Dan BrockwellGetting the commission structure right for SDRs can unlock outsized impact and performance. Conversely, getting it wrong can cause artificial roadblocks in front of overall team success.
So, we're diving into the nitty-gritty of what to think about when setting up or reviewing your SDR commission plan.
šļø Structuring a Commission Plan
Creating a sales commission plan for a team isn't a one-size-fits-all approach, but there are tried and proven models to consider.
SDRs are accountable for cold outreach, sales prospecting, and booking meetings. They're the unsung heroes behind the pipeline and revenue magic, even though they don't usually seal the deal.
So, their commissions should be more about hitting activity goals and quota attainment rather than a cut from the final closed deals (but some do a combination of both).
We'll dig into the details later in this guide, but here are a few things to keep in mind as you think about a plan:
- The commission plan should be transparent and simple
- Who is the plan structured for?
- What are you trying to achieve?
- Where is the commission plan going to be applied?
- When is this plan going live?
- Why are you introducing/changing the commission plan?
- Grounded in significant milestones and aligned with precise sales performance metrics
- Optimise for a positive sales culture
- Reps should immediately see the rewards of their hard work
š§® Determine On-Target-Earnings (OTE)
OTE simply put is the total compensation an employee can earn when they hit 100% of their target and it's used to show the expected salary for roles with a meaningful component.
When crafting a compensation plan for your SDRs, our suggestion is to take a reverse approach, beginning with OTE.
Choosing your overall target compensation upfront aids in maintaining budget discipline and ensures fair and industry-standard pay for your SDRs.
To work out OTE, you might want to consider these factors:
- Compensation Philosophy:Ā the company's overall approach to compensation and whether they usually pay at, above or below market rate.
- Budgets:Ā The budget available for hiring for an organisation or particular function.
- Target Hiring Persona: Required and/or desired education background, seniority, and industry background, of the hiring persona.
- Employee Mix:Ā The composition of your sales team, along with their tenure, can affect how certain factors contribute to determining sales team salaries.
- Revenue Targets:Ā A great compensation structure aligns with the financial goals set by the entire organisation.
- Average Contract Value:Ā Determine the value of an average customer to your business, this helps you gauge how much you're willing to invest in acquiring a customer.
- Expected Outcomes and Conversion Rates: If you have an existing SDR team, assess the business they bring in annually and the activities required to achieve those results.
- Benchmarking:Ā Comparison to organisations in or at a similar industry, location and size of sales team.
šĀ Here is a link to our ROI template
š Determining the OTE Split
Across the world, typically, SDR teams fall within a range of a 50/50 to a 70/30 split but in Australia specifically, the average is 70/30 due to high minimum salaries across the country.
Effective commission plans aim to strike a delicate balance, enabling SDRs to sustain themselves on their base salary alone without creating excessive comfort. An overly generous base salary may result in reduced motivation for reps.
If uncertain about the ideal approach, consider making gradual adjustments to your current compensation plan and conduct tests. If the changes lead to extremes, it's always possible to re-think and find the right balance.
š¤ What if I donāt have historical benchmarks for SDR or prospecting performance?
Something we often recommend for early-stage startups or companies that are new to the SDR function is initially not having commission in their package, but overcompensating through a more generous base salary or equity.
In doing so, you can make a verbal agreement with a new hire that a commission model will be introduced at the 3-month mark once youāve had a baseline of sales data to understand what is realistic.
Then, over the first 3 months, review their activity, meetings booked, opportunities qualified and any deals sourced that closed to identify ambitious but achievable targets on which to structure commissions.
š Determine Which Activities or Metrics to Tie to Commission
SDRs commonly earn commission through either activity-based or outcome-based approaches.
- Compensate on activities:Ā This method involves paying a fixed amount for each call made, an opportunity created, meetings booked by the SDR or meetings conducted (noting that show rate is important to monitor).
- Compensate on outcomes:Ā In this approach, a percentage of revenue is paid based on the number of deals closed that came from meetings booked/opportunities created by SDRs.
Most businesses opt for a blend of both activities and outcomes in their commission plans and the rationale is straightforward.
Relying solely on activity-based compensation may prioritise quantity over quality, where the focus shifts to the activity itself.
If you only incentivise meetings booked, thereās a danger that reps fill their calendar with low-quality meetings. If you only incentivise qualified opportunities, thereās tension around consistently determining what āqualified meansā and who decides this.
Either way, SDRs may feel frustrated that they donāt get any bonus when a deal they bring in eventually closes.
However, if you only incentivise deals closed, thereās a lot of work thatās outside the control of SDRs and questions around fairness i.e. their commission is heavily influenced by AE quality.
Our general suggestion is toĀ pay a commission on qualified opportunitiesĀ withĀ an additional kicker for deals closed.
This rewards high-quality activity within the direct control of SDRs, but also encourages high-quality pipeline and continued SDR support on deals
However, each SDR org will have a different architecture, dependent on things like customer size, industry, sales cycle, business goals, etc. and this may change which stages of the funnel get commission + how you weight commission by stage.
For instance, if you sell to early-stage companies with a short sales cycle, you may weight SDR commission more towards deals closed, but if you sell to enterprise companies with a long sales cycle, you may weight commission more towards qualified opportunities.
š The ROI of an SDR
Youāve just worked out the SDR salary. Use this Google Sheets template to sense-check based on your team numbers the ROI of your SDR.
To understand the strength of your SDR channel, youāll want to compare this ROI to other demand-generation activities across the business e.g. paid advertising to see whatās producing the most value relative to cost.
Below are some rough benchmarks to consider for SDR team ROI. Note, as a general trend, higher ACV products tend to also have a higher SDR ROI.
- Less than 1X ROI - Negative
- 1-3X ROI - Low
- 3-5X ROI - Medium
- 5-10X ROI - High
- 10X ROI - Extremely High
If your ROI is significantly lower than other channels, you may want to rethink your compensation model or dive deeper into variables like activity volume and stage-by-stage conversion rates to understand where the sales process needs to be improved.
If your ROI is significantly higher than other channels or at a high benchmark, lucky you! Probably a sign to double down on growing the team.