Sales Development Reps– or SDRs– are a crucial part of any business. SDRs are often the first line of qualification and a major source of pipeline at most organizations. To put it bluntly, how you compensate your SDRs can make or break the success of your sales organization.
The right commission structure can motivate your SDRs to jump out of bed in the morning and take action while the wrong one can wreak havoc on your revenue and pipeline goals.
Today we discuss important considerations to keep in mind while building out your first SDR commission plan, how to get started, and we’ll also look at some example compensation plans. Let’s jump into it!
What’s the best structure for an SDR commission plan?
While there’s no one-size-fits-all approach to creating a sales commission plan for your business development team, there are some best practices and tried and true models to keep in mind when deciding the type of compensation structure you’ll use.
The most common sales compensation plan we see used in SDR organizations is a combination of base salary and variable pay- otherwise known as at-risk pay.
Typically, the SDR team is responsible for cold outreach, sales prospecting, and booking meetings. Although they’re directly involved with pipeline and revenue generation, they aren’t typically responsible for closing deals. Therefore, SDRs usually earn commission based on activity and quota attainment and not on a percentage of closed won deals.
Although we’ll get into specifics later on in today’s blog post, here are a few important considerations to keep in mind as you start to plan and strategize:
- Your SDR commission plan should be based on meaningful milestones and tied to specific sales performance metrics.
- It should motivate behaviors that lead to positive outcomes and discourage behaviors that don’t.
- And lastly, your first SDR comp plan should be easy to understand but nuanced enough to motivate your team.
Determine SDR On-Target-Earnings to Get Started
On-target-earnings– or OTE– is the amount of money an employee can expect to earn if they achieve 100% quota attainment. This metric is used by companies to communicate the expected salary in roles that have a variable component.
When it comes to building a compensation plan for your SDRs, we recommend you work backwards, starting with OTE. Deciding on your total target compensation first will help you stay within budget while also ensuring that your SDRs are paid fairly and in line with industry standards.
Here are some important metrics to keep in mind throughout this entire process:
- Average Contract Value: How much is the average customer worth to your business? Consider average order size and typical contract length to get a better understanding of how much you’re willing to spend to acquire a customer.
- Expected outcomes and conversion rates: If you already have an SDR team at your organization, consider how much business they each bring in within a single year and what activities it takes to get to that number.
- Revenue goals: How much revenue is your leadership team expecting the SDR team to generate?
For many organizations, SDRs are responsible for generating 30% to 40% of new business revenue. With this as our benchmark, let’s say your company has a goal to bring in $10m in new revenue. That means your SDR team should be prepared to generate at least $3m. If you have ten SDRs, your annual new business quota per SDR is likely going to be around $300k. A general rule of thumb is to have an OTE to quota ratio of 5x to 8x.
Continuing with this same example then, would give us an OTE somewhere between $38k and $60k– which is in line with these widely published benchmarks (source):
In the US average sales compensation for a Sales Development Representative with
- 1 year experience is an OTE of $45k
- 1 to 4 years of experience is an OTE of $46k
- 5 to 9 years of experience is an OTE of $50k
Of course this was just an example. These numbers will look different based on your organization’s goals, the size of your SDR team, and the general price of your product.
Determine the Pay Mix
Typically, in more entry level sales positions, the split between base pay and variable compensation tends to lean heavily towards a larger base salary. This pay mix creates a more stable environment for an SDR or BDR to learn critical sales skills while having a stable income to rely on. We typically see SDR teams fall somewhere between a 50/50 and 70/30 split.
The best commission plans strike a balance that allows SDRs to survive on their base salary alone but don’t provide too much cushion. Too large of a base salary can lead to situations where reps aren’t as motivated to hit quota, book meetings, or create opportunities.
When in doubt, start with minor changes to your existing compensation plan and run tests. If you find you’ve ventured too far to either extreme, you can always dial it back.
Determine Which Activities or Metrics to Tie to Commission
The two most common ways SDRs earn commission are based on activities or on outcomes. Let’s take a quick look at each:
- Compensate on activities. This approach pays out a set amount for each call made, each opportunity created, or each meeting booked by the SDR. This is often the preferred approach for SDR teams that don’t directly close deals.
- Compensate on outcomes. This approach pays out a percentage of revenue based on the number of deals closed by your SDR team.
We rarely see SDRs compensated on just one or the other. In most cases, businesses use a combination of activities and outcomes to create commission plans for their SDRs. The reason for this is simple. Compensating on activities alone can lead to a quantity over quality mindset– where the focus becomes the activity itself. Compensating SDRs on outcomes alone can also lead to frustration– especially when the power to close a deal is no longer in the hands of the SDRs.
Compensating Outbound SDRs vs. Inbound SDRs
Inbound and outbound sales development reps (SDRs) are often lumped into the same category, but they serve very different functions. While inbound SDRs qualify and generate pipeline from inbound marketing leads, outbound SDRs spend their time prospecting cold leads and reaching out to them. Their commission plans should reflect this difference.
For an outbound SDR team, consider important KPIs like number of meetings booked, number of cold calls made, discoveries held, or number of personalized emails sent. For an inbound SDR who isn’t cold prospecting consider KPIs like lead response time or qualified meetings booked.
The goal with any SDR compensation plan is to essentially flip your sales funnel upside down and work backwards to determine how many activities and what types of activities lead to a single closed won deal. Then use that information to build a compensation plan to motivate and incentivize your SDR teams to complete those activities.
Examples of SDR Commission Plans
Let’s look at two examples of SDR comp plans. We’ll look at plans for both inbound and outbound SDRs so you can compare the differences. Let’s start with an example of an inbound SDR comp plan:
While this is just an example, you can see we’ve chosen to incentivize a few different behaviors– responding to inbound leads quickly, qualifying inbound leads accurately, and doing everything in their power to generate positive, closed-won outcomes. Let’s look at this example SDR commission plan in action:
Now, let’s look at an example of an outbound SDR commission plan:
For this example outbound SDR, you’ll see we’re incentivizing slightly different behaviors– meaningful engagement, accepted meetings, and closed won revenue. Let’s look at this model in practice:
Final Thoughts About SDR Compensation
If you’re just getting started on this journey, don’t be overwhelmed by the sheer number of factors to consider. Instead, focus on the basics and keep it simple. Even a basic commission structure will get you going in the right direction, help you attract and retain top talent, reduce sales turnover, and make sure your SDRs are properly incentivized for their actions.
Spiff is a new class of software that creates trust across the organization by delivering real-time automation of commission calculations and motivates teams to drive top-line growth. With a combination of an intuitive UI, real-time visibility, and seamless integrations into current systems, Spiff is the first choice among high-growth businesses. Spiff’s sales commission software enables finance and sales operations teams to self-manage complex incentive compensation plans and provides transparency for sales teams.