When you think about it, it’s true in just about any sale that the sales person must be part of a team that has:

• the right offering (services staff, right skills, right organizational capacity, …),
• the right delivery system (tools, processes, methodologies, management structure, …), and
• the right business model (pricing, contracting/terms, contractors vs. employees, …)

to create perceivable value for both the customer and the company. So why do the sales people earn variable pay while the others vital to closing the sale (and delivering the value) not earn variable pay?

The answer may be that some of the others do earn variable pay. But more often the answer is that the sales person’s own individual value creation is reliably measured in terms of sales closed (order value, margin value, hours booked, etc.) than that of others on the team, AND the sales person is interested in placing a meaningful portion of their at-market compensation at risk (20% to 50% is typical) in exchange for the opportunity to double or triple the amount risked if they are able to put together a banner year. That’s the basis for much of “sales compensation” as we see it today.

So, even if “it takes a village” to make the sale, the hunter who finds the opportunities, identifies the decision makers, puts together a strategy to win the business, and coordinates the internal team often has both risk and upside in their compensation plan tied to the results they manage to produce in order to encourage and reward their success.

Many of the other vital technical or industry expert contributors may also see the value they help create and express an interest in sharing in the upside – but they often are not interested in putting a meaningful amount of their compensation at risk.So while you may choose to offer spot awards and/or recognition to those non-sales associates who make a great contribution to closing an important deal, that’s not the same as pay at risk, a structured incentive plan, and exciting upside for the “stars.”

Of course, the above are only general guidelines and not legal advice.  Talk to your legal advisor to evaluate any proposed approach in light of applicable state laws.  Some countries outside the US, as well as some states in the US (the state of California in particular), have very specific guidelines about what constitutes a commission and how commissions should be paid.

If your plans offer limited acceleration for over-goal performance, and you include substantial training and networking in your PC event, you may want to dip deeper into the organization (even everyone at or over goal could be included) to make the award help drive goal attainment, and make sure you are providing training and development to your highest potential sales people.

If you recognize the top performing region every quarter with a splashy announcement, a fabulous dinner, and a cash award (~$1k grossed up each) AND you pay a handsome binary bonus when people achieve their annual goal, then you may want to make your PC more exclusive, top 10% or so only – maybe only those who hit a level of attainment above goal (e.g., 115% of goal or better.

These are just a couple of scenarios to illustrate. The idea here is that you need to design your President’s Club in the context of the whole reward system, the prominence and ability to measure true contribution of the sales people, etc. And while it’s totally appropriate to have goals about what percent of the sales force participates, it’s probably not a great idea to design the cutoff as “top xx%” – you don’t want one person to be able to win only if another loses. You want them competing with the goal, not each other.

How does your company’s President’s Club work? Comment below if you’re willing to share.

1. Relevant – the incentive program should be tied to meaningful business results. Define what matters to your business, what are your objectives for the year (improved customer service, increased revenue from new customers, better margins from existing customers, improved operating profit, etc.) and link your bonus to those objectives.

2. Controllable – to the extent possible, drive the measures as close to the individual’s line of sight as possible. If the overall objective is improved operating profit, think about how each person can impact that measure and tie a portion of the plan to the specific results they can deliver that help achieve this goal. For Accounting, that might be an A/R balance target of $0 > 90 days. For Sales, it might be improved top line growth which provides more revenue to work with to cover expenses. For HR it might be better recruiting performance with less turnover.

3. Measurable – if you can’t measure it, you can’t pay for it. Also, you need to be able to automate your measurements as much as possible or you will drive yourself crazy with the added administrative burden of calculating bonuses. For many roles, you will only need to calculate a bonus at most quarterly (for some annually is just fine). For Sales roles you will find yourself calculating pay more often, probably using more complex calculations, which is why sales compensation is a specialized compensation function and consulting discipline.

4. Objective – you need to avoid subjective payouts at all costs. These are demoralizing and risk legal challenges. Pool approaches, though common in small companies, are often based on a subjective allocation (“we’ll see how much extra we made and then share that with the staff”), but this does not provide anyone with a goal or ability to take control of their potential payout. Instead, any bonus under this type of approach ends up being just additional pay with zero motivational value.

Another caution for small companies is to not base their employee bonus on final operating profit (after management/ownership has taken out their disbursements) as this creates a conflict of interest and lack of control in the outcome for employees, as the more the owners take in disbursements the smaller the profit to use for employee bonuses. The employee bonus amount should be determined prior to owner disbursement and budgeted for as a fixed cost rather than just a “sharing of the profits” at the end of the year.

Generally small companies start from the wrong end of the equation when thinking about bonuses. They ask “what do we have left over” rather than thinking about “what do we need to pay to get good talent, and how can we divide that pay up between salary and bonus for the maximum motivation.” Obviously the economics need to work out either way, and the second approach requires more management involvement in controlling staffing costs, but the bonus targets should be built into the budget, allowing for upside if company and individual goals are exceeded.

