If you ask ten CEOs how they compensate their sales people, you’ll probably get eleven different answers. Everyone has a different plan and has changed it more than once. As a business and executive coach, it’s a question I get all of the time. And it’s not an easy one to answer.
There are two basic questions you need to address before deciding on a compensation plan for your salespeople.
First, you need to know what you can afford.
Start by figuring out the total value of a new sale and then back out your costs. Total value is the total lifetime revenue of a new account, less delivery costs and the related portion of overhead. I typically look at 6-24 months for most industries.
Secondly, you need to look at your sales process and decide who manages which risks.
I do this by determining the uncertainties in the sale and who is in the best position to impact these. For example, if pricing is variable and something the salesperson will decide, I want to design a compensation plan that make their compensation dependent on profit not revenue so they negotiate the highest price.
Once you have your budget and know the variables, you can look at any of these six strategies to create your compensation plan:
1. Fixed base salary
I’ve seen more than one company take this approach. Here there is a clear set of expectations and measures of success, but there is no variable compensation, just a base salary.
I find this works well when the sales team is tightly coupled and involved in delivery and overall company performance. It’s also a cultural decision for your company. If you’re a very collaborative culture, you might want to consider this type of model.
2. Commission on closed sales
The opposite of a fixed-base salary is an “you eat what you kill” approach. Here, compensation is totally dependent what you sell and you make a fixed, or possible graduated, percentage of the sale price. This works well in highly competitive environments where the sale is transactional in nature and the product is a commodity.
This typically does not work well when there is a lot of consulting, configuration, or customer services involved in the sale. Often salespeople on these types of plans will promise the world and leave the rest of the work up to the delivery team. Not a good formula.
3. Commission on lifetime value
This is a slight twist on the previous option. Instead of basing the commission on just the first transaction, the commission is paid out over time based on repeat sales by the same customer.
This works best when the true customer value is based on an ongoing relationship. This model will create incentive for sales people to close deals that will build a relationship, not just on the first transaction.
4. Commission on gross profit
This model pays a commission, but only on the gross profit and not on the total sale price. Use this model when your salesperson is involved in configuring the solution or the choice of customer has a strong impact on cost of delivery and service. The salesperson is compensated for choosing a good customer and selling them the right product or service that can be profitably delivered on.
5. Performance bonus
In this model, a salesperson has incentive to work more and harder for certain types and amounts of business based on specific sales targets and metrics. This could be anything from sales of a specific size, location, business type or target accounts.
I’ve seen this work well when a company has certain strategic goals and these goals do not easily tie back to revenue or profit calculations. I’ve seen companies, using this style of compensation, cap bonuses to diversify risk and clientele or to gain market share in emerging sectors.
6. Team bonus
This approach can use any of the above models, but the compensation is calculated based on aggregate team numbers, or overall company performance, rather than individual performance.
This works well when the company culture is much more collaborative and people work together to sell and close deals. It’s also a good choice when there are different roles and services required for the sales process, such as technical engineers who help design and configure solutions for the potential client.
Often times companies start with one approach and evolve to others as they figure out what works best for them, their markets, and their people. In the end, the best approach is the one that delivers profitable clients, creates a happy sales team, and aligns with your company’s core values.