What could be the best incentive model for direct sales employees? Do you beleive that variable salary (significantly dependent on results) would improve their motivation? What would be optimal ratio between variable and fixed part of the salary?
Do you beleive that variable salary (significantly dependent on results) would improve their motivation? What would be optimal ratio between variable and fixed part of the salary?
Answers (14)
YES!!! The best way to motivate top sales people is by money. You should have at least a 50/50 ratio between their base salary and OTE (on target earnings). You should also have agressive accelerators after 100% quota acheivement and no cap on earnings. In addition if there are behaviors you want to reinforce tune the commission plan to reflect that. Show me a commission plan and I can predict the behavior of your sales force.
Milovan,
Top performers like pay based on results.
The most important aspect of your compensation plan is that it matches your organizational goals. I would start by identifying the sales and operational goals of your organization. Then you would translate these goals into what a salesperson would need to achieve to help the organization reach it's goals. Once this is set, you would set the compesation to encourage results in your sales force. For example if your company is more profitable from the selling certain services and products then use the compesation plan to reward reps who sell those services.
It sounds like common sense but too many organizations are rewarding behavior in their sales force that does not benefit the organization.
I agree with the previous answer at plan a 50-50% ratio is a good target, with the ability to accelerate once the quota is meet.
Dave is right on. My only change is more closer to 45/55 up front. To get it 50/50, make a small portion of the salary as a guaranteed bonus over the year so risk/concerns are mitigated on both sides. If they performed that first year, then work the guaranteed bonus into the salary. If you hire a person of strong character, then they will sell for your company, but let them know you're behind them with a strong base. Their incentives are the accelerators and uncapped commissions.
Clarification added September 28, 2007:
John makes a solid point about the cycle as well. Make sure the sales goals are in line with reality or it could be a disturbing year on both fronts.
One factor you need to take into consideration is your sales cycle. Can they be up and running toward quota in their second month, or do you have sales cycles in the realm of 6-9 months. Are they a senior person coming on in a bus dev role or an inside sales person banging out phone calls. I think the 50/50 is about right with sales quotas that are easily attainable, and earnings only capped if they triple their base.
I believe the answer to this is more complicated than a standard ratio, theire are many factors at play when determimning compensation. Primarily, the industry, age of employees, experience and previous corporate networks/ knowledge they have. The base salary model + percentage of gross margin. is a great model if you are hiring sales "hunters". with a low enough base salary to maintain their employment. If you are banking on experienced sales staff with a great network of existing customers and contacts , the base will need to be increased substantially.
The base salary for all employees should be the bare minimum for say 3 months, at which point the reassesment should be based on performance with standard percentage increases based off of the sales staff as a whole. i.e the #1 - # 5 producers should recieve the base salary of $XX,XXX + $15K whilest the remainder of staff remains at the core base salary... This model will reward for improvemet without demotivating the remainder of the sales staff. I have also found that this produces a staff that are essentially "gunslingers" from the get go. Vying for the top tier as quickly as possible to obtain the bonus salary and If you hire the correct type of individual the monetary reward and competition based employment should yield positive results. And do not forget to let the remainder of the staff knmow that another assesment will be in say 5-7 months etc...and you will be taking the top 2 producers from that group for the base + bonus salary + x% of margin....
Clarification added September 28, 2007:
This was primarily focused on the base + bonus model. However the % of gross margin needs to be determined by your company to aligin with your business objectives.
I run a company and have direct sales people for women apparel. My model is simple . Based on the sales volume I make them partner in the company with appropriate share in company and profit sharing. On Top of that the Sales people get a hefty profit from Sales volume they make (15 ~25%).
This has worked out for us and can work out for most people as most good Sales people want to create their won destiny based on their competence level.
Glynn P
Business Development, Strategy and Planning
Best Answers in: Sales Techniques (4), Facilities Management (1), Business Development (1)
All the benchmarking I've done recently suggests a 50/50 blend between salary and OTE.
Industry Standards range from 25/75 to 75/25 depending on industry/market. Typically the lower base salary the higher the OTE (On Target Earnings), as there is a risk/reward ratio at work (if I, the sales rep take more risk in earnings, i expect higher rewards). I also agree to significant accelerators past 100% (assuming the 100% isn't a gimme) and no cap. Nothing dumber than telling your superstars to, in effect, take the rest of the year off, because you are too good and generating too much revenue and we don't want to pay for your performance.
