Inside Sales Compensation: How to Effectively Incentivize your Team
Compensation and commission are two of the biggest motivators for inside sales reps.
A confident compensation plan for each role can help businesses across multiple layers of their business. Aside from the clear performance and work rate incentive, it can help businesses to attract high quality talent. As well as retain their existing top performers.
Today, getting sales compensation right is critical to the success of your operations. If you want to attract the best talent, drive their performance, and keep them satisfied long into the future… you need to invest in them effectively – and reward their efforts at the right time.
In this blog, we’ll take an insider look at how we manage compensation, your duties as an employer and how you can use commission to incentivize your teams.
What is Sales Compensation?
Sales compensation is the amount paid to a salesperson each year. Typically, compensation includes a combination of base salary and commission. It can also include monetary incentives, based on performance against targets or goals.
Compensation and commission is usually part of a wider strategy known as a Compensation (Comp) Plan. This is a structured program that helps determine how much a sales rep should earn, based on their performance.
The purpose of a Comp Plan is to reward sellers for working above and beyond their job title’s outlined expectations. When used strategically, it can encourage greater performance, drive results, and set standards for cash compensation across the team.
Why Do I Need to Offer Commission & Compensation Plans?
There are a number of reasons to use sales compensation programs. Its overarching purpose is to encourage positive behaviours and actions. Many businesses will use Comp Plans to move towards their revenue goals faster, driving performance through commission based rewards.
Today, a Comp Plan is simply not a luxury. If you want to attract and retain the best talent – and then get the best return from that person, you need to incentivize them in the right way. Plus, inside sales is like any other role within a business. There are standards and practices in place that are either expected under law or by the industry.
In the following section, we’ll look at some of the main reasons to put a confident compensation strategy in place.
Legislation & Industry Standards
Compensation can be very different based on location. This is often led by employee best practices, industry standards, or it can be needed under labor law. This can include whether you’re required to offer hourly- vs salary-based packages, whether you’re in an at-will state and states with different holiday periods. In the UK, for example, your payment must include a pension under the law. This is not the same for the US.
Attract & Retain Talent
A good Compensation Plan with attractive rewards gives businesses (especially newer startups) a stronger competitive advantage in securing talent with years of experience. Similarly, once that talent is onboarded, by always updating compensation in line with their performance, you’ll give them a reason to stay, rather than losing them to a competitor.
Create Structure & Progression Model
Sales teams have some of the highest turnover rates of any sector. Sales Compensation Plans should discern between junior, mid-level and senior roles. This will help leaders and operations managers to show that defined career progression opportunities for team members exist within your company. It creates another reason to stay, maximize performance, and commit long-term future to the business.
Incentivize Individual Rep Performance
It can be challenging to motivate and incentivize reps, especially in larger sales teams. Knowing that they could potentially earn more by going beyond should be enough to drive their performance to greater levels. Plus, with additional culture bonuses available, reps may be encouraged to take additional training and hone their craft.
How Do I Set Inside Sales Commission?
There is no prescribed answer for which Compensation Plan you should use in your business. This will be dependent on your team’s sales strategy, structure, targets and headcount.
Base salary is incredibly important, but paying commission for performance success is essential. Commission itself, should typically vary based on the rep’s role and position in the funnel. This will dictate the control, visibility and influence they have over the sale and final deal value.
When you’re defining commission plans, of course they need to be aligned to the revenue and margins of the business. However, from the reps perspective, make it as clean, transparent, and simple as possible – and controllable by them. From reps to account executives, your team should feel like they can make a difference to their own personal earnings each day, and motivated to do so. Align commission earnings to the role above all else, don’t naturally align it to the goals of the business.
At InsideOut, we generally break up the compensation plans into Top and Bottom of Funnel.
Top of Funnel
Top of funnel tends to be an 80/20 – 70/30 split, base to commission, based on appointments created, leads generated and activities.
Bottom of Funnel
Higher than the commission available to the top of the funnel as they are physically closing the deal. It could be as much as 40/60 or even 50/50.
Top of Funnel
If you’re a Top of Funnel rep, it’s likely you’re going to have a higher base salary ranges and a lower commission. That commission isn’t naturally being driven by an actual product sale value, the margin on that product or the number of years the contract has been sold for. Top of funnel commission is more volume-orientated; focussed on creating MQLs, SQLs or SALs for another salesperson to take control of further down the funnel.
