The Ultimate Outbound SDR Comp Plan

UPDATE: I updated the strategy and numbers below in April 2023.

Over the past few months I have been talking to a lot of CEOs, VPs of Sales, SDR Managers and SDRs from different companies trying to understand the compensation plan they put in place for the SDR role. The reason behind this is a previous blog I wrote about how top SDRs should make $200K per year. I only found one company where the best SDRs are making $200K. In this blog post I discuss the different levers in the SDR comp plan, and propose a way to optimize SDRs incentives.

Crafting a compensation plan for sales is one of the most important actions for a company. You want to balance employee motivation, retention, and profitability. Today we will first define the most common factors used in employee compensation, then explain the conflicting forces companies face, and finally discuss how to set the base, analyze commission options, show you examples and recommend a better approach:

1. The Defining Factors (skim through):

1. The Base: Your SDR gets this amount regardless of work performance.
2. Meetings Scheduled: The SDR gets a bonus for every meeting he schedules on the calendar, regardless of if the meeting happens.
3. Meetings Performed: The SDR gets a bonus if the person shows up to a meeting.
4. Qualified Meetings: The SDR gets a bonus if the AE determines after the first meeting that the prospect that showed up was "qualified" which might mean they were the right role, from the right company, with the right need.
5. Pipeline Created: The SDR gets a bonus after a qualified meeting turns into an Opportunity and the contract value is determined.
6. Revenue Generated: The SDR gets a bonus when the Account turns into a paying client.

You can always use multiple components, but the less you use the better, as the final formula is easier to understand for SDRs and calculate for management. My rule of thumb is to always have a base and a maximum of 2 other variables.

2. The conflicting forces: SDR Motivation vs. Company Alignment

This is the dilemma that every company faces. It seems like alignment and motivation require the exact opposite approach...

If you purely reward employees on every meeting they set, SDRs will be very motivated to make the extra 10 calls each day, but you might have no control over the quality of the meeting. Your SDRs are misaligned, trying to book anything they can.

However if you purely based their compensation in revenue generated, to maximize alignment, there is no motivation to make those extra 10 calls because they won't see a reward for many months until the deal closes.

3. Eliminating bad performers: The Base

The SDR role is different than a traditional closing role, because it's hard to assess which employees will be successful and which ones won't. I've hired over 100 SDRs and if you've hired a few you'll understand that most of the time the success of these employees is a coin toss. It's very hard to assess who'll do well if they have no experience. The majority of your employees come to the role without a background in sales development, some of them are switching careers, many others are just starting their careers after college.

I discourage companies from paying a high base because the mediocre employees decide to comfortably stay at the company. If someone is not doing a great job after 4-6 months, you want them out. They should want out too. However if your base is low, how will you attract great talent? High Commissions. How high? This depends on your market, but you'll see an example at the end.

4. Analyzing Commission Options

The purpose of commissions is now to motivate great work, maintain high quality for your meetings, and retain high performers while maintaining customers profitable for the company. Your commissions may vary according to your target market (SMB, Mid-Market, Enterprise) and your company stage (pre-series A, Series A, or Series B+), but first, let's analyze the intended outcomes we want to obtain.

4.1 Keeping Employees Motivated to get the next meeting (short term)

Behavioral psychology explains that you must shrink the amount of time between an action and its consequence to motivate behavior. That's why we learn to avoid touching the stove, we did it once and got burned. Very quick feedback, lesson learned. Therefore one factor of the variable should be aligned to the fact that the SDR booked a meeting. If you decide to pay on meeting performed or qualified, will depend on your diligent sales stages as well as the data factor (section 4.2), but I highly recommend having a "per meeting" component. Never pay SDRs purely on meeting scheduled / set. It incentivizes them to send calendar invites to everyone and anyone.

4.2 Maintain High Quality Meetings: Who Finds the Data?

One thing you want to make sure of, is that the quality of the meetings is high. If your company has a data research team, and you know that every prospect being contacted is a good one, optimize for meeting performed since you just want to guarantee the meeting happens to drive positive outcomes for the company. This is also the fastest way to minimize the action-feedback loop.

In the case that you don't trust your data (85% of companies have really bad data), and you're having your SDRs do some research about the Accounts and Contacts, you might want to incentivize doing a good job there, and therefore make the variable qualified meetings, to still optimize for alignment, while rewarding short term effort. Make sure you'll have the qualification criteria well defined and the AE can make a determination after the first meeting. Otherwise the feedback loop is too long and SDRs lose motivation.

