"The sales compensation plan is one of the most underutilized tools in the CEO toolset" - Mark Roberge, The Sales Acceleration Formula
It is becoming increasingly prevalent for inside sales teams to be closely aligned with inbound lead generation. This practice is evident in both established B2B technology companies and startups. Due to alignment between practices, the sales compensation plan has quickly become a critical tool for business leaders looking to drive sustainable business growth.
In today's post we're going to dive into:
- Why sales compensation plans support business growth
- Key elements of sales compensation plans
- How you implement these plans into your business
Why the sales compensation plan matters
A good sales team is one of the key pieces that can fuel business growth. However, if your sales team isn't closing the right type of customers or selling solutions that aren't the best fit for any given customer, then growth isn't going to be sustainable over the long term.
For example, a company with roughly $500 in monthly recurring revenue could translate into sales reps closing 8–12 deals a month. But with a recurring revenue model, you must keep in mind that it's not a one-time transaction. Rather, the deals that sales reps close in one month will affect revenue in the coming months. This means it's the lifetime value of a customer that is critical for success, not necessarily MRR.
What does this mean for sales reps? Shouldn't they be incentivized to generate customers who are sticky vs. customers who will bring in the most amount of money for the company in the short-term? And how do you incentivize your sales team?
In most sales teams, reps are incentivized to close the biggest deals for greater business impact (and personal and financial gain). But the adoption of subscription-based pricing models have incited changes in compensation methods. In Mark Roberge's latest book, "The Sales Acceleration Formula: Using Data, Technology, and Inbound Selling to go from $0 to $100 Million," he unveils how HubSpot has addressed this change in its sales compensation model. HubSpot used three completely different compensation plans over the course of the company's growth. Changes were made between each iteration to ensure that the final plan would be simple and aligned with the immediate goals and challenges of the company as a whole.
The key elements of a compensation planContinuing with our HubSpot example, there were three key levers that HubSpot used over the three evolutions of its compensation plan to drive rep behavior:
- Commission ratio
- Payment schedule
After HubSpot implemented a sales plan largely based on outbound and hunting methods to acquire new customers more quickly, it felt a lot of pain with customer retention. At this point, it realized churn rates were unsustainable. Additionally, churn was occurring a month or two after the sales reps' clawback had expired.
After crunching the numbers, HubSpot realized there was a tenfold difference between the salespeople with the highest and lowest churn rates. While churn across the customer-success team members—which was responsible for managing the accounts once a lead had become a customer—was constant. This substantial difference in the churn rate across teams made it clear that it was a sales problem.
So when HubSpot restructured its sales compensation plan, it found the top quartile of reps with the lowest churn rate earned $4 for every $1 of MRR sold instead of $2. The next quartile earned a 3:1 commission to MRR sold, and so on. This change in commission ratio resulted in a 70-percent decrease in customer churn rates.
Creating a compensation plan for your business
Of course, there is no standard or perfect blueprint for a compensation plan. However, the plan should change based on size and scale of your business. Understanding your goals and the current or upcoming challenges to your business is the first step in creating a scalable sales plan. From that point, move forward to define individual reps' goals and the behaviors you want to incentivize. Then you can shape a commission ratio, accelerators and payment schedule that will help get you there.