1. Stop base pay increases and add to the variable pay over time.

If you have a pay structure with salary ranges you can red-circle* the reps who are above the salary maximum, and over time hire in newer reps at a lower salary level.  From a practical standpoint, the red-circled reps will be ineligible for salary increases unless they are promoted into a position with a higher range, or the range moves for their position based on market adjustments.

The problem with this approach is it does nothing to increase the motivational value of the incentive plan for the reps who have high base salaries, and it also will likely increase your overall cost of compensation if you simply layer on a higher fixed target incentive for all reps in the role, without decreasing base salaries.

2. Treat a portion of the current base to a non-recoverable draw against variable pay during a transition period.

If you find you must decrease base salaries, it is best to do it over time, converting the salary to a draw in a series of steps.  Under this methodology, if a rep had a salary of $100,000 that you wanted to reduce to $80,000 with a $20,000 target incentive, you could convert the salary to a non-recoverable draw in $5,000 increments over 3 to 6 month periods.  The first $5,000 in incentive earned would cover the draw, and any incentive earned above the $5,000 would be paid as additional income.  If the draw is not covered, the negative is not typically carried forward (which is why is it called a “non-recoverable draw”), but if by the end of the transition period reps are not covering their draw they will be in jeopardy of losing their jobs.

This approach allows reps time (typically 12 months) to adjust their finances to the new lower salary amount and to make whatever adaptations are needed to begin earning the additional pay from their incentive.  If done properly, the increased upside should more than outweigh the risks for your top performers, but expect that you will have some turn-over among your lower performing reps, and even among some of the higher performers who cannot or will not adapt to the new reality.

*”Red-circle” is comp-speak for freezing base pay at the current level for a period of time.

Recoverable draw

A recoverable draw is an advance against future earnings. So if a person were paid a $10,000 draw for each of the first three quarters of work (typically in addition to a base salary), and if they earned under the standard compensation plan $5,000 in that same period, they would go into their fourth quarter owing the company $25,000 (3 x $10,000 – $5,000).  And since the sales cycle is 9-12 months, we might expect more substantial sales in the fourth quarter – perhaps earning $12,000. So the sales person would finish the fourth quarter owing the company $13,000 ($25,000 – $12,000).

Non-recoverable draw

A non-recoverable draw is an advance against earnings in a specific time period which will not be owed back at the end of that period if earnings on the standard plan are less than the non-recoverable draw amount. So consider a new sales person who is paid paid a $10,000 non-recoverable draw per quarter for the first three months, with earnings under the standard plan of $0 for the first quarter, $1,000 for the second quarter, and $4,000 for the third quarter, The sales person would receive payments of $10,000 each of the first three quarters since earnings are less than the draw. The fourth quarter would then start with no arrears position for the sales person, and the earnings of $12,000 in that fourth quarter would be paid to the sales person.

A declining guarantee

A guarantee is an amount that will be paid regardless of performance, and it is often structured to decline over time. For our example sales person, the guarantee might be structured as $12,000 for the first quarter, $10,000 for the second quarter, $8,000 for the third quarter, and then $0 going forward. In this case, the sales person would be paid the $10,000 for the first quarter (no earnings under the standard plan) + $11,000 for the second quarter ($10,000 guarantee + $1,000 earned) + $12,000 for the third quarter ($8,000 guarantee + $4,000 earned) for a total of $33,000.

The problem with this example is, of course, that we are assuming the same performance with different incentive plans. Many companies find that the declining guarantee makes for the fastest start since the sales person is protected in the early period, but there is no reason to hold back sales or not get as fast a start as possible since they all result in earnings.

Key sales objectives

For long sales cycle jobs, it is also reasonable to expect certain activities, training, and progress in creating account strategies and moving opportunities along in the pipeline in order to earn the full guarantee amount. So instead of a no-strings guarantee, the declining payment stream shown above might be made contingent on developing and executing a territory or account development strategy.

How many months, what % target?

So to be specific about your second question, a good approach is to offer a guarantee which, when combined with the earnings under the standard plan in the early quarters, will yield 2/3 to 3/4 of the target amount. You want the sales person to invest with you in this time period – you are paying something even though sales aren’t coming in, and they are earning less than their market value as they make progress towards closed sales. If the sales cycle is 9-12 months, there may need to be some accommodation for up to a year, but diminishing in value over time.

For an additional discussion of these ideas see another post about onboarding for a shorter sales cycle all-commission role, but many of the principles and examples will apply here in an obvious way.

Some businesses provide a commission plus a base salary, while others may provide only a commission. The commission-only pay plan is appropriate in situations in which the sales person is highly independent, and sales success (or failure) results primarily from the skills, effort, and personal network of the sales person (vs. the price, product features, delivery schedule, location, brand quality created by the company). For a more thorough discussion of pay mix (how much in the base, how much in the incentive), see our Talking Slide Show about Pay Mix here.

100% commission plans drive motivation, focus and accountability for sales like no other plan type. They also link the cost of compensation directly to sales volume so that costs go up and down with revenue (or margin, or volume). They send the clear message that the sales person gets paid when they create value for the company, and doesn’t get paid when they don’t.

So what does a vacation look like in this world, and in what sense is it “paid vacation”?