The right system can have a dramatic effect on productivity and morale, because people will know what is expected of them and what they can do to change the outcome, plus it creates a map for the company showing how everyone fits together to achieve his/her own piece of the puzzle that will lead to the company’s overall success…provided the 4 watch-words above are adhered to in the design. A program that uses measures that are irrelevant to the business, uncontrollable by the employee, not measureable, and not objective would of course have a profoundly negative effect!

• The sales job isn’t really done until the cash is collected – this is true when collection is often the responsibility of the sales person
• The company is earlier stage with limited cash reserves and needs the cash in the bank in order to pay the sale people
• Sales people are selling contracts for a rate ($/hour, $/square foot) rather than a fixed price contract, so the real value is not known until the product or service is used and billed.

Others who credit and pay when an order is booked do so because acquiring new business is the primary sales accountability, and there are others in place to deliver and collect, and the situations listed above are not top priorities for these businesses as compared to focusing their sales talent on new business acquisition.

And sometimes it becomes necessary to move from paying at booking to paying when cash is collected. In this case, the business may have to eventually deal with the problem that the lag created by the new sales crediting policy will mean a permanent loss of income for the sales people. (This might be recouped at the very end of their employment IF they continue to be paid them after they have terminated for deals sold while they were employed. But many companies would not plan to continue the payments after termination. And either way, that’s a potentially long time from now.)

Some companies making such a transition will offer a bridge payment to cover the transition; others may expect the sales person to absorb the loss; and of courser there’s the third option of sharing it. If we look at it purely from the company’s point of view, the current year cash outlay to offer the bridge (maybe 80% of expected commissions for the average lag time between booking and cash, paid out during the transition months) would not add any cost vs. the expected cost of the old (pay at bookings) plan. And if the comp plan doesn’t pay after people leave, then it all comes out even in the end, roughly. That’s probably the humane approach, and most likely to keep the sales people focused and productive during this transition (which they will not like, however you do it).

The problem occurs when stellar performance this year results in a very high quota next year (calculated as a percent increase over this year’s results), and so a significant risk that the new higher quota will not be attained next year. Sales person frustration will be compounded if, in addition, there is a relatively high threshold below which no payout is earned (e.g., 85% or 90% of quota), and total compensation at target does not increase with added quota. If all of this aligns, then the sales person who wants to maximize total earnings over the long run may do best to adopt a pattern of dramatic over-performance in one year followed by dramatic under-performance the next year. Most sales people in this situation, even if they realize that the high-low-high-low pattern is their best strategy do not intentionally execute it. But they are painfully aware that top performance will not go unpunished.

To avoid this situation, consider these suggestions for quota-based plans:

1. Set quotas based on territory potential, not just prior year actual sales.
2. Avoid setting low quotas for weak performers and high quotas for strong performers, unless you…
3. …Offer higher total compensation at target to those with the highest quotas, perhaps adjusting both the base and the variable pay at target for them.
4. Set any threshold at the level of quota attainment below which performance is truly unacceptable. And you know what’s unacceptable because you actually terminate or reassign people who perform at this level, and it’s probably not more than 5% of your sales people. (If you have more than 10% or 15% of your sales people below threshold, earning no variable pay, and you’re not putting them on a performance plan or moving them out of the role, then your thresholds are too high.)
5. Offer meaningful acceleration for over-achievement so that the added risk of next year’s higher quota (if that’s what will happen) is offset by the added compensation for this year’s over-achievement.

If you have other suggestions, please add them below in the comment box.

• Are those account movements good for business? Does the lack of a stable long-term relationship hurt customer loyalty?
• Why are the accounts moving?
  • In a quota-based incentive plan, is this perhaps a case of “hot potato” in which both quota and sales credit move with the account, and it helps a rep to “dump” accounts that are likely to generate under-quota sales?
  • In a commission plan, are sales managers moving accounts in an effort to directly manage pay by giving more accounts, and therefore more sales credit, and therefore more income to the reps they think need it?
• What else? Please feel free to add more in the comment section below.

So it might be good to start with the goal of reducing the account movement. However, if this appears to be inevitable you definitely want to anticipate it in your design. Here are a few ideas:

1. Independent months or quarters. Instead of measuring results for a whole year, issue goals and measure results for each quarter (or month) separately so that an account move will not result in continued adjustments for the rest of the year.
2. If the reason for the account movement is to balance territories, and keep opportunity even across the team, then a commission type plan may be a good idea. In this case, only allow movements at the end of a month, and calculate the commission based on credit for all accounts assigned during that month. Add the months of credit together and you have year-to-date credit for calculation purposes.
3. If the reason for the account movement is “hot potato” (see 2nd bullet above), then you need another mechanism to total pay level problems. If this is the only way managers can retain good reps, then the plan is not delivering market-competitive pay. You may need to review base pay levels, consider adding comp at target for higher quota territories, etc.

I invite others to join in with whatever good ideas you have found to help out with this in the comment section below.

