Sales comp plans
cardaly
5 Posts
Our small company is in the process of designing compensation plans for sales. The type of service (designing corporate learning internet sites) is new to the company and I know we want a mix of base/variable pay, most likely 60/40. Would anyone be willing to share their sales comp structure and language for a services-oriented sales employee?
Comments
I've done sales comp plans for everything from technology sales executives to hourly telemarketers. Here are some helpful guidelines off the top of my head that I hope you find helpful.
60/40 is an aggressive split. So, unless the base is pretty strong, the at-risk compensation should be lucrative for good performers. Think about what you want the overall pay to be at an "average" acceptable level of performance and backwards engineer it. For example, if you want what you regard to be an average acceptable performance to result in $100,000 gross pay, then their base should be set at $60K and you need to write a plan that nets out at $40K over the year. A mix of short and medium term (e.g., monthly commissions plus quarterly or semi-annual bonuses) should keep people busy.
Make sure that the comp plan doesn't implode for high performers. That is, if you had a superstar who sold twice your average acceptable rate, would the comp plan leave the Company making money on those sales?
Anecdotally, in my experience, rising rates of return tend to drive better performance than flat rates. That is, paying X% for the first Y thousand dollers but paying 1.1x% if they hit 1.2Y thousand dollars is better than a flat x% of all revenue above some certain level. Use quotas to drive performance but make sure your quotas are not ridiculously high (or low). Be prepared to renegotiate based on the demands of business or your sales staff, especially given that you are talking about a new product.
If you intend to provide continuing revenue, such as a percentage of revenue from a customer who continues a subscription, then place a time limit on the period over which they will qualify to receive the continuance.
Be explicit about what happens at the time of termination. What you can and cannot do is governed by state law.
Consider whether or not you want to factor in a requirement that your sales people grow their portfolio every year by a certain amount or be at-risk of termination for low production. This is an "up or out" model which is not unheard of in sales.
Thanks for sharing your expertise, TXHRGuy. You've responded to a couple of questions I've posted here and you always give thoughtful replies, as you have with many others. Now I have a few questions based on your reply:
How are the quarterly or semi-annual bonuses different from commission? For example, if commissions are determined monthly, would the bonus be calculated on the entire sales during the quarter? So, if they have a great month and then a bad month, they would have an incentive to be more aggressive the final month so they can meet the quarterly bonus target?
What would be the employer's advantage to putting a time limit on a sales employee's revenue earned from a long-term customer?
Can you give an example for wording that would be used for the "up and out" and also any termination of a sales employee?
[quote user="cardaly"]Thanks for sharing your expertise, TXHRGuy. You've responded to a couple of questions I've posted here and you always give thoughtful replies, as you have with many others.[/quote] You are too kind.
[quote user="cardaly"]How are the quarterly or semi-annual bonuses different from commission? For example, if commissions are determined monthly, would the bonus be calculated on the entire sales during the quarter? So, if they have a great month and then a bad month, they would have an incentive to be more aggressive the final month so they can meet the quarterly bonus target?[/quote]
You can call the longer time horizoned incentives commissions, also, if you wish. They can be used in a few ways. giving incentive to make up for bad months with good ones is one way. Another twist on the same idea is to have your sales people needing more than just December in a x-mas dominant sales market to get the big money. You end up with a 3-tier plan. Base to make sure their rent/mortgage, car payment, and groceries are taken care of. The idea is to ensure that they are focused on selling and not worried about basic necessities. Commissions to keep their living comfortable and their focus on their work (given that comfort is better than bare necessities). Bonuses are to let the good times role. That should be where the big money is made. Missing your targets in the short term translates into eating Kraft singles instead of Brie. Missing yuor targets in the medium to long term translates into driving a corolla instead of a <insert appropriate vehicle for the pay rate of your top salespeople here>.
In the end, the Company likes a good month but needs a good year. If you put all your eggs in the short term commission basket, then your sales force can afford to blow a week here or a month there and still do well. You want to be sure that the incentive plan in place stimulates the pace and shape of your revenue flow. If sales people are easy to find or make, you don't need a long term horizon because you can just terminate poor performers and get another one. That would be unusual for most face to face sales environments.
[quote user="cardaly"] What would be the employer's advantage to putting a time limit on a sales employee's revenue earned from a long-term customer?[/quote]
To force the salesperson to continue selling. If they get to a point where the continuing revenue is comfortable, you will normally see a significant decline in growth.
[quote user="cardaly"]Can you give an example for wording that would be used for the "up and out" and also any termination of a sales employee?[/quote]
"Sales employees compensated under the XYZ commission plan [You should name these types of plans in case they will have different rules so people aren't confused about what applies to them] must achieve net sales volume growth of N% per calendar year. The first year of service will be pro-rated upwards for comparison to the second year's target revenue. Calendar year sales volume growth is a job requirement for sales employees compensated under this plan."
I think TXHRGuy is on the right track with his advice. We currently have monthly sales goals for each sales rep. Our commission is based on a % of the gross profit of each deal. We have a tiered system, meaning that the percent changes depending on where the GP number falls based on the goal. Of course someone who is at goal or just below is going to make a less % of GP then someone who has exceeded the goal. We also have a quarterly bonus.