This Winning Commission Structure Pays Reps More and Optimizes Lead Gen
Besides talent spend and perhaps our sales tech stack, paying commissions is a significant part of a sales leader's P&L statement. Get it right, and the result is higher performing and more motivated reps, improved lead generation, and cost savings for the business.
Since the dawn of professional sales, commissions have been a bedrock component of the job. The insurance industry in the 1870s brought us specialization with hunters (find new signups) and farmers (collect payments). Fast forward 50 years, and Thomas Watson Sr. brought more innovation to his sales teams at IBM by experimenting with different commission structures.
Today, sales leaders can pick from an infinite number of options to pay reps for bringing in leads and closing deals. Let's focus on three of the most common before unveiling the winning recommendation.
Tiered
Perhaps the most common of them all, the benefit of a tiered commission structure is its simplicity and fairness. Account executives understand how much money is earned after each win, whether the payout ties to the volume of deals won or revenue bands. Most sales teams with tiered commission offer between three to eight tiers. Reaching the top of the first tier unlocks a higher percentage in the second. Though simple, the tiered approach works under the guise that all leads are equal.
Product-Based
Some sales leaders introduce more significant commissions when account executives sell a specific product. It could be a higher-margin product or one newly rolled out. Product-based commissions also show up when a company acquires another business, and we need a motivated cadre of reps to accelerate integration efforts. Often paired with a tiered structure, account executives get commissions at the highest tier for selling a particular product. The downside, however, is the potential for sellers to aggressively market products that don't make the most sense for the customer.
Accelerators
Slightly nuanced from the tiered structure, accelerators work off of a rep's attainment to quota. Say a superstar seller hits her quarterly goal in August; she's eligible for a 2x accelerator doubling her standard commission rate through September. The extra motivation for the high-performing rep cancels out with the complexity on the backend and possible team animosity toward newer account executives with much lower quotas.
The Winner: Lead Source
Kill two birds with one stone and create a winning commission structure based on lead source. Motivate account executives (even those tenured with giant pipelines) to keep hunting and add new leads and opportunities while treating AE-sourced prospecting as a windfall.
Recognize that all leads are not equal. When aligning the difficulty of closing leads to the amount of commission paid, we reward reps for lowering our customer acquisition cost (typically reflecting our marketing investment to acquire a new customer). The marketing investment is essentially zero, with AE-sourced leads that close.
- AE-sourced: 20%
- SDR-sourced: 15%
- Marketing-sourced: 10%
- Partner-sourced: 5%
Reduce stress for the reps. Ensure that these AE-sourced leads are not incorporated into planning and forecasting models, making quota attainment achievable. The result should be more reps hitting their goal and making more money.
Other Considerations
Find other ways to pay reps more money (and do so quickly). Any financial incentive for the sales team is to drive outcomes that help the business and keep our frontline closers engaged.
Consider adding these tactics to the lead source commission structure:
- Pay commissions immediately, not after a customer pays
- Pay commissions monthly
- Offer SPIFFs and a bonus pool to award:
- Multi-year deals (pay reps now, not in future years)
- Lowest average discount rate
- Pipeline generation
- CRM hygiene
- Most deal advances in a month
For Sales Development Teams
Admittedly, the table below is complex and challenging to track. However, it drives lead quality and higher sales accepted lead rates. In this bonus structure, sales development reps are rewarded with $200 – 4x for a booked appointment with an above-the-powerline executive looking to make a large purchase.
A potential decrease in lead volume cancels out with increased pipelines and deal sizes and happier account executives. Sales development leaders could ask our teams if this incentive model would change their go-to-market approach. If we get a positive reaction, why not give it a try?