4.3 Retain High Performers: Rewards Appropriately

After your employees are motivated short term to book meetings, you want to make sure that your A-Players aren't leaving you for a $5K increase in base next door, an AE role that pays them an additional $15K per year, or any company that offers them a better career path faster. You need a long-term motivator or an amazing commission structure. Remember this part is not necessarily about having control of what closes and what doesn't. It's about making boatloads of money if you're a top performer.

To be able to maintain a high commission structure, you'll want to tie this part of the commission to something that aligns closely with company value. Ideally it's revenue generated, but in a few cases you can use pipeline created or other indicators of value.

The exceptions come from payment processing systems, or other products where the revenue generated per client is not clear up-front. Ideally this part of the SDR commission is similar to how AEs get paid.

5. Our Recommendation

Form what we have talked, the basic formula is easy:

Total Comp = Base + $$ per meeting Meeting + Small % of Revenue generated.

However, you should have an accelerator component to retain your best employees. The math is simple. Beyond their OTE include a 2x - 5x accelerator on that variable.

You should also change the comp according to the segment you sell to, as the sales cycle and contract values are different. The longer the sales cycle, the higher the per meeting comp and lower the % on closed. Also keep the base low. In a post-Covid world, a $50-60K base is reasonable. Only go above that in rare occasions for incredible talent.

6. Examples of Compensation Structures

The below examples consider that you've split your team in Inbound and Outbound, and the comp plan is for OUTBOUND only SDRs.

6.1 Selling $30K ACV with 2 month Sales Cycles.

Assume you expect 8 meetings performed per month, you have good data and your close rate is 12%.

OTE = $60K base + $200/meeting performed + 3% of ACV

OTE = $60,000 + $19,200 + $10,370 = $89,570

6.2 Selling $100K ACV with 9 month Sales Cycles.

Assume you're working with an ABM motion and you expect 5 meetings performed. Your close rate is 10% of qualified meetings.

OTE = $60K base + $500/ meeting qualified

OTE = $60,000 + $30,000 = $90,000

6.3 Selling $5K ACV with 1 week Sales Cycles.

Assume you expect 15 meetings performed. Close rate is 20%

OTE = $60K base + $80/ meeting performed + 8% ACV

OTE = $60,000 + $14,400 + $14,400 = $88,800

6.4 What happens if your rep hits 200% of Quota?

As you read in section 5, their accelerator should be 2x - 4x beyond quota, that means that if John (6.1), Sally (6.2) and Jess (6.3) double their quota, they would make:

John has a 4x accelerator = $60,000 + $29,570 + $118,280 = $207,850

Sally has a 2x accelerator = $60,000 + $30,000 + $60,000 = $150,000

Jess has a 3x accelerator = $60,000 + $28,800 + $86,400 = $175,200

6.5 Wait, pay my SDR $207,000! No F'ing way! That's too expensive!

Or is it? You might come and argue that the guys hitting goal make $88K, and that $207K is more than double that... your cost per meeting has gone up... yes!

I'll also say that your rep has pushed the barriers of what is possible, has inspired your team, has found a way to make more money that you can learn from and teach your team, and is only taking 1 desk, 1 chair 1 computer, less management time, less software, and all his friends are F'ing jealous that he just bought a Porsche so everyone wants to come work for you.

Change your comp next year and increase goals by 10% or whatever, but for now, keep it the way it is and pay your rep $207,000! If you don't do it, they'll leave for an AE job next door, or a slightly higher base. That's expensive.

6.6 Here's what's actually F'ing expensive...

The guy who joined, does mediocre job, takes all your training time, misses their goals by 50% and complains all day that he is not happy at work. The one who shows up on Monday morning wishing he wasn't there. The one that works from home and barely puts 2 hours of work per day, blasts some emails and shuts down for the day. He's expensive. He sucks the life out of your company. Or the other one, the super motivated one who barely hits goal because he is working on his side hustle, his other business. They're is the reason why your company is a revolving door of SDRs, because someone else will promise them 10% more and they'll leave.

It's not their fault though. It's yours for not valuing the work and the value of SDRs, and for not knowing how to do basic math and realizing that your top reps are worth it.

Rant finished!

Now, can you please go change your comp structure before all your reps ask me if they can come work at AltiSales? because that has already been happening.

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