SDRs’ motivation, and how they spend their time on a day-to-day basis. What behaviors do you want most to incentivize? How are you defining poor, average, and excellent performance? The compensation plan largely determines all of this.
With the stakes so high, creating a compensation plan must be undertaken carefully. We recommend these best practices:
1) Determine the balance between base salary and variable earnings.
Typically, SDR salaries are a combination of base salary and variable earnings. For SDRs who meet quota, the national average is 64% base salary and 36% variable earnings. This breaks down to an average of $46,000 in base salary, for $72,100 in total earnings. (Note that while variable earnings typically include commission, many businesses include other factors in variable earnings.)
Settling on the balance can be tricky. If your base salary is too low, SDRs won’t be motivated enough and you’re likely to see high attrition. But if base salary is too high relative to variable earnings, SDRs won’t be hungry for meeting and exceeding quota. Striking the right balance depends on the length of your sales cycle.
Most SaaS companies have a base salary that’s close to average, but the national average may not be the most appropriate compensation structure for your company. Companies with a short cycle and a lot of transactional sales can do quite well with a lower base salary and high variable earnings potential. But if your product has a long sales cycle (and thus fewer opportunities for SDRs to close deals), a higher base salary is necessary.
2) Research SDR salaries in your industry and geographical area.
To remain competitive, you should offer salaries that are in line with what comparable companies are offering. That means looking not just at national averages, but also at averages for your region and industry.
Generally, you’ll have to pay a higher base salary if you’re located in a market that has a high cost of living and a competitive job market. If you’re hiring SDRs with more experience, or specialized technical skills, that will also mean higher pay.
Use resources such as Glassdoor to research SDR salary averages.
3) Identify the factors which will impact variable earnings.
Many sales reps think of variable earnings as being interchangeable with commission, but that’s not quite right. Most companies incentivize revenue-generating activities (such as setting up meetings) by making them part of the compensation plan.
Some factors to consider including:
- Meetings scheduled
- Meetings completed
- Meeting with qualified prospect completed (the AE determines prospect was qualified)
- Pipeline created (prospect becomes opportunity after meeting)
- Number of deals
- Revenue generated
You want to avoid making things too complicated, so we recommend selecting no more than two factors, with revenue being one. Select the other factor based on what you most want to incentivize for your SDRs. Think about what’s most important for your business’ revenue generation. If you just want to meet as many prospects and close as many deals as you can, you should incentivize meetings or number of deals. But if you’re more concerned with quality over quantity when it comes to prospects, then it makes more sense to emphasize pipeline created or meetings with qualified prospects.
Remember: Your SDRs will prioritize their time based on their compensation plan. Make sure that they’ll be prioritizing tasks that make sense for your sales model.
4) Consider what the range of salaries will look like.
Define what different tiers of achievement mean at your company. What do the numbers look like for top performers? Mid-performers? Poor formers? Then, think about what SDRs in each category should be making–a ballpark figure is fine.
From there, you can work backwards to identify a compensation plan, looking at historical data to help guide the process. It’s important to set benchmarks that are achievable for most SDRs, without being too easy. Nationwide, about two-thirds of SDRs meet or exceed on-target earnings (OTE). You probably want to stay somewhere in the 60-70% range, so adjust the OTE accordingly.
5) Run the numbers to test out how well the compensation plan works.
Once you identify a potential compensation plan, run the numbers for hypothetical SDRs. If you have real data to work from, use those examples.
After you get the numbers, take a critical look. Given your research into typical SDR salaries for comparable companies, is it enough to stay competitive in the job market?
6) Build in opportunities for growth.
Rewarding top-performing SDRs is one of the most important parts of any compensation plan. If you don’t pay your top performers what they’re worth, they can and will go elsewhere.
To reward superstars—and encourage everyone to exceed expectations—many companies elect for a higher commission rate once certain thresholds of revenue generation are met. Again, run the numbers for a hypothetical high-performing SDR. When you do this work, make sure you’re comparing top-performing SDRs at your company against top performers at other companies.
7) Decide how you will compensate SDRs during the ramp-up period.
Compensating SDRs during the ramp-up period can be tough because they don’t have enough opportunities in the pipeline to be closing deals regularly. Typically, the ramp-up period is between one and three months (though it might be longer for some products).
During the ramp-up period, you may need to provide a higher base salary than usual. Calculate a system that makes sense for your ramping up process.
8) Succinctly summarize your compensation plan.
Many compensation plans don’t work well because they’re just too complicated. Your managers need to be able to explain the plan, and SDRs need to completely understand it. Try typing up a document that explains the plan. If it exceeds a single page, it’s probably too complicated.
SDR compensation plans are tricky. But with proper planning, you can avoid common pitfalls.
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