The challenges of compensating inside sales teams—which are responsible for selling primarily by phone and online, with limited face-to-face contact—are highlighted in a recent survey of sales practices at U.S. high-tech companies.
Forty percent of large technology companies plan to increase their inside sales headcount by 2016, according to a December 2014 survey report, Outside In: The Rise of the Inside Sales Team. Inside sales currently make up just 10 percent of sales at large technology companies, compared with 55 percent of sales from inside teams at smaller tech companies and startups, according to a the survey, conducted by sales consultancies ZS and Reality Works Group.
“This shift will affect how all high-tech companies approach drivers of sales force effectiveness, including motivating and rewarding these teams,” said Kyle Heller, a leader in ZS’s high-tech practice, who was quoted along with other thought leaders in the report.
Three primary factors are giving momentum to inside sales, the survey found:
- Business-to-business (B2B) organizations are under margin pressure and are seeking more efficient ways to sell.
- B2B buyers are becoming more comfortable using the Web, social media and email to inform purchasing decisions.
- Videoconferencing and collaboration technologies let inside salespeople create customer intimacy without field interaction.
“As industry watchers and consultants based in Silicon Valley, we’ve seen a growing number of companies launching with an inside sales team, or a hybrid strategy,” said Anneke Seley, CEO of Reality Works Group. “They’ve learned from and followed the example of a number of high-profile, cloud-native business successes,” she noted. “For these companies, inside sales is the primary sales channel.”
Inside Sales Job Design
One of the first steps in establishing compensation for inside sales team members is to clarify whether they are exempt or nonexempt from earning overtime pay, the report points out. This is a source of confusion: Half of large companies surveyed classify their inside sales staff as exempt from overtime, while the other half of respondents classify inside sales as nonexempt.
Confusion over federal labor laws and lawsuits filed against high-tech companies concerning overtime has made it difficult, at best, to discern how to address overtime for inside sales teams.
“Bigger firms are finding out the hard way that the same overtime laws don’t always apply for inside sales teams as field salespeople,” said Chad Albrecht, who leads the sales compensation practice at ZS. “While inside sales roles are starting to look like those in the field, you need to identify when to treat them similarly, and when distinct treatment should exist.”
That treatment applies to how companies approach hiring, development and retention. The turnover rate for inside sales roles stands at 19 percent for technology companies, the survey found, which is higher than for outside sales roles.
“It’s absolutely critical to attract and retain talented inside sales professionals,” Heller said. “Companies need to consider retention strategies, competency models, coaching and career progression for inside sales, just as they do for their field sales organizations.”
According to Seley, part of the issue is a mindset that does not consider inside sales on the same level as field sales: “It is outdated to think of inside sales as a junior, script-reading selling organization,” she said.
For most high-tech companies, the predominant approach in compensation is to “closely link incentive pay to what they sell,” Heller said.
Added Seley, “It is demotivating to give an inside salesperson a quota and commission plan, but make them dependent on field sales to close deals. If a team quota is in place, it is still important to carve out what inside reps are responsible for, and compensate them on that contribution.”
Among common practices, the survey revealed that:
- About 95 percent of small companies reported using commission pay structures for inside sales teams, compared with 60 percent of larger tech companies, which prefer quota-based compensation (90 percent).
- Some 79 percent of small tech companies also use quotas to determine pay.
Startups are more likely to be high-growth companies, and they want to link expenses closely with revenue, Albrecht said. “They are hunting for new business—and hunters are paid on commission.”
Smaller companies also give greater rewards for their top performers: Smaller companies planned for top-performing inside salespeople to earn twice their target incentive pay, compared with 1.65 times incentive pay for the larger technology companies.
“In smaller companies, inside salespeople are more likely to own accounts, and they’re truly influencing the final result,” Albrecht said. “At larger companies, inside salespeople are more likely to be teamed with a field person or part of a key account team, and have less of a direct impact on the overall result.”
Top Compensation Challenges
The top three challenges with inside sales compensation, according to the surveyed companies, were as follows:
When asked to name the most significant challenges in compensating inside sales teams, quota-setting was respondents’ most pressing issue. According to the survey, 90 percent of larger technology companies and 79 percent overall use quota-based plans, making sales quotas the linchpin for inside sales motivation and retention. And yet, often companies oversimplify quota allocation by spreading growth evenly across the team, based solely on historical sales or what’s in the pipeline.
If quotas are too aggressive, sales motivation and productivity will diminish; set targets too low and sales teams lack motivation and compensation payouts will escalate faster than sales.
To establish a competitive compensation level and base-to-incentive mix, companies should benchmark each inside sales role against comparable roles in the market using third-party or custom surveys.
“Developing a measure of customer-level sales opportunity has been the biggest difference maker I have seen,” Heller said. “Setting and testing quotas using a sound measure of available sales opportunity completely changes the discussion.”
The second-most cited compensation challenge was establishing a competitive pay level for inside sales teams.
“In certain geographies, there is so much competition for experienced inside sales professionals that salaries and commission plans have gone through the roof,” Seley said.
Not only is competitive pay essential in motivating sales teams, but as in all sales roles, it is essential in hiring and retaining the best salespeople.
“If you don’t appropriately pay for the top sales talent—and instead match their pay to a more junior role such as a customer service or sales development rep—you’ll get what you pay for,” Albrecht said.
Sales forecast accuracy
Sales forecast accuracy is a concern for 42 percent of respondents. Generally, it is one of the biggest drivers of effective quotas and inside salesperson motivation. An unrealistic sales forecast (usually with overaggressive targets) is the most commonly reported cause of ineffective quotas, often resulting in a sales force that is underpaid, disengaged or unmotivated.
“It’s difficult to realize the benefit of the plan design and quotas on salesperson motivation if the sales forecast is too aggressive,” Albrecht said.
Heller said that creating sales forecasts needs to be a rigorous analytical exercise, supplementing market and pipeline data with historic salesperson, product and customer data.
“There are numerous analytics products now available to help sales and finance managers with quota-setting and forecast accuracy,” Seley said, “but it’s still important to apply critical thinking to make sense of the data.”
Most Cited Compensation Problems for Inside Sales Teams
High-tech companies were asked to name the most significant challenges in compensating inside sales teams. Below is the percent of respondents that cited each challenge.
Competitiveness of total pay levels with the market
Sales forecast accuracy
Adequate opportunity to motivate and retain top performers
Plan complexity and/or rep comprehension of the plan
Efficient incentive compensation administration
Data availability to accurately assess performance
Effective communication of the incentive plan
Source: ZS and Reality Works Group, Outside In: The Rise of the Inside Sales Team
Stephen Miller, CEBS, is an online editor/manager for SHRM. Follow him on Twitter @SHRMsmiller.