Some Observations on Sales Compensation Plans

I apologize for not having posted to this blog for a while.  In March, I agreed to lead the turn around of a business in the coin handling (high-speed sorting, counting, dispensing) industry.  Much of my time has been devoted to that endeavor.

Last weekend though, Norm Eagle — Director of Sales for Meta Health Technology, sent me an email summarizing multiple comments he’d collected on developing sales compensation plans.  As part of his evaluation of the sales compensation plan for his own team, Norm solicited input from a group of high-level sales executives via the Marketing Executives Networking Group (MENG).  MENG members are senior sales and marketing executives with business-to-business (B2B) and business-to-consumer (B2C) companies, both large and small.  MENG members lead sales and marketing organizations across the United States and around the world.  As you might expect from such an experienced group, the responses Norm received were full of valuable insights.

I share with you a slightly edited version of Norm’s summary below.  If after reading this post, you would like to contact Norm directly, please let me know and I will put you in touch with him.

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FROM:        Norm Eagle
SUBJECT:   Summary Sales Plans and Incentives

Thanks again, lots of good advice and suggestions.  Here is a summary of all the information I received.

Everyone agreed that what is most important is that a Company knows where it stands in the marketplace as well as knowing what it wants to accomplish.

 Where does a company stand as to Market Share, Recognition, and Revenue, etc.?

  • Market leader
  • Startup
  • Middle of the pack

 Being honest about these answers allows you to better accomplish what you want to get done.

  • Increase market share
  • Grow revenue
  • ROI
  • Sell the company
  • Add new customers
  • Up sell to existing base

Certainly combinations of the above are the norm.  If a company is really looking to be sold, then their needs are going to differ greatly from the company that is staying in business.  If you are looking to sell the company, then driving revenue is of paramount importance and profit is usually less important.  Again there is lots of room for interpretation here.

Answers to the above questions will help you build sales plans and provide incentives for the salespeople. 

The advice and suggestions I received include driving revenue from new sales as well as from the current base of customers.  Most agreed selling to new customers was harder, took longer and was more costly.  Given the greater difficulty, the feeling was to pay a higher commission rate for those sales.  Sales managers justify lower commission rates for sales to existing customers because it is an easier sale.  Since you know the players, the sales process and, given you are doing well with other products in the account, up-selling will hopefully take less time and be less costly. 

There was some disagreement here and some felt you should pay the same commission on new sales and sales to existing customers.  Here, the justification is that the sale to the old customer is easier and could generate revenue for the company more quickly.  As a result, the sale is less costly so why not pay the higher commission rate.  I’ll leave that to others to decide which way to go.

There were a number of suggestions on sales plans and incentives for salespeople and they included:

  • Setup a “quick start” incentive – some extra payment or extra percent of commission for the first sale of the year or maybe the most sales by number or revenue for the quarter.  Anything to promote some fast deals.
  • Backload the sales plan to include retroactive money once quota is achieved.  On a million dollar quota, once your sales rep hits the million, pay a 1 percent retroactive kicker.  The kicker is now worth $10,000 for hitting quota.  This could vary based on quota.
  • Also set up more retroactive money for 150% and 200% of quota.
  • Some people suggested accomplishing the same thing by raising commission rates when you get over quota.  Pay 7% for all sales over quota instead of the 6%.  Raise the payout number again when your reps reach 150% or 200% of quota.  I use 6% as the starting number but that will vary by company and products and size of the deal.
  • Some suggestions for mid-year contests etc., special prizes for a weekend away for biggest deal of the quarter, gift cards and so on. 

The other topic discussed was what you pay on Term-Use deals versus Perpetual-Use deals.  I received a lot more suggestions on this one.  Perpetual Use was pretty easy as commission was figured on the value of the contract because it was all paid up front.  Here are the suggestions on commission of Term Use Deals:  

  • Pay full commission of the full value of the 5 year deal (I am using 5 years but it could be different depending on the deals your company does)
  • Pay full commission on the first three years and then a lesser commission on the remaining two years.  The reasoning here is that if the customer tries to back out of year 4 or 5 and doesn’t pay, you don’t lose as much money on paid commissions.   I have not seen this happen very often and in my experience it is very rare unless there are some problems with the product or service.
  • I have also seen dividing the 5 years into 60 monthly payments and then multiplying the monthly payment by 50 and paying full commission on that amount.  Taking out the 10 payments and not paying commission on that amount is charged to cost of money and waiting for 5 years to get all the money due.
  • Another suggestion was to pay some lesser percent on the full 5 year deal (maybe 4.5 out of 6) and then on the fourth year of payment the salesperson gets 1.5% retroactive payment of the original 5 year deal.  This would only go to the original salesperson so this might be a way to keep salespeople around longer and build long term loyalty.

Some additional points everyone seemed to agree on:

  • Keep your sales plan simple and understandable
  • Sales plan should match up with the goals of the company
  • Sales plans drive the desired behavior while rewarding sales reps for results
  • If the sales plan is set up right, salespeople make a lot of money and the company does extremely well.

I believe that is all of it and if I missed anything my apologies.  Thanks again to all that contributed.

Norman Eagle

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