I have had experience with this on both ends, as the owner of an enterprise that employed a direct sales force and as a sales professional working for other companies, and I agree with most of what has been said above. I think Jeff's statement that top performers like agressive commmissions structures is true to an extent, but it should be tempered, as John Lyle astutely pointed out, by a keen awareness of your sales cycle's REALISTIC length. No sales pro wants to/ can afford to starve for the first 6 months trying to close their first deal, even if the commissions on that sale are astronomical.
The way I see it, the bottom line is this: -attract- solid and talented sales professionals to your organization by offering a base that is fair and matches their experience/responsibilities. Then -keep- them on your team and performing by offering capless potential commissions earnings for hitting and exceeding quotas. Remember that you can never pay a sales pro "too much" commission - every cent they earn above and beyond what you expected is still ten cents in your pocket first! ROI doesn't get much more tangible than that...
Clarification added September 30, 2007:
To Ian's point re: performance pay possibly encouraging unethical and dishonest sales tactics, customer retention problems, etc .... One word: Clawbacks.
The only thing sales professionals hate more than not making money in the first place is making it and then having it taken away! Employ a fair and reasonable clawback policy and you shouldn't have a problem with fabricated/forced sales or "let the customer service department deal with it" mentalities.
Geoff W
Experienced Market Intelligence Analyst/Consultant to High Technology Firms
There needs to be far better understanding of company goals to be able to answer the question. As many have intimated, it is surprising how many firms will have compensation plans that are at cross purposes with their corporate strategy.
Likewise, you generally want to establish some compensation circuit breakers in that if you compensate the field guys on revenue, then compensate first line managers on gross margin contribution.
What's the new account sales cost? Does this mean you pay more for new account penetration or does it mean you reward for increasing revenue within existing accounts which should be a cheaper way to grow the business and provide some defense by solidifying the existing account base.
Put 10 experienced sales managers in a room and you can concoct about 25 different sales plans. The more important question is clearly articulating the corporate strategy and then aligning the compensation metrics to achieve those objectives.
Capping earnings rarely is going to be a top seller. Management has to get over the fact that some top sales guns will earn more money than most managers. There's nothing wrong with that, yet it generally receives incredible emotional resistence.
Clarification added September 28, 2007:
Another point happens to be the nature of your firm. If you want top quality sales people and are in start up mode or a firm that has been taking on water for a couple of years, then you are going to offer a much higher base to entice people to leave a more secure selling environment to take on that risk. Likewise, if the product sells itself, then you need to marry the senior guys with far cheaper support personnel in a siamese twin compensation model and ratchet up the number on them.
Again, all issues lacking in the question posed ....
If you're small, another big challenge is how long the founders will white knuckle it while they wait for returns from this obscenely compensated sales guy who you talked them into giving a higher base than they were comfortable with. I had a personal experience with this when an incredibly competent sales guy came on board a small firm where I worked. The CEO was getting the yips after about 90 days, and the guy came real close to getting the gate. Seven months into it and he had popped a couple of large deals and became the CEO's darling.
Founders see all the cash the suddenly flies out the door once the move goes out to build the sales force, and it roils the stomach acid, particularly if the CEOs have an engineering background.
You also do not mention where channels come into this mix. Oftentimes comp plans between the channels turn them into natural adversaries. The plans can be a little like tying two cats' tails together and hanging them over a clothesline. They're close but they aren't really getting along.
Some thoughts are needed as well on target setting for the OTE part of the compensation plan.
Their is nothing like an unrealistic (or at least illogical/poorly explained) quota to scupper the morale of your sales force.
Ian S
Programmer, Game Designer, Teacher
Best Answers in: Software Development (3), Career Management (2), Job Search (1), Compensation and Benefits (1), Staffing and Recruiting (1), Advertising (1), Business Analytics (1), Hedge Funds (1), Option Markets (1), Personal Real Estate (1), Market Research and Definition (1), Professional Networking (1), Business Plans (1), Small Business (1), Using LinkedIn (1)
Be very careful with performance-based pay. As soon as you tie a person's income to any sort of measurable metric, they will cheerfully maximize the metric... even at the expense of the company.
