5 Key Factors That Affect the VP of Sales Compensation Structure
This blog helps you understand the various factors that affect the compensation structure of a VP of Sales and the average salaries paid for different criteria. It also looks at a few common compensation structures and their use cases.
The Vice President of Sales is responsible for optimizing your sales process, improving sales reps' performance, and helping to create products that customers want.
These responsibilities make their role crucial to the growth and survivability of a business.
And that’s why you need to hire the right person.
So naturally, whether you can attract and retain the best talent for such a pivotal role will depend on the compensation structure you have planned.
In this blog, I’ll help you understand the factors that impact the VP of sales compensation structure and a few standard salary structures companies use.
5 Key Factors That Affect The VP of Sales Compensation Structure
There is no standard approach to determining a compensation structure that can apply to all companies.
It depends on various factors and will vary from one organization to another. Here’s a quick look at them:
1. Years of experience
Experience is always a significant criterion for hiring for any role, and this is all the more vital for a VP of sales. While most companies prefer someone already experienced as a VP of sales, some companies might be open to experimenting with someone new to the role.
For example, a tech startup might not necessarily look to hire an experienced VP of sales and would be okay with giving the role to a seasoned sales manager who seems capable. This way, they control their costs as an experienced VP would demand much higher pay.
Here’s a list of average salaries per year based on the years of experience of a VP:
2. Industry
The industry has the most impact on the compensation structure, often given more importance than years of experience. A fresh VP of sales in one industry might be earning much more than an experienced individual in another industry.
This is determined by many factors, like the nature of revenue in the industry, the demand and supply, and profitability.
Explore the sales commission rates by industry.
As seen in Table 2, a high-revenue and high-profitability industry like IT sees a much higher average salary for a VP of Sales than a comparatively lower-revenue industry like Education.
3. Location
Your company’s location affects not only the cost of your inputs but the cost of your labor as well. Whether the salary you offer will comfortably cover the cost of living will be the primary concern of a prospective candidate.
To get this right, compare the cost of living in your city compared with other major cities.
Once you do this, framing a compensation package that looks promising to your applicants becomes easier.
Take a look at Table 3, where we see a stark difference in the average compensation a VP of Sales receives in Nashville, Tennessee, compared to what they would get in New York City, where living costs are 40% higher.
Also, notice the difference in average compensation of remote VPs of sales.
4. Size of the company
Larger companies would have much larger and diversified sales teams with different targets given to each team.
Naturally, managing such a wide range of operations demands a higher salary, and large companies' revenue allows them to offer salary structures much higher than the market average.
On the other hand, small companies with comparatively lesser revenue, smaller sales team, and limited roles offer salaries that align with the market average.
5. Skills
Apart from good leadership skills, a sales VP must also be great at customer relationship management, account management, and sales strategy. The more skilled they are, you'll have to shell out to keep them.
Pro Tip: Take a detailed look at every experience mentioned in the resume and what they have contributed to each job. Ask them questions about what they did there. This will tell you a lot about the skills they possess.
3 Common VP of Sales Salary Structures
Let’s take a look at a few common salary structures for a VP of Sales:
1. 50/50:25+
A tailor-made compensation structure for startups and small organizations, this model incentivizes growth while not putting too much pressure on your finance team.
The breakdown of this structure looks like this:
- 50% of compensation as base salary.
- 50% as commission.
- 25% of all revenue above the total revenue target can go to the leader.
While companies might have different cycles for the payment of commission/bonus, making it a monthly payout provides instant gratification that will encourage better performance.
In this model, it’s crucial for you to set the right sales goals because a goal that is too easy to achieve might mean a heavy bill for you, and a target too high can negatively impact the motivation levels of a sales VP.
2. 70/30:Equity
Seasoned players often prefer predictable income, having already worked for several years with variable structures. This structure is best suited for large companies looking to hire experienced sales leaders as a VP.
This is how this structure works:
- 70% of compensation as base salary.
- 30% as commission.
- Cash and stock bonuses for milestones above targets.
Not just for bigger organizations, this model is also applicable to companies that want to streamline their sales process and give importance to sales rep training.
A higher component as base pay will encourage this trend, compared to a majority as variable pay where cutting corners to earn more is possible.
3. Year-over-year comparison
This model helps you recognize the efforts of a Sales VP for an entire year and not just a short period. This is very useful for companies dealing with seasonality affecting their sales prospects.
At the end of the year, a comparison of revenue, net profit, and gross profit is made. You can then determine the bonuses that align with the gross profit for each category over the previous year. If, for that period, the company saw no growth, there would be no bonus.
The advantage of following this structure is that it encourages the sales VP to create a strong team culture that is focused on achieving the common goals set for the company.
Wrap Up
Eventually, finding the right compensation structure for a VP of Sales is a game of balance. But it’s crucial that you define very early how much you are willing to stretch your finances for a prospective candidate.
Picking a good VP of Sales is as much about saying no to those who do not fit your budget, even if they are very skilled, as it is about saying yes to one of the candidates. Find a candidate who resonates with your company’s values, is affordable, and is good at implementation.