In general, inbound telesales is one of the lower prominence sales roles, and also generally lower in TCC (Target Cash Compensation) than the outbound rep. So there may be less pay at risk as a percent of total compensation for the inbound rep than for any other member of the sales team (including field roles). And there would also be less upside for over-achievement for these roles. But their base pay level may be higher than that of an outbound telesales rep.

Outbound telesales reps are often one of the highest prominence sales roles, and may even function very close to the level of a field rep with the distinction that they don’t actually visit the customers on-site. Often their plans are relatively aggressive in terms of pay mix (50/50 might be typical, but check on this for your industry), and include some dramatic upside for overperformance. They are usually running shorter sales cycles than the field rep with their total quota made up of a large number of small deals. So they are often paid monthly even when the field rep is paid quarterly.

Outbound renewal-only telesales reps are one more refinement of the above, with responsibility for calling into the existing customer base to secure a renewal for a subscription-type service (e.g., phone service, online data access, SaaS). They may have upsell/cross-sell opportunities as well. For these roles, there is probably a known/expected renewal rate. Ideally their earnings start to be meaningful at some minimum acceptable rate of renewal generation, and go up dramatically if they manage to beat expectations and/or add on services. For example, if 85% of customers renew when prompted, then the performance threshold might be 75% or 80% of customers renewing. And outstanding or “excellence” performance might be set at 90% or 95% of customers renewing. Clearly no more than 100% of customers can renew, resulting in a natural cap if the plan rewards for percent of customers renewing. In order to ensure meaningful earnings throughout the year, this role would most often be paid monthly based on results that month (not cumulatively for year-to-date performance).

Standard direct rep plans, in contrast to the renewal-only telesales plan, would likely have

• More total compensation at target (as field roles generally do, compared to inside roles)
• Wider performance ranges (for example, 50% of quota as the threshold and 150% of quota as excellence performance, or maybe 75% to 125%)
• A core measure (like sales value) augmented by a secondary measure of sale quality (like profitability, new name account, or percent of sales from a strategically important product line).

Practices vary from situation to situation, but these general directional pointers would apply in many businesses with these roles. If you have good ideas to add, please comment below!

1. There’s a leader over all these folks who is willing to require that they come to a consistent approach so that “agreeing to disagree” is not an option.
2. The legacy company sales leaders have a chance to voice their beliefs and stories, their priorities and boundaries, their concerns and fears before the work begins in earnest. They need to be heard, and the real wisdom they have gained in their former companies needs to be tapped.
3. The Design Team is formed to include all those stakeholders, business leaders or sales leaders from the legacy company. If someone claims he/she is too busy for this, and that they’ll give their input up front and then help when the designs are closer to final later, that is probably not a good idea. The alignment and struggle with the challenges of building a consistent set of plans is a valuable part of the change management, and no legacy organization should be allowed to decline to participate Even if they agree to accept and abide by the decisions of the Design Team, they will not be able to articulate the rationale and support those decisions if they haven’t been part of the process.
4. The historical pay and performance data are collected and reviewed carefully to develop a shared understanding of how people have been paid in recent years, sources of dispersion in pay, goal attainment distributions, and differences among legacy sales organizations. Perceptions are often tainted by the outlier stories we remember. The data will tell the whole story.
5. The Design Team has a clear shared understanding of the sales roles for which they are designing, and they have come to agreement on this. (If not, then the organization and job design effort should precede the comp design effort.)
6. The Design Team is grounded in the principles and best practices of sales compensation plan design. This doesn’t mean they all need to go take the WorldatWork C5 class – a good robust discussion of principles can usually be completed in about 2-3 hours, and include a fair amount of sharing of perspectives as well.
7. The process then proceeds through the logical steps of compensation design (role definition –> pay structure –> incentive measure selection –> incentive mechanic design –> modeling and testing –> final plan design approval –> communication and administration). And all of this is built on the strong foundation of the principles. Try to keep the focus on principles and facts rather than beliefs and anecdotes.
8. The Design Team then leads the rollout, sharing the rationale and “selling” the new plans to the sales people.

1. A limited number of specific objectives should be assigned to each person so that the plan is easy to understand and administer, and so that sales people have a clear understanding of what is expected, and what they will earn based on what they do. The objectives are weighted so that 100% of the target payout amount is divided among them.
2. The objectives need to be stated in a way that provides for different levels of payout since pay at risk and upside both matter to creating good motivation. There should be some level of performance below which no incentive is earned (threshold performance), some level at which the target incentive is earned (at-goal performance), and a higher level at which some upside is offered (excellence performance). This will provide a basis for keeping sales people “in the game” over an expected range of performance, and will encourage over-goal performance.
3. At the end of the performance period, evaluation of sales person performance should be straight-forward and objective so that any three people who understand the business and the objectives would easily agree as to whether the sales person had: (1) failed to meet the threshold, (2) exceeded the threshold but had not met the goal, (3) had met the goal but not the excellence level of performance, or (4) had met or exceeded excellence.

Then when it is time to assess performance and deliver the payment, an assessment table and calculation method like that shown below works well:

Well-crafted objectives like those shown above provide clear guidance and link pay to performance over a range of possibilities.