Many business owners struggle with salesforce compensation. If this is you, you are not alone. It comes up all the time in my Revenue Generation consulting practice. Some feel they are not paying enough and worry their best sellers will leave. Others feel they are overpaying and are giving away margin dollars. Maybe salesforce compensation is a burr in your saddle? If yes, here’s some thoughts that might get your sales comp plan right sized in short order…
To begin, determine exactly what selling behaviours you would like to incentivize and which you would like to discourage. If the sales role is primarily hunting and bringing on new business, you want to provide a strong financial incentive for all hunting activities and results. If the requirements are mostly around farming and account management, the plan should reward farming activities and results.
Before setting your comp plan determine if you have the right people in the right sales roles. I’ve often seen farmers in hunting roles, which never ends well. Interestingly, it’s rare that a hunter ends up in a farming role. I think they self-select out of those jobs. If you have a miscast player your comp plan will not do what is designed to do regardless of how well it is constructed. This means you may need to get the right people into the right seats on the bus before you change your comp plan.
With your hunters and farmers appropriately placed, it is time to look at how your plan is constructed. The best hunters are coin-operated, so ensure your plan rewards bringing on new customers, and is uncapped. I have seen capped plans, you can guess what happens, hunters hit the max compensation and stop selling. You don’t want that.
For your farmers, have your plan reward them not only for account retention, but year-over-year growth. Retaining a customer with significantly declining revenues does not help your business.
The steps to creating a plan for either role are…
- Begin with the Total Target Compensation [TTC] for the job role. This number is typically arrived at by looking at comparables within your market.
- Decide the split of base salary to commission earnings that will make up the TTC. For hunters you would want a 40% base salary component. For farmers, 60%-65%.
- A note on hunting roles with a high base salary… I consistently see that hunters with a high base salary produce less revenue than those with a lower base salary. They simply are not hungry enough and have been made too comfortable with the higher base salary.
- Determine if you would like to base commission earnings on the attainment of achieving a gross revenue or Gross margin sales goal. [Which you pick is based on a number of factors – too much for this posting. Happy to chat about this if you would like].
- Your commission percentage number will be determined by the sales goal number and the commission earnings needed for your seller to hit their TTC when achieving 100% of their sales target.
As an example…
- Sales Role: Hunter.
- Total Target Compensation: $100,000 per year.
- Base salary/commission split: 40%-60%
- Base Salary: $40,000 per year
- Commission Earnings at 100% of Sales Plan: $60,000
- Sales Goal Type: gross revenue sold.
- Sales Goal Detail: if a salesperson is required to sell $300,000 gross revenue per year, then the commission percentage must be 20%.
To make this compensation plan uncapped but not break the bank, a few thoughts…
- After the sales person achieves 100% of their sales goal the commission percentage drops to a lower number for additional dollars sold. The additional dollars sold could be tiered so that the 1st block of $20,000 sold above sales plan has a lower commission percentage than 20%. The next chunk of $50,000 could have a lower percentage still. You need to play with the numbers to ensure that you maintain your margins, but you get the gist.
- For your comp plan to work you need to have your sales goal setting correct. If you make the goals too high your sellers won’t earn enough and may go elsewhere. If the goals are too low, you will then be overpaying for your sales results and erode your margins.
- In terms of the frequency of commissions payout it’s been my experience that monthly is best. This maintains a short time frame between your seller selling and then getting the positive feedback reward for doing that selling. Also, if the base salary is a relatively smaller part of their compensation, regular commissions will help their cash flow.
So, there is a lot to think through when it comes to setting your sales force compensation. If you have any questions, I am absolutely happy to chat [no strings attached!]. Please feel free to reach out [email protected]