Typical Hunter and Farmer plans

A typical Hunter plan is a first dollar commission on the sales (top line) value of new business won. Sales credit and payment may be given once the business is fully secured (e.g., contract signed), or under way (e.g., shipped, or implementation started). A typical Farmer plan is goal-based with the goal size reflecting the assigned “book” of accounts. The measure may be the sales value of renewals, recognized revenue in-year, or even the margin value of the recognized revenue in-year. And the plan is most likely a goal-based incentive with a threshold and meaningful acceleration over goal.

So how do I pay someone to do both?

There are several possible approaches here:

1. Split the plan into New and Existing incentive components

Pay a first dollar commission on New and a goal-based incentive on Existing. Think about how much time the sales person should spend in each type of sale, and split their incentive at target accordingly. For example, if 40% of their time should be focused on New, then 40% of their incentive target should also be focused on New, with the remaining 60% on Existing accounts.

1. Single component plan that requires both retention/growth and New

Assign a goal for Total Sales that will only be achieved if an acceptable level of business is attained AND an acceptable level of New is also achieved. A threshold level of performance may be established below which no incentive is earned in order to focus the variable compensation dollars on the range over which performance should move; this makes each added increment of sales in the performance range more valuable to the sales person. Provide meaningful acceleration for over-goal performance since this only going to happen if things go well for both new and existing accounts, a valuable outcome for the business.

1. Pay on Net New

In a fast-growing business in which the question is not, “Will we grow?” but “How much will we grow?” this can be very effective. Assign a book of existing account and new business opportunities, then pay a commission on the growth (generally over the prior year). Clearly the commission rate on the growth will need to be much higher than a commission on total sales would be. WARNING: If there is any chance at all that “growth” could be negative, this is not a good choice.

New business sales jobs focus primarily on acquiring new accounts.  The incentive plan rewards for new revenue or profit margin brought to the company.  In contrast, account managers often are assigned a book of business that includes several new business sellers’ territories. Their focus is on retaining and growing established accounts (so new business sellers can continue to bring in new customers).

The territory manager we will discuss is a hybrid of the two with the expectation to not only acquire new customers but also retain these customers (and grow revenue or profit margin). The compensation plan that results is often is a hybrid of the hunter and farmer plans’ key components that may let the territory manager decide whether hunting or farming will maximize the incentive pay regardless of sales management’s preference for a more balanced approach.

An alternative approach that has been more successful in achieving sales management’s objective is to measure performance and pay incentive pay based on net new business revenue or profit margin.  This approach communicates to territory managers that any lost business must be offset by new customer acquisition or selling additional products or services to current customers.

The key is that the net new business goal is set based on historical territory performance plus the desired growth.  The goal will not usually be as great as for a direct seller since the lost business goal for account managers is an offset to the growth.  In addition, there is often real work involved in servicing and maintaining the established book at historical levels before any growth is achieved. However, the net new business goal should always be a positive number – new business exceed anticipated losses to keep the territory manager focused on growing the business by at least the overall percent the company is expecting revenue or profit margin to grow.

When goal setting is a challenge for this job and results may be volatile, and effective compensation arrangement may be a mix of bonus and commission.  For example a prorated bonus is paid for performance above threshold to excellence (e.g., 80% to 120%) then a commission is paid for above excellence performance (over 120% in this example).  This approach retains the needed linkage between pay and performance while ensuring that the additional incentive dollars are self-funded.

By Beth Carroll, The Cygnal Group

(Read Spotlight on a Sales Representative: A Sales Rep’s Perspective on How Sales Compensation Plans are Implemented and Communicated)

Communicating changing sales compensation plans is never easy. The salesforce will always start with the assumption that the new plan is going to take something away from them, and will be skeptical of anything the company tries to push as a “positive change.” It usually takes two payout cycles under a new plan for the reps to figure out what behaviors they need to change to maximize their pay under the plan, and this is the point at which your top performers will finally stop holding their breath about the new plan design (provided, of course, it is designed well and truly rewards top performance in a fair and equitable manner).

There are several strategies that can be used to help ease the change process for the salesforce.

• Include the reps in the assessment process by interviewing or surveying them before you begin the redesign effort. If you don’t have time to talk to every rep (and there are diminishing returns the more reps you talk to), be sure you select a few from each role who are new reps and a few who are tenured. You can typically avoid under performers UNLESS they were star performers under previous year plan designs. In this case, find out what has changed.

• Be sure you include sales management on the design team. However, do not under any circumstances include anyone as part of the design team who will be paid under or as a direct roll-up of plans being designed. It is impossible for anyone to be objective when it comes to his/her own pay.

• Once the plans are designed, hold a challenge team meeting with a few of the most vocal sales reps, team leaders and front-line managers who were not part of the design process. They should be told they are helping to craft the plan communications, which they are. However, they will also poke holes in the design (even if you tell them the design is set), and this may provide you with a chance to correct any problems you have missed. Also, your communication effort will be smoother because of this step.

