Sales Compensation – Real Life Example

Last week I had an email exchange with one of my readers.  This sales rep was in the process of negotiating (and re-negotiating) the sales compensation package.  I thought you might be interested in the exchange.

Reader:

I came across your Blog about Sales, and would love to get some advice.

Over the last year, I have brought stellar new clients to the interactive firm I work for, I’ve built strong relationships with key individuals within organizations, thus when RFPs and new projects come about, they come to us, or perhaps us and one other firm.

At the time of RFP being issued, the interactive firm partner and new business team take over, so my role is really bringing the new opportunity.

I have brought [Large Beverage Company],[Major Retailer], [Luxury Goods Company], [Regional Airline], [Domestic Airline], [Toy Manufacturer], to name a few, for which we have signed projects for 1.7 mill in revenue, with subsequent engagements currently in the pipeline at over +3 mill in revenue.

I would love to get a sense of what would be a fair compensation for what I do based on revenue. Should you have any insight, it would be greatly appreciated.

Top Line:

I’m glad you found my blog.

The role of new business rep is unique.  You have the toughest sales job of all.  Your calls are cold or, at best, lukewarm.  It sounds like you turn over leads once they’ve been qualified to the point of RFP.  Someone else does the closing.

For your compensation, I would look at a number of things.

  • What is the close rate on the RFPs you bring in?  The higher the close rate, obviously the more you’ve qualified the opportunities you work on.  This should result in higher compensation to you since the company does not need to expend resource at the back end responding to proposals you will not win.
  • Are you paid for bringing in RFPs or for proposals that your company wins?  It sounds like you share in the risk that the firm partner and new business team may not be able to close a deal that you have already won.
  • Are you paid on revenue generated, gross margin or projected margin on the opportunity?  I revenue, I would expect you to be paid a lower percentage than margin.  If you are paid on margin, does the company share with you what the expenses are on each transaction.  If you are paid on margin, you should know this information.
  • Are you paid on the initial business only?  Or, are you paid on follow-on business?   Typically, commissions on the initial business are higher and commissions on follow-on business are a lower percentage.
  • If you are paid on follow-on business, is there a time limit for which follow-on business counts?  Some companies will continue to pay you for all follow-on business.  Others will limit you for business closed within one or two years of the first transaction.  After that, the account management team receives the commissions.
  • What is the gross margin on the business you bring in?  Higher margins should generate higher commissions. So, if you are paid a commission on revenue and your deals usually have higher margins than other reps (say, account managers), then your commission rate should be higher.

Reader:

Thank you kindly for your response.

My current compensation structure is as follows:

  • 90K base + 1.5% commissions on revenue, 50K cap/year on commission, commission paid yearly.  Originally I requested 3% commissions on revenue, but since several other team members would be involved in seeing an opportunity to close, 1.5% was agreed.

I recently proposed a review of the compensation terms, that the 50k/year cap be removed, commission be paid quarterly, and commissions awarded on subsequent projects / revenue from clients i bring, since typically clients award us a small project and then a larger one thereafter.

My employer came back with 90K base, lowered to 1% commissions on revenue  – he now feels that my involvement in the sales cycle is minimal, 0 .5% commission for any clients that may have known of our organization prior, commission for 6 months on subsequent projects with the clients I’ve brought in, and is trying to now apply this recent 1% and 0.5% to clients I’ve brought last year, that I am due my 1.5% on, which is wrong.

I am standing by what I feel is fair, 90K/year base, 1.5% commission to include projects revenue for 1 year.

i should mention this is the first year the company i work for has employed someone like me, so there’s a learning curve. Clearly I’m successful and bring value to the company, but want to really be sure that my request is fair. Essentially getting compensated $145,000.00/year for new clients with projects at 3 million in revenue, or 4.5% – this seems reasonable to me.

Would love to hear your thoughts.

Top Line:

What you are proposing sounds fair to me.  However, much depends on the gross margin of the projects.  If the margins are in the 50% range, then 1.5% of revenue translates to 3% of margin.  I would consider this to be very low.  If gross margins are in the 25% range, then 1.5% of revenue translates to 6% of gross margin.  This is pretty good for you and not bad for the company.  It’s appropriate, though that they are reducing the commissions for not taking the deal all the way to close.  Is there any reason why you wouldn’t (or couldn’t) do that?

From your other comments, it’s apparent that you are their first new business “hunter” rep.  For them to try to change your compensation plan after the plan year is over is unconscionable.  I hope you have the original plan in writing.  I stand by my view that you should be paid for follow-on business, at least for the first year (especially since the first project tends to be small to “test the waters”).  Without your landing the customer in the first place, they would not have the follow-on business.  If they don’t pay for follow-on business, then you should be paid either (1) a much higher percentage of the first deal (like 20% or more if you take the deal to close), or (2) a fixed “new customer bonus” that reflects a percentage of the value of the customer for the first year or more.

Also, if they are going to limit pay on customers that may have known about the company, demand that they provide a list of those companies in advance with demonstrable proof that there is a relationship (not just knowledge).  Then you would not work on those customers at all.

My next installment will close out this interaction.  If you have any thoughts on this situation, send me a note, or add a comment below.

For more information, contact Wallace Management Group at (203) 834-0143 or email David Wallace.

© 2010, David P. Wallace

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