How We Created the Best Sales Compensation Model

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The best product or service in the world will never get off the ground without a high-performance sales team to close its deals.

Developing a team like that requires you to attract and retain top-level sales talent. That means building the best sales compensation model you can to incentivize your sales professionals.

But your sales compensation plan can’t just be a fixed structure of incentives. It has to evolve with your business so reflects your growth strategy and business goals.

Here’s how you can design a strong sales compensation model built on scalability, fairness, and cost-effectiveness. We’ll also share an abbreviated case study on how Aircall developed its own commission plans for our sales team.

What is a sales compensation model?

Most employees are paid base salaries that are related to their role and level of seniority. Some may have performance bonuses that are based on high-quality projects or meeting certain quotas deadlines.

Sales teams are also paid base salaries. What makes them unique though is that their income is strongly influenced by their performance in meeting sales targets and receiving sales commissions based on that performance.

A sales compensation model determines how these commissions are structured and how they change based on your company’s financial goals and an employee’s seniority.

What is a sales commission?

Sales commissions are incentives awarded to sales teams for meeting certain targets.

These can take various forms. Some include a fixed percentage of the price of each deal or a percentage of sales revenue for deals closed in excess of sales targets within a given period. These commissions encourage sales teams to grow your company because their compensation is tied to sales performance.

What is a typical commission for sales?

One common and traditional sales commission is a fixed percentage of the deal price.

This often starts at 5% and can grow up to around 20% to 30%. For example, if your sales team has a commission of 5% and closes a deal worth $500,000, then they’ll share a sales commission of $25,000.

Benefits of a Sales Compensation Plan

Having a simple commission plan like our example above will make life easier for you. It will mean every commission can be calculated with simple math and factored into your customer acquisition costs.

However, it may also encourage stagnation. If your sales team is comfortable with their current commission percentage, then they have no incentive to grow the company’s sales or streamline sales processes.

A more detailed sales compensation plan that changes with your company’s needs can prevent stagnation. It also has a variety of other benefits.

1. It helps you advance your business goals.

Your company’s needs will change as it grows. A good sales compensation model will help you achieve them by encouraging certain sales strategies in your team.

For example, you might start by looking for large deal sizes to generate revenue that you can reinvest into growth. A fixed-commission sales compensation model that focuses on improving monthly recurring revenue (MRR) targets works well here.

When your company is more established, though, you may want to refocus your efforts on closing and maintaining healthier long-term clients. At this point, an effective sales compensation model rewards sales reps for closing clients who are engaging in longer-term commitments and paying more up-front.

2. It rewards high-performing sales representatives.

The right sales compensation model rewards overachievers and encourages them to keep closing at a high rate and deal size.

An accelerator rewards sales reps who exceed their quota.

A de-accelerator penalizes those who underperform.

3. It attracts the kind of sales personnel you want on your team.

Aside from rewarding the people who are already on your team, a good sales compensation plan also attracts the right kind of sales personnel.

With a transparent commission plan that’s visible during the hiring process, recruitment becomes self-selecting. This way, only prospective AEs who believe they’ll perform well with your model are going to apply. This can save you a lot of time and resources spent on recruitment.

4. It reduces turnover.

The annual turnover rate in B2B SaaS sales averages around 34%. Having a strong compensation model can help keep your sales team together. It can also reduce the amount you spend on turnover, which can cost as much as 1.5 to 2 times the annual salary of a departing employee.

How You Can Progress Your Sales Compensation Model

To illustrate how an effective sales compensation model can adapt as a company grows, we’ll share some of the models and best practices that Aircall has used for our sales compensation model.

Team comp model (0 to $1 million)

Early on, when our annual recurring revenue was less than $ 1 million, Aircall used a simple team-based compensation model to reward our sales team. The structure was simple. Teams needed to achieve a certain monthly recurring revenue target in order for everyone to receive a bonus. In this model, the target had to be achieved or exceeded for anyone on the team to earn a commission.

This structure encourages sales reps to use teamwork and meet fixed targets, which is what you want to focus on early on in a company’s growth. However, this is not a long-term strategy and should evolve as your business does.

For one, the team-based structure lacks the ability to incentivize overachievers—after all, as long as the company reaches the MRR goal, everyone gets rewarded.