While there are many nuanced ways of handling vacation pay for 100% commission sales people, they fall into two big “buckets”:

You can take time off, but while you’re not selling you’re not earning

Many 100% commission sales people are paid a draw against commissions to smooth out the month-to-month (or quarter-to-quarter) ups and downs of the business cycle. A draw is a payment made in advance of earning the money – so you’ve got to sell enough to earn the money to cover the draw, or you will owe the unearned amount to the company. If a sales person continues to be paid their draw through a vacation period, but those payments are still part of the draw and must be earned in order to avoid an arrears position, then in truth there is so “paid vacation.” The sales person must sell enough to pay their own vacation.

Alternatively, it may be the case that there is no draw and the sales person just goes unpaid for the time spent on vacation. Either way, vacation will cost the sales person money in total, and there will likely be a dip in payout immediately following the vacation.

You need a break, so take your vacation and we’ll pay you while you’re not selling

Some businesses truly pay for vacation time. This may take the form of a pre-determined daily rate for vacation (same for everyone) , or a variable rate that is higher for the most productive sales people (for example, many businesses calculate average commission earned per day for the prior quarter and pay that amount per day for vacation time). This vacation pay is earned outside of any commission/draw calculations.

Those who design these paid-vacation plans do so anticipating the paid time off, so the commission rates are somewhat lower than they would have been if there had been no true paid vacation in the package.

Either of these approaches can be designed to cost the company the same amount in total comp. The key difference is the message. The first sends the message that the sales person is valued as long as they are producing, and if they are comfortable with the reduced compensation that accompanies time off, they are welcome to take vacation time. The second approach encourages sales people to take allotted vacation time and sends the message that the company believes that time off is important for the health of the employee and the business.

To be specific enough to be helpful, I’m going to make some assumptions that will almost certainly be wrong for your roles, but you can substitute the right numbers to get your own answers. So let’s assume your intended total earnings at the expected level of productivity for the new Inside role is $48k/year, which would be $4k/month. Let’s also assume that you’re working with a two month sales cycle so that you wouldn’t expect a new rep to sell anything the first month; they might sell a little bit the second month; then by the third month they should have some real sales coming in, and really start to hit their stride in the fourth month.

If this were the case, I would recommend a guarantee designed to provide about 2/3 to 3/4 of target compensation. So let’s assume it would be 3/4 of target compensation.

First month
Pay $3k as a guarantee (= 3/4 of $4k).

Second month
Assume they might close enough business to earn $1k (1/4 of expected eventual productivity), then pay $2k as a guarantee (= (3/4 of $4k) – $1k they should be able to earn).

Third month
Assume they might close enough business to earn $3k (3/4 of expected eventual productivity), then no guarantee is needed ( (3/4 of $4k) – $3k they should be able to earn = $0).

And from that point on, they are on the standard commission plan.

I suggest making this a guarantee rather than a draw. A draw is a payment advanced against future earnings. If you don’t feel they could possibly earn enough to stay with you in the first few months, and if you treat any payments during those months as a draw, then they will start their productive period in arrears, owing the company money. It also gets really crazy to keep up with the calculations.

Some people make the draw non-recoverable, but won’t pay any commission in excess of the draw unless the total calculated commission is greater than the draw. This actually incentivizes people to hold orders until they get past their draw period, unless they expect to spectacularly out-perform the draw amount.

Notice that the guarantee amount is less than the compensation level you feel is right for the role. So the message here is that the company is investing in the employee (paying for them to learn to sell and fill their pipeline) while the employee is investing in the company (working for somewhat less than their market value in anticipation of earning more when they are fully productive). But there is no disincentive to sell as much as possible as early as possible, as this will only add to earnings for the employee (and to sales for the company).

In this example, the company has invested $5k in paying a sales person who has not sold anything to earn that. It’s a modest investment to start your sales person out feeling supported and eager to sell. However, the new sales person’s success at mastering your offering and starting to fill that pipeline with good opportunities should be monitored closely in the first weeks and months to ensure that the guarantee “invested” has the promise of a solid return.

Some technology companies pay quarterly for results that quarter. In this case, each quarter stands alone and there is no concept of a draw.

Some pay quarterly as long as year-to-date results meet certain criteria – this version could be considered a draw in the sense that the plan design is an annual plan with a quarterly payout mechanism. Usually any accelerated over-target payout is reserved for year-end when the total year results are available and overall over-performance can be verified.

I have assumed here that you are not asking about sales compensation plans, where draws are more common. These are generally offered in roles where sales people have a smaller portion of their total target compensation in a fixed base (less than 60% or so), and a highly seasonal business. For these roles, the draw is needed to keep cash flow stable during the “off season.”

The other thing to consider is the economics of the draw. Is there a valid business reason for delivering pay this way vs using a modest salary? Typically there is “recurring revenue” that is generating a relatively fixed amount of compensation that is actually acting as a base salary. I’ve found over 10 years of designing sales comp plans that 9/10 times using a 100% variable approach with a draw actually REDUCES the effectiveness of a sales incentive plan and makes it hard to attract talent vs using a modest salary + truly variable incentive. However, in some industries, this approach is the norm.

Question

We need a comp plan for the first year for a new experienced sales person.

Answer

My suggestion is that you first be clear about the long-term nature of the role, the expected level of productivity (e.g., sales/year), and the amount of total compensation you feel would be appropriate for that level of productivity. You can then design the “steady state” comp plan for the longer run.

Once you have designed the long-term comp plan, you will be able to clearly state the base pay amount as the base for that long-term plan. Let’s assume it’s $60k base with a target total compensation of $100k. Then you would offer a non-recoverable first year draw of $40k with the expectation that the second year, any pay in addition to the base would have to be earned based on the mechanics of the incentive plan.