Bottom of Funnel
At the bottom of the funnel, it’s a longer sales cycle and a more complex sales cycle. It’s more strategic, so you’re going to have a compensation plan that pays a higher level. It’s associated with the physical sale of the product. You might make this role more of a 50/60 base, the rest being commission. That commission value is going to be higher than the commission available to the top of the funnel as they are physically closing the deal. It could be as much as 40/60 or even 50/50.
Compensation Plan Challenges
According to the Society for Human Resources Management, there are three main challenges identified in the creation of effective sales compensation, as per a survey conducted in 2015.
Quota Setting Fairness
Sales quotas can be the linchpin for sales motivation and therefore retention. If quotas are too aggressive, work rate will diminish. On the other hand if your targets are too low, compensation payouts will quickly escalate beyond sales.
To establish a competitive compensation and base-to-incentive blend, companies need to benchmark each sales role against the roles of their competitors. Setting and testing quotas using a verified, comparable source adds an extra layer of confidence – across sales development, account management and more.
Experienced inside sales professionals are in incredibly high demand. There’s a huge amount of competition, so much so that average inside sales representative salaries and commission plans for top performers have skyrocketed.
You get what you pay for. Not only are competitive salaries essential for driving motivation, it’s also critical for attracting the right talent to your team. If you can’t compete with the pay offered by your competitors, this will ultimately reduce your competitive advantage when it comes to selling your product.
Sales Forecast Accuracy
Forecast accuracy is one of the biggest drivers of effective quota setting and salesperson motivation. An unrealistic forecast, with overambitious targets is the most commonly reported cause of ineffective quotas, causing sales teams to be underpaid, unengaged and unmotivated.
Creating forecasts needs to be analytical and rigorous, supplementing market and pipeline data with historical performance and buyer data.
Consider Geographical Law
There are different legal rules for compensation, certainly in the United States. Different states have different tax requirements. In Florida, you pay a federal tax, but in many states you are required to pay both federal and state tax.
Taxation can instantly affect salary. Employers might be more likely to increase commission so that their reps notice more of a difference in their wage packages. Equally, this can affect the appeal of your role to new hires, with base salary decreasing seriously after tax.
Keep it Simple & Don’t Factor in Management Issues
When you put a Compensation Plan together, keep it as simplistic as possible. It’s never worth pouring all of your management issues into it. Some businesses will choose to create a commission plan based on physical sales, essentially along the lines of: “We’ll pay you $100 for every one of these that you sell”. This is clean-cut and easy.
Other companies will tie their incentives to activities or management issues. For example: “I’ll give you $100 for every product you sell, but you have to have performed 80 activities a day to get into the commission poll”. All these companies are doing is infusing their compensation plans with their own internal management challenges.
Similarly, compensation incentives can be tied to tardiness or lateness – that’s a management issue. Your commission plan is there to drive your performance, to achieve your greatest maximization of earnings. It’s NOT there to manage your attendance, activity levels or quality of work. Commission should be there to reward sellers for going above and beyond what would be considered a standard level of performance.
Setting Targets Correctly to Prevent Overspending
To prevent commission overspend, you need to set your initial targets based on clean, accurate, historical data, review these on a monthly basis, and change them on a quarterly basis. That’s the only way to prevent commission from taking the biggest share of your revenue.
If you see the trend of the business changing, whether up or down, you need to set targets based on this, to balance out both performance, revenue income and the amount of commission attainable by your reps. By ignoring this, you’re only going to lose money as a business. It’s that simple. If you’re selling a product in the field and you’re paying 2% commission of revenue, but you’re getting a degrading margin, you need to change that to 1% to achieve sustainable growth.
No sales Compensation Plan is perfect. It takes serious review and a great deal of ongoing analysis and data research.
Reps will always chase higher quota attainment to gain better commission. Naturally, some will be prone to look for loopholes in your program. Equally, your prospects are always changing their preferences and needs.
At InsideOut, we’re backed by the experience of supporting hundreds of inside sales teams. From SaaS to leading tech companies, we can drive the creation of your new inside selling team, with Compensation Plans based on rich industry insight, verified benchmarks, and complete performance, success and customer data.
Originally from Iver in the United Kingdom, which she will proudly tell you is near where the Queen lives, Christina moved to the U.S.A. in the early 2010s before founding InsideOut in 2015. Fast forward 12 months to 2016 and InsideOut had 150+ employees and a 7,500 square-foot facility based in Florida! With 25+ years in sales and operations, the majority of which has been at board level, those who have met Christina would agree that she strives for operational excellence on a daily basis, consistently working to develop the individuals at InsideOut and help them unlock their full potential.