There is no incentive for working harder to achieve individual recognition. This also means it becomes difficult to assess who the best sales representatives are on your team.

Individual comp model (From $1 to $3 million)

As our ARR grew past $1 million, we evolved our sales compensation model to better reflect individual achievements. Every account executive (AE) had to achieve a certain individual target that was based on the MRR goal to get their incentives. We had a simple formula for calculating the incentives:

Target + $x = OTC + $x

This model helped each AE close more sales, as it effectively incentivized going above and beyond their targets and it was easy to understand.

Unfortunately, this model gave us little control over incentive payouts. This lead to unsustainable commissions that had the potential to seriously affect our bottom line.

Fair acceleration & deceleration payout (From $3 to $20 million)

With our company soaring to huge annual revenue figures, we wanted to have more control over our incentive payouts while still encouraging our AEs to close more sales.

To do this, we implemented a new scheme that arranged payout percentages in a Gaussian distribution. We set a cutoff for performance at 75% of the individual MRR target, below which an underperforming AE would not be awarded any bonus. We also allowed unlimited up to ensure that our AEs were rewarded fairly for their efforts.

All this made payouts easier to manage. It also made it more difficult for lower-performing reps, who risked getting nothing if they fell below their targets. This led some to start gaming the system by sandbagging, where they’d withhold some deals for a particular high-performing incentive period to pad their earnings for the next one and make it to the target.

On top of that, all these compensation plans were still critically limited by the fact that they only considered MRR as the target dimension. If we wanted to encourage our AEs to close deals that aligned with our business goals, we had to rethink the metrics we used to provide compensation.

More up-front payments ($20 to 50 million)

After our Series B funding round, we began considering deal value based on the service model that a client subscribed to. We looked for more annual deals, which were more sustainable in the long run for our company’s growth, so we:

• Modified our sales targets so that closing annual clients had a greater impact on our account executives’ targets, as compared to monthly commitments.

• Added multipliers for up-front deals—the more a client paid up-front for their commitment, the greater the multiplier when calculating an AE’s bonus. In fact, deals closed with a 12-month up-front payment were worth double when counted toward an AE’s bonus calculation.

This is the point at which our sales compensation model began adapting to our specific business goals. By shifting the incentives toward annual deals with large up-front payments, our sales team worked to close deals that were the best fit for Aircall at that stage in our evolution. The direct result? We went from closing 0% of our deals with up-front payments to 50% in just eight months.

With that said, we recognized that this model also encouraged some negative behavior in our sales teams:

• By over-emphasizing the importance of closing the kinds of deals we wanted, account executives lost sight of the big picture, which was our MRR.

• AEs also focused on closing up-front deals at any cost to the exclusion of any other objectives.

• Annual deals became overrepresented in our portfolio due to their disproportionate incentives, even if these incentives did not necessarily reflect the true deal value.

• We had to adjust our targets often to keep up with the deals that were coming in.

The perfect sales compensation model (Post-Series C)

In creating the perfect sales compensation model, Aircall needed to align the commission plan for each account executive with the overall value that each deal brought to the company.

It needed to address the flaws of the previous model, which led to sales teams losing sight of bigger company objectives. It also needed to emphasize closing high-priority deals. We had the ultimate goal of creating a scalable system that could increase Customer Lifetime Value (CLV) overall.

Here’s how we did it:

• We set both monthly bonuses and per-deal commissions. These were influenced by deal value and an “Account Executive ratio,” based on an AE’s seniority and their on-target commissions.

• We also had additional bonuses that were based on how much AEs overperformed compared to their MRR quota and on AEs exceeding the average revenue per user (ARPU)  targets.

This was a markedly more complex plan than any of our previous models. To test the waters, we tried this model for a quarter to make sure our sales team was sold on the idea—and it worked.

How Do You Determine a Sales Commission Structure?

Our compensation model evolved with our needs. That meant understanding the kinds of deals that were most suitable for our company at each stage of growth. It also meant we thought about how to incentivize our account executives to close these deals.

In developing this plan, we identified four key steps to building a successful sales compensation plan.

