How Much Should I Compensate My Sales Executive?

Compensation is essential in managing, motivating and retaining a sales force. A great sales executive compensation plan accomplishes quite a lot. It provides fair compensation to the sales executive, incentivizes specific actions and behaviors that suit the organization's needs, and motivates employees to hit set goals.

Today's sales executive wants a challenging job with a clear path to match his or her performance based on what he or she can directly impact and control. They want employers to recognize their performance with rewards that increase as their impact on the organization increases.

What is fair compensation for a sales executive? Unfortunately, there's no one-size-fits-all answer. Instead, gear your sales compensation plan toward what is right for your company. Design it to influence the outcomes you want, and align it with your SMB sales executive's strengths and motivators. Here are some guidelines to think about. 

Sales Compensation Plan

An effective compensation plan will drive your sales team's performance. It includes details about all aspects of your sales team's earnings, such as salary, commission, benefits, incentives they are eligible to receive, and on-target earnings (OTE).

OTE is a metric that helps forecast the total potential compensation of a specific position when a team achieves all the set performance targets. It is common in sales compensation plans since it's a contract that guarantees a particular commission percentage. 

• Purpose: Compensation plans encourage positive behaviors across your entire sales teams, starting from the sales executives. It also sets standards and defines expectations for compensation, and drives results to achieve business goals.
• Structure: Sales compensation varies by business, how your company generates sales, and how your team is organized. For instance, business "A" might offer a higher base salary. In contrast, business "B" might prioritize variable compensation. And, business "C" might have a more balanced compensation plan blending base salary, variable compensation, profit sharing and a benefits package.

You need a comprehensive compensation plan for all your sales team members based on their role, experience, the type of deals they handle and the sales cycle's length. Consider these factors:

• Your budget
• The complexity of your sales
• How your business culture affects your compensation strategies
• How your competition pays its executives and salespeople
• Your area's living costs
• Your team and business goals

Factors that Affect Your Sales Executive's Compensation Plan

Determining compensation for your sales executive is challenging. You must consider several factors in your plan, including experience, the current market and the business sector. How long will it take to train and bring them up to speed? Do they bring their own book of business? Here are five factors to consider when creating your compensation plan. 

1. Determine if You Have a Farmer or a Hunter.

Hunters love chasing down leads and finding opportunities. On the other hand, farmers cultivate leads and opportunities and grow existing accounts to generate revenue. Making this distinction will help you select the right person for a sales executive position and determine compensation.

How do you know if you are hiring a farmer or hunter? There are certain soft skill sets associated with each. Try giving candidates sales assessments during the recruitment and hiring process. Here's what I mean. 

Hunters tend to be outgoing, risk-averse and motivated by recognition. They are typically self-managed and able to operate independently. Their ability to bet on themselves makes packages with a high degree of variable compensation desirable for them and their employers.

Farmers excel when they can grow relationships, create ongoing value and connect with the same clients year after year. They thrive on driving customer loyalty and creating long-term value. Farmers are more security-oriented than their hunter counterparts, making a base salary and small variable compensation structure more attractive for them. 

2. Incent Based on the Degree of Control.

This method holds sales executives accountable for things they control. For example, if a sales executive influences a sale alone instead of enlisting help or delegating tasks to their team members, they qualify for higher incentive compensation.

To implement this sales compensation plan, determine what variables the sales executive can control. Will they close sales or open doors for their sales team? For sales management, consider whether they can increase the sales team's closing rates, impact KPIs, affect Customer Relationship Management (CRM) adoption or decrease the sales cycle.

These tangible metrics help measure the impact of their work and determine their compensation.

3. Reward Successful Results with Variable Pay Plans.

Variable or incentive pay plans refer to pay that sales executives earn beyond their regular salary. It is not a guarantee, and you only pay it if the sales executive achieves his or her goal. Those goals are tied to tangible metrics such as sales growth, profits or productivity improvement.

Variable pay plans allow you to reward your sales executives for attaining successful results. It also controls compensation expenses when they don't achieve good results. These plans motivate your sales team's performance, encourage them to meet their specific job role's goals and any measurable targets you associate with their compensation. For example, their plan might be based on an individual sales quota for their team if they are responsible for sales team management.

​Here are four main types of variable pay. 

• Sales Commission Structures: Commissions refer to a percentage that salespeople earn after closing a sale. You can set structures using a flat rate, calculating them on gross margin or determining them using the percentage of quota completion (multiplier structure).
• Activity-Based Compensation: It is used when the sales executive is not directly responsible for closing the sale. It's typically associated with professionals in business development and lead generation. In these scenarios, tie compensation to what the role can impact, such as leads and opportunities for the sales team to close instead of closed revenue (since they cannot control that step in the sales process).
• Bonus Structures: Bonuses are dependent on performance and are typically a fixed amount. You can pay bonuses quarterly, annually or with each pay period.
• Management by Objectives (MBOs): These help employees set individual targets to work toward incentive pay.

4. Work Back from the Revenue Targets Using OTE

Start with the goal or objectives in mind. When you work backward from your sales executive's revenue or success targets, it will help you determine an appropriate compensation package for them. 

On-Target Earnings (OTE) provide you with a realistic view of what your sales executive's total compensation would be when they reach their expected (and reasonable) quotas and goals. OTEs could include the base salary plus the realistic commission from closed deals. You can use this metric to determine your employees' total potential compensation when they achieve their performance targets.

For example, if your OTE is between $200,000 and $250,000 annually, the basic salary could be between 70 and 80 percent ($140,000 to $200,000). You could base the rest of the OTE on performance, which you could pay annually, quarterly or monthly.

Start Creating Your Compensation Plan

An effective compensation plan is vital to the success of your team. Commit to continuously evaluating your plan to match the changing business climate and the outcomes you want to achieve.

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