This one is tricky, and we’ll provide an answer based on comp design principles and what we’ve seen in practice. But please know that there are laws governing commission payments in some countries, and in some states in the US. Please confirm your intentions with legal counsel for your local jurisdiction. We are not lawyers and cannot give legal advice.
First place to look is your plans document
If you don’t have one, then there’s probably no legally binding obligation so you’re free to think about what you should do (not what you must do). If you do have a plan document (which you should), you will need to follow your own commitments. If the plan documents it includes a “management discretion clause” or beginning and ending effective dates (which it should), then you are under no obligation for future years (in most jurisdictions); however, your choices here will be watched carefully by current staff – so be sure your choices are consistent with the type of selling your people are doing. And that’s where we’ll focus for the rest of this discussion, on…
What type of sales role do you have
- Independent operators who build their own books of business with a high rate of renewal or repeat business
- New business sales people who sell multi-year deals into an assigned territory
- Account managers who manage and grow an assigned book of named accounts
There are many other sales roles, but these are the three for which the question of the future commission buy-out would be most likely to arise. (And if you’ve got another type you’re wondering about, please post a comment below or send me an email, and we’ll add it in if we’ve overlooked something!) We’ll take each of these one at a time.
Independent operators who build their own books of business with a high rate of renewal or repeat business
This would be typical of someone selling a subscription service (software as a service or business class internet services), or an ongoing agreement (insurance), investment management, etc. In these businesses, sales people work hard to land new accounts and make a modest amount of money in their first year, but make the more meaningful income as they grow their “book” based on the annuity stream it provides in the out-years. If the product or service being sold is available from other very similar competitors, then these sales people may be able to go to another competing company and have much of their book of business transfer with them. They are often on 100% commission plans (no base, or perhaps a modest recoverable draw against commissions).
These people are truly running their own business inside of their employer’s business. There are often arrangements at retirement for the successful sales person to “sell” their book of business to a younger sales person because that annuity stream has substantial value; and their employer may accept, or even encourage, this practice because it enhances the chance that those valuable customers will remain with them after the retirement of the long-time sales person. In these cases, there is often a buy-out in some sense, but it’s not the employer who buys out the future commission stream – it’s a fellow sales person.
New business sales people who sell multi-year deals into an assigned territory
This type of role is often found in large systems sales (software with implementation services, utility infrastructure, large scale construction). Deals are large, often with very long (multi-year) sales cycles. And the company recognizes revenue from these sales over a long period of time, typically several year. Sales people who lead the selling effort for these deals are often paid over the deployment period as revenue is recognized (sometimes with an up-front “win bonus” or other mechanics – but payment triggers is a whole separate topic). These sales people typically have a more substantial base pay, enough to live on (perhaps not comfortably) in the “building” years before the first deal is closed. Their compensation on the large deals may eventually make up 40% – 60% of their total compensation, but far short of all of it.
If a sales person who has been successful selling several of these large deals leaves the company before full payment is made, a few different approaches could make sense:
- Continue to pay the commissions under the standard compensation plans, even after the sales person has retired. This would be appropriate if the deals include substantial anticipated revenue that is not a full commitment (e.g., up to 1000 hours of professional services at $200/hour). In this case, the reason for the delayed payment may be that it’s not absolutely clear what the full value of the contract will be by the time it’s over – so the most sensible approach is to just pay it out as it would otherwise have been paid.
- Pay commission only up to the time of retirement. This would be especially sensible if there is an ongoing responsibility for managing the customer relationship through the deployment, and this responsibility will need to be assigned to another sales person when sales person retires. That newly assigned sales person will need to be paid for their contributions, so they would likely pick up the commission stream from that point. (Alternatively, there could be some sharing of the future commission stream if a good handoff is important to incentivize.)
- Buy out the future commission stream at retirement. If the full value of the deal is known at signing, and the comp value is also known, it may just be simpler for all concerned to calculate the expected value of the future commissions, perhaps discounting the out-years a bit based on the time value of money, and end the tracking and accounting with a check at retirement.
Account managers who manage and grow an assigned book of named accounts
These sales people are responsible for important accounts, often the largest and most important accounts in the company. They may have been the original seller, or they may have “inherited” the accounts from others who came before them. Either way, their job is to maintain and grow these account on behalf of the company. Typically they are coordinating multiple resources inside the company to serve the needs of their assigned customers. They generally have a substantial base pay, and a stated target incentive amount, perhaps in a 60/40 to 70/30 mix (%base / % incentive at target), with the ability to earn about twice the incentive target in a great year with great results.
These people are team players who are doing an important job inside the company as part of a larger group. Their incentive pay is really for this year’s results given the book and opportunities that came their way. No buyout of future commission payment would really make sense for them. In fact, their compensation plan is likely to be a bonus type plan and not a commission plan anyway.
Donya Rose, CSCP, is Managing Principal of The Cygnal Group. She is a recognized expert in sales compensation plan design, regularly speaking at conferences and writing published articles. She serves clients from F500 to growth-stage businesses, and advises WorldatWork on sales compensation hot topics and best practices.