We sell long term, high volume contracts. Should our sales people be compensated through the entire term of the contract, or should they receive an initial commission which diminishes over the term of the contract?
The applicable principle here has to do with the definition of the sales job for those long-term contracts. If the sales person is expected to “account-manage” the account and ensure satisfaction throughout delivery (perhaps while also looking for opportunities to expand the business in the account), then payment over the life of the contract would be appropriate. If, however, the sales person hands off the signed contract to a delivery team and is expected to then begin to focus on the next opportunity, then completing payout closer to contract execution would be in order. And in between these two would be the situation in which the sales person’s role is expected to diminish over time, in which case a commission rate which decreases each year over the life of the contract would be appropriate.
The rule of thumb is that you finish paying the sales person for the deal at the point at which you would typically expect them to disengage and move on. That said, the company may also reserve the right to reverse sales credit if the contract is cancelled, or if the eventual contract value is materially less than the value at signing.
One major exception to all this is in the case of contracts for rates as opposed to fixed price contracts. If the contract is for a rate and the total volume is not known or committed to at the time of signing, it may be necessary to pay out as the business is invoiced over time.
A significant disadvantage to paying out over time on long-term contracts is that it will tend to create a long annuity “tail” of payments which can serve to make sales people far more focused on managing those existing already-sold deals than on landing new ones. While some will argue that the annuity tail serves as a retention tool, consider who you are retaining with it. Those who expect to sell significant deals in the future would prefer the more substantial up-front payment and a “tail-less” plan. Those who prefer the plan with a tail would be those who prefer to create a comfortable cushion to mitigate their future risk.
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.