1. The right choice at the right stage of your company

Before anything else, you need to understand your business objectives at your company’s current growth stage. This is because your compensation model must reflect your business goals at all times.

When starting off, it’s viable to have a simple quota- or commission-based model for your sales team. But when your objectives change, you need to modify your plan to ensures your team is acting toward your goals.

2. Align the compensation model with the actual value brought by each deal

You should also know the kinds of deals that will bring real value to your business. This will be based on your business objectives, and so your metrics for determining what is valuable will evolve along with your business.

After our Series C funding round, Aircall identified three key success factors for determining the value of a deal:

• Commitment: The length of time that a client is committing to the deal. A greater commitment means lower churn and therefore a more predictable, reliable cash flow stream.

• Up-front payment: By receiving a larger amount at the onset of a deal, we reduce the cost of capital.

• No discounts: Discounts reduce our margins, cash flow, and overall deal value.

3. Identify the right levers to increase Account Executives bonuses

You want your AEs to be incentivized in the right direction and to be compensated in a way that encourages exceeding expectations and career progression. You also want to penalize low-performing AEs to get their performance to improve while avoiding disincentivizing them.

4. Revenue predictability = aligning Finance team, Sales Ops, and Revenue teams

Ultimately, you want a healthy and predictable revenue model. By aligning the profit-loss equation of your Finance and Sales teams, with the bonuses of your Revenue team, you’ll be able to develop a reliable process for closing deals for your SaaS business.

Sales Compensation Plan Examples

To give you a good example of a sales compensation plan, let’s go over Aircall’s own compensation model. It consists of a commission that applies to every deal and a monthly bonus payout.

• For every deal:Deal Commission = Deal Value * AE Ratio

• For every month of closing:
  Total Commission = Deal Commission + ARPU Bonus + Quota Accelerator

This compensation model is based on three levers that we identified to increase our account executives’ bonuses. Our goal was to reward high-performing AEs and penalize low-performing ones.

1. Deal Value Ratio

A set of multipliers based on the length of commitment and the up-front payment. We developed the following formula based on this:

Deal Value = Deal Size * (commitment period rating + upfront payment rating)

2. AE Ratio

A figure identified by the AE’s experience level and country-based OTC.AE Ratio = MRR Quota / On-Target Commission

3. Quota Accelerator

An accelerator that applies to AEs whose closed deals exceed the MRR quota.

Quota Accelerator (MRR) = $ Signed Over MRR Quota * AE Ratio

Sales Commission Structure Best Practices

Ultimately, building a sales commission structure relies on a keen understanding of where you are right now with your business goals and your sales team. It also incorporates how you want to move forward together.

Here are some best practices to help guide you in identifying your current stage and needs:

Your sales compensation structure should evolve as your business grows.

Maintaining a single sales compensation structure from beginning to end might be tempting, but it’s not sustainable. Your model needs to adapt and encourage your sales team to grow the business if you want to scale.

Match compensation with the real value of each deal your company makes.

The price of a deal is not all that matters to your company. You also need to consider whether you want a more secure revenue stream or a larger up-front payment from your clients. This can help you reduce capital requirements for expansion.

Understanding what real deal value is, relative to your needs, is critical to developing a sales compensation model.

Create a predictable model to align Finance & Sales on revenue

Unpredictable sales compensation models can be risky. Unexpectedly large commissions can take away from deal value, while excessively high bonus targets can demoralize your sales reps.

A predictable, fully transparent model will help your teams get a better picture of the revenue that your company can expect.

Why This is the Right Sales Compensation Plan Template

Aircall’s sales compensation template has helped us identify our needs and how we can incentivize our account executives.

The result?

Aircall has grown and scaled from a small startup to becoming the trusted cloud phone service provider of over 8,000 companies. We have our dedicated sales team to thank for that. And by following this template, your business can achieve your growth targets and cultivate a highly competent sales team who understands your objectives.

Once that’s done, you may further improve your sales figures by equipping your sales teams with the right tools. Aircall’s sales features include integration with major CRM platforms, skill-based routing, and coaching features like call monitoring and whispering. We also provide actionable insights to help you make decisions about your sales team’s goals and commission plans.

Download our Sales Compensation Model Now

Published on June 7, 2021.