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.

While this slide show doesn’t talk, we think the graphics all but sing. Have a look at some great ideas for visually depicting key aspects of your plans and their health.

To view at your own pace, click the Play button (>), then click Pause (||) and advance the slides using the controls on the bottom left.

It is totally appropriate and makes sense to pay two people for a sale in either of the following situations:

1. It takes both to get it sold (for example: the field person secures the contract then the inside person follows up to ensure units are purchased and deployed; or the inside person identifies opportunities and makes appointments, and the field person shows up to demonstrate the product and close the sale).
2. Some opportunities need only one team member or the other, and others need both, and you want the team to work out the most efficient way to get the most sales between them without any penalty to either.

In contrast, individual measures and credit to only one person for each deal makes the most sense when the customer base can be stratified so that one set of customers is totally covered by Inside, and another by the Field. Most often this is done based on the size of the customer. This arrangement allows very clear accountability for success and simple crediting and compensation calculation. When it is not used, it is generally because the teamed selling approach is deemed to be a more efficient one.

If there is shared credit for each sale, the key to ensuring that the right selling focus occurs at the right cost of comp for the company is to set the rates so that appropriate total pay is delivered to each person when the TEAM makes their goal. For example, if the company intends to spend 10% of margin on sales compensation, it could be spent as 4% to Inside / 6% to Field, with both are paid for all sales. This has to also work in the context of the expected productivity of the teams, and the market value of their jobs.

One other common challenge with this occurs when the team members feel that their earnings opportunity is negatively affected by the level of competence of their partner. So if an Inside person is paired with a new or less productive Outside partner, the Outside partner’s lack of productivity is likely to adversely affect the compensation of the Inside person. This will often drive organizations to expand team size or revert to separate quotas and sales credit.

1. Revenue – total sales volume can increase with the right incentives. And it can increase with a sales force that isn’t distracted by a complex comp plan and shadow accounting. Revenue can also be increased by focusing sales people on strategically important sales (right customers, right products, long term revenue streams, etc.).
2. Margin – by focusing sales people on the most valuable sales and on correct pricing and deal structure, margin can be increased even if revenue is not.
3. Cost – While this is not typically the focus of sales compensation plan redesign, the cost of comp can be managed down either by paying less to sales people for the same productivity. More often costs are managed down by expecting sales productivity to increase faster than sales compensation. Other costs that can be managed include the cost of administering the plans, cost of delivering the company’s offering (reduced through better deal structure), and the cost of turnover in the sales organization due to un-motivating, unintelligible, or unfair comp plans.

The specific issues faced by the business will determine where the value creation can happen. Ask why you are considering changing their plans, what benefit you expect to gain. Ideally, substantial changes in sales focus that yield business results are the result of a full program that is supported by the compensation plans. It is rare that compensation plan changes alone will make a dramatic difference on the income statement. It is also rare that a change in the market strategy, a change in sales roles, a new coverage model, or other important changes in the sales job will be successful without support from the sales compensation plans. So the ROI is most likely on the overall change initiative of which sales compensation is a part.

Question

I need benchmark data on what percentage of annual gross revenue should come from new business and should be allocated to sales force compensation. For example, if in insurance or other annuities there is a commission on first year premiums only and not on renewal business or a reduced rate on renewals. I assume that the 1st year budget for acquisition is higher than maintaining existing customers, but I am curious is that is really the case or if there are any good benchmarks to use as a reference.

Answer

I believe your question is about sales roles with a new business focus when the acquired business generally turns into a long-term annuity type relationship. Examples from my experience include insurance policies, ASP software offerings, software leasing, online test delivery contracts, EDI services, data and voice communication subscriptions. In all these cases, the company most values the acquisition of new business, and counts on the quality of the service delivered to retain it.

In these business models, new business sold earlier in the year contributes more to in-year revenue than that sold later in the year as the revenue is generally recognized monthly. For this reason, much of the incentive design effort may be aimed at rewarding those who acquire significant new business early in the year by measuring “in-year new revenue.” Retention is sometimes the job of the new business sales person, but is often assigned to a different Account Manager or Client Services role. If the same person is doing both new business and account management, the total revenue from new business may be very small compared to the total revenue from the existing assigned book (5% – 20% of the total). Often the new business is commissioned (based on new in-year revenue or total contract value), and the retained business is handled more as a quota bonus, with the weight on each component proportional to the expected time allocation.

But to get to your specific question, the budgeted sales comp % revenue is likely all over the place, depending on industry and company stage of growth. In very high margin businesses (software, data services), you are likely to see a higher comp % revenue. Similarly, large deal sellers (deals in the millions, tens of millions and more) would see a smaller percent of revenue as their comp; and small deal sellers (I’ve seen deal sizes in the thousands of dollars) would earn a larger percent of revenue. And in earlier stage companies you are also likely to see higher comp % revenue. The right comp % revenue is really based on the market value of the job (numerator) and the selling model, which generates a reasonable sales productivity expectation per person (denominator).