As a very simple example, suppose you give commissions for every sale. Then your sales force does everything it can to maximize sales, up to and including: high-pressure tactics, outright lying about your product's abilities, and signing up clients without their knowledge. These then will REDUCE the company's revenue by translating to larger percentages of returns, complaints and tech support calls (which all cost the company money), but what does the salesperson care since they aren't paid based on tech support or customer service costs?
I'm not saying performance-based pay for direct sales is a bad idea, mind you; certainly, if I were in that industry I would have no desire to "go the extra mile" if I weren't getting paid for it. I'm just saying that you have to be extremely careful about exactly how you measure and compensate your sales force's productivity, so that you don't inadvertently give bonuses in exchange for creating problems elsewhere.
Paul M
Federal Civilian and Commerical Technology Account Manager
Best Answers in: Sales Techniques (2), Business Development (1)
Milovan, I've been a salesperson for pretty much most of my life. (My first commission sales job was at age 12). One of the things I like most about sales is that it is the only job where your salary goals are (or can be) in complete alignment with the company's profitability and revenue goals.
In almost every other career, bosses try to keep employees happy and productive at the least possible cost to the company. Unfortunately, most employers view employee salaries as an expense, and not an investment.
Salespeople have a great situation salary wise, because when I make money, my company makes money. When I make more money, my company makes more money.
Of course, that's in a perfect world. If a salary plan is not in alignment with company goals, or it is not clear, or improperly designed, then your salespeople could be out of alignment with the company's sales and revenue goals.
50/50 plans are standard in my industry. I have 2 kids, and I like to have a base salary to make sure my family gets taken care of. The problem with 100% commission plans to me is that cash flow fluctuates too much in terms of salary. I use my base to keep the lights on, pay the mortgage and car payments. Commission is used to redo the kitchen, fix the patio, etc.
Some things that counter the effectiveness of commission plans are:
1) Income ceilings: putting something in the contract that says the maximum a sales person can get on a sale is X. It keeps middle management happy, because they are secure in knowing that the salespeople make less than them.
Ultimately, a super successful salesperson should be allowed to make as much as they can, even more than the CXO.
2) Raising plan goals and increasing territory sizes without raising compensation as well. If demands on the salesperson are increasing, then salary should increase as well.
3) Not balancing new business needs versus repeat business needs. Too much focus one way or the other can have the result of abandonment of your existing customers by the salesperson, or a salesperson who won't go after new business.
Links:
Clarification added October 2, 2007:
I had to run to work this morning, so I didn't get a chance to finish up my comment. I'm especially concerned about Ian's comments above, that salespeople will essentially rip off customers, or sell them products that don't work or unneeded, in exchange to make some comp plan money.
One of the great things I've found in my sales career is that I've never had to misrepresent what my products or company does. NEVER. PERIOD. In fact, one of my major goals in any sales engagement is finding out why I can't sell to a customer, and if I can't overcome the issues, part ways.
I'm an open book, I can't lie to a customer that a product is going to work for them when I know it won't. It's against my ethics, and my faith.
And it's a bad business practice. I have a 10,000 person Rolodex, and yes, I haven't been able to make every customer happy, and I've made mistakes, I've said the wrong things at the wrong times, and I've placed products in when they were a bad fit. But these bad things were never my intent, and I keep learning.
I've had some of the same customers for over 12 years now, and I've been through a number of job changes. It's an honor that they still allow me to serve them, and I wouldn't break that trust.
I know this part of the email sounds like a diversion, but it's not. A top salesperson will do what is right for the customer, even if it's not in perfect alignment with the comp plan. A 20 year relationship is much more important than any fast buck.
Drew P
Manager Senior Appointments LION 4K+ TopLinked.com MyLink500.com drew.percival@evolutionjobs.co.uk
Best Answers in: Staffing and Recruiting (1)
Too much saftey with 50/ 50, saftey cause's complancy, your ratio should at most should be 30% base 70% ote, Money itself is the motivator for these people, their commision should be generous rather than base and motivate them to achieve. It also self cleans your works force for you keeping only reall money makers in the business. The balance does change for each industry but at the end of the day they are paid to sell ensure the actual payment reflects the effort"!