• After the plans have been rolled out, you want to check in with your sales reps frequently to be sure they have understood the plans. Using an earnings calculator is a common way to help reps internalize the designs and plan their year to maximize their pay. This can be a simple Excel-based tool, or it can be an add-on module available from several of the EIM vendors.

When selecting the reps to participate in the process, you want top performers who are vocal and considered leaders by others. Often, you may find you have your most “difficult” sales professional included in this group, and there is usually a reason. A good sales rep never stops negotiating, and will therefore push at every opportunity to get the best deal he/she possibly can — especially from their compensation plan. The only time I truly worry about a plan design is when there are no complaints from the reps.

If the role to which you refer is more of an account manager who lands the business only to manage the account and grow the relationship over time, then the ideal measure is recognized margin (the margin value of the revenue recognized). If margin is controversial or hard to measure or calculate on an account by account basis, then revenue may be the better measure (and it is certainly the more common measure for this reason). In this case, the person may be paid based on attainment of a quota customized for their book, or based on growth in the value of the assigned book over prior years (through more volume to existing accounts or addition of new accounts).

The roles you ask about (account manager, business development manager, technical sales support specialists, and sales engineers) are more in the gray area in terms of eligibility for “sales-type” incentive plans. I would need to know more about the exact job descriptions before I could give an opinion about whether or not the role should be on a sales incentive plan or a corporate-wide plan based on overall company performance as Account Manager (which is a very common selling role title with best-practices all its own in terms of incentive design) may not mean to your company what it means in other companies.

That being said, here is some general guidance that may be of help. If performance in the role is objectively measureable on an individual basis and the result of that performance has significant business impact then you should seriously consider investing the time and expense in developing a customized incentive program. If you can’t objectively measure individual (or small team) performance and/or the performance impact has limited business impact, then you are better off leaving them on the corporate-wide plan. Developing sales-type incentive plans (often referred to as customized plans for non-selling roles), takes significant time and effort and can be complicated to track and administer. You have to be sure that the resulting change in behavior that you may get from the plan is worth the added administrative expense.

If your Account Managers are individually responsible to manage and grow a defined set of accounts, with objectives such as upselling, retention, penetration, and growth of those accounts then this role should be on a sales incentive plan (but the plan would look very different than plan for a sale reps plan who is out selling widgets every day, and might not use a commission structure at all, but instead use a goal-based bonus approach).

Business Development Managers could be low level lead generators, or could be out closing really large new business deals on their own. My hunch is that it is likely this role would be on a sales incentive plan, but the exact nature would depend on the accountabilities and expectations of the role.

Technical Sales Support Specialists (if this role is similar to what I’ve seen elsewhere) are often paid using a less variable pay mix (80/20 or 85/15) and are paid based on the results of the sales reps they support. This is also the case for Sales Engineers, although these roles often support the entire sales organization w/o being directly aligned to a team of reps, so their individual contribution becomes even less clear. For these two roles, the line starts to blur between corporate plan and sales plan, and often you end up with a hybrid. Part of their plan is like the corporate plan, but there may be a portion that is tied to the overall performance of the sales team as a whole or the sales region or team they support. There can also be a small individual performance modifier, but this often based on subjective manager evaluation.

There are many possible compensation arrangements for Account Managers — but here are some tips that may help guide the design process:

1. Account Manager roles are generally rewarded for growing their assigned accounts — ideally growing account profitability if it can be measured.
2. Compared to the “hunter” job (what I think you’re calling the Sales Department), they would generally have less pay at-risk (as a percent of total comp).
3. The Account Manager would be more likely to have a bonus type mechanic than a commission. (A bonus is an incentive that delivers a pre-established payout amount for hitting a pre-established goal, and less for under-performing, more for over-performing. A commission is communicated as a percent of productivity, like 3% of sales.)

And, as always, the measures and acceleration points in the comp plan should focus the Account Managers squarely on delivering the results most needed by the company — which varies from one company to the next.

1. Pay mix and upside: Selling to new clients generally relies more on the initiative, skill and creativity of the sales person than does managing existing clients. Existing clients continue to buy partly because sales people do their jobs well, and also very much because the company has delivered value to them in the past. What this means for comp plan design is that the business developer generally has more at-risk pay as a percent of Target Total Compensation than the account manager. The business developer also generally has more upside (more acceleration above target performance) than the account manager.
2. Measures: For account managers, measures typically include both revenue and some measure of account (/territory) profit contribution – maybe gross margin or gross profit. For business developers, it is less common to emphasize a measure of profitability as long as it is within acceptable bounds. The message is that the business developer gets the new customers in, then the account manager works over time to grow the value of the relationship to both your company and the customer.
3. Incentive form: Depending on the industry you’re in, the market position of the company, and your compensation philosophy, you may be using a commission type incentive (percent of sales, percent of margin, etc.) or a bonus-type incentive (fixed dollar payout for achieving the assigned goal, less for less, more for more). Bonus type incentives are more common in account management roles, and commission type incentives are more common in business development roles.
4. Payout frequency: Because the business developer has less fixed pay and is more personally and immediately accountable for results, they are often paid more frequently than the account manager. The business developer may be paid monthly, for example, while the account manager is paid quarterly.