1. Mature companies with successful business strategies and an efficient go-to-market approach should, over time, see sales person pay go up with the labor market while sales productivity goes up faster. This means that comp % sales goes down. You have more control in continuing to align pay with the labor market and productivity with company expectations using a cost-of-labor plan (not a cost-of-sales = commission plan). If you have a commission plan, you are stuck communicating a lower commission rate every year (or at least every few years), which makes sales people nuts.
2. Market leaders with strong brands and value creating products have the right to claim the value they have created over time. This means they have the right to assign a sales person to a territory/book, expect them to maintain and grow it, but not expect to pay for the size of the territory/book in a linear fashion. So a person assigned a $6M territory should make more than a person assigned a $3M territory, but not twice as much. It is much more straightforward to manage the dampening of the comp delivered to keep that relationship non-linear in a quota-based cost-of-labor type plan.
3. True commission plans take a lot of tinkering and often involve a fair amount of discretionary adjustment, complicated mechanics and side deals. This becomes unwieldy in a significantly large sales organization. How fair can management be with such a system across 700+ people?
4. In a complex sales model with multiple people involved in the sales process by design, a commission plan does end up double-paying when you offer credit to multiple individuals. A quota bonus type plan will allow you to directly manage your cost of comp as you hold the right people accountable for their contribution to securing the business.

At its most basic, a commission rate is derived by taking the total compensation you intend to deliver and dividing it by the amount of sales you expect. The result is the commission rate. Many companies then add motivation-enhancing mechanics such as acceleration at high levels of achievement so that commission rates may increase over the course of a quarter or year. But the starting place is those two key ingredients: the amount of variable pay you would like to deliver through the commission, and the amount you expect a person to sell in order to earn that much.

To determine the amount of money you want to deliver through the commission you must decide what the total compensation should be for on-target performance, and divide that appropriately between any base pay you will guarantee and the variable piece. In more mature companies it is more likely that there would be a substantial base pay level. Also, for very skilled selling roles, it may be necessary to offer a meaningful base pay in order to attract the talent you want into the role. And, in general, the more direct control the individual contributor salesperson has over the sales results on which they are measured, the more appropriate it is for them to have a high level of variable pay and a low level of fixed pay. Conversely, if the sales are made by a team, or if the brand is strong, or if a strong marketing function guarantees a steady flow of warm leads to which the salesperson must simply respond well, then a higher base, lower variable, and lower upside for over-performance arrangement would be appropriate. So that’s a very high level overview of some of the issues around determining the total variable pay to be delivered through the commission, your numerator in determining the commission rate.

For the denominator, the total sales you’re expecting from them, this is a function of how you are selling, the level of skill required, the characteristics of the market into which they sell, any support systems you have in place, the effectiveness of your competition, and your basic selling strategy. Knowing what your competitors expect of their sales people might be helpful, but do they have a teamed inside/outside pair, or only a Field sales person with no inside resource? Do you have a strong marketing department and a great lead flow while your competition expects their sales people to generate their own leads? Much goes into determining a productivity expectation for a salesperson, but this must be estimated, and will serve as the denominator for your commission calculation.

While it seems like a simple question, a lot of thought must go into getting to the right answer.

Typically as a company grows, the company adds value (brand, product breadth, back office systems, marketing, etc.) and the sales person should therefore be able to sell more with the same level of skill and effort. This means that, while sales compensation should continue to increase year over year (with the labor market), sales productivity should increase even faster — which means that over the long run, commission rates generally come down. And at some point in this process the comp plan may switch from a commission mechanic (% of sales/margin) to a bonus mechanic (earn the target payout for meeting quota, more for more, less for less).

This company has experienced both the maturing of the company, and they have added a decrease in the capabilities of the sales people to the usual combination. So the answer is that, yes, the commission rates need to come down. However, just adjusting rates down and leaving all else alone is probably not the best answer. They should probably have a look at their basic pay structure, sales roles, labor market, key strategic imperatives — and make some structural changes in the plans all at once. Ideally they also support this with training, great coaching and mentoring, exciting new product introductions and lots of reassurance and encouragement. The goal is probably not to reduce total comp delivered per sales person, but to improve the ratio of sales comp to sales productivity. So while earnings continue to increase for sales people, sales productivity goes up even faster.

Question

Our sales force’s compensation is 38% of total company compensation. Is that appropriate?

Answer

There’s not really any useful benchmark I know for sales compensation % total compensation. It depends very much on your industry, company stage and basic competitive strategy (technology driven, operations driven, market driven).

The right place to focus is on the value of the sales force and how that relates to the cost. Even if what they are paid is market-competitive, it could be that you don’t have a sustainable selling model if the rest of the economics of the company (marginal profitability of the next sale, cost of supporting the sale, overhead structure, other channel costs, etc.) don’t align to create value for the owners.

There are useful ratios that hold within industries like total sales compensation should stay below xx% of revenue — but even these are useful guidelines at best.

One key idea to keep in mind is that, as a company matures, the sales people should continue to earn more money each year. But their productivity should go up even faster than their earnings so that sales compensation as a percent of revenue declines gradually over the very long run. This is because the company is adding to the sales person’s ability to be productive every year by building their product line, cost efficiency, market presence, selling tools, etc.