Sales Director Plan Designs - not the same as those for individual sellers

Sales Director comp plans should bear a strong relationship to the plans of the individual sales people, but should also have a few key differences:

1. Be sure the Director of Sales "wins" when his/her people win. So starting with their compensation plan and aggregating is a good approach for at least one measure.
2. Even if the individual contributors have a commission-type mechanic (payout is a percent of what is sold), consider a bonus-type mechanic for the Director job (payout is a target amount for hitting goal, less for less and more for over-goal achievement).
3. If your reporting systems support it, you might consider a measure of "contribution margin" for the Director. That would be [sales] - [cost of sales] - [directly controllable sales operating costs]. That measure rewards the Director for making the right tradeoffs in sales resources to get the maximum contribution from the overall sales force.
4. Another great idea for sales managers is a bonus based on the number of direct reports who meet or exceed their sales goals for the year. This type measure doesn't allow riding on the coattails of the over-performers, and encourages good coaching, hiring, and “pruning” of the organization over time.
5. The pay mix for the Director of Sales is generally less incentive-rich than that for the individual contributors. So if your individual sales people have 60% of their target total compensation in their base (at midpoint) and 40% in their incentive (at target), that’s a 60/40 mix. In that sort of situation, a Director of Sales might have a 70/30, or even a 75/25 mix.

Rewarding sales people for both revenue and profitability

When sales people directly influence both sales volume and profitability of what they sell, rewarding them for doing both well aligns their incentives with value creation for the company. Here are three approaches to consider:

1. Make revenue the primary measure using a bonus-type mechanic, and add a profitability multiplier. For example, they could add 20% to total earnings (1.2 multiplier) at year-end if a stretch profitability goal is achieved, lose as much as 20% of total earnings (0.8 multiplier) if they are below an unacceptable level of profitability, or have no effect on their own earnings in-between (1.0 multiplier). This would be most appropriate if revenue is the most important focus for sales, with profitability in the also-important category. It would also be appropriate if profitability is difficult to measure at the individual level, but very accurate by business unit or in aggregate.
2. Measure sales people only on gross margin or gross profit dollars, and drop revenue. This would be appropriate if you can accurately measure profitability by individual sales person. Here again, a bonus-type mechanic is probably the best choice.
3. Use a matrix with revenue goal attainment on one axis and profitability goal attainment on the other. In the middle of the matrix (at goal on both), pay 100% of the target incentive. As both revenue and profitability increase, pay over-target earnings. Pay very little for below-goal performance on both. And pay in-between if they’re over on one measure and under-goal on the other. It’s a little tricky to design the matrix, but once you’ve got it, it’s very easy to understand and administer.

A new commission plan for Customer Service Reps

Typically, commission programs are used for revenue generating roles. If your Customer Service Representatives are in a position to influence the customers to buy more, to retain them, to cross-sell them, or otherwise to generate revenue, then this can be a great approach. If they are more fulfillment, helpdesk or troubleshooting oriented, a bonus program might be more appropriate.

If you are just starting out with a commission program for people already on an all-base plan, then funding the commissions will be an issue. For variable pay to really motivate behavior, a number of conditions have to be met:

1. The eligible employees need to have the ability to make the results happen themselves, or as part of a very small team (2-6 people).
2. You need to be able to establish a productivity standard -- know how much you expect the employee to "produce" (/sell/retain/collect).
3. There needs to be true at-risk pay so that the eligible employee will not earn their full market value unless they meet the productivity expectation and earn the full target incentive.
4. There needs to be upside for over-performance. This is the counter-balance to the risk you are expecting them to assume in #3 above. Without the possibility of better-than-expected rewards, the risk isn’t worth it. This means that your top performers (top 10% or so) should earn a small multiple of what is earned by on-target performers (1.5 – 3 times as much, for example).
5. You need to have, or be willing to hire, people in the role with an appetite for the rewards and risks of such a compensation arrangement – willing to bet on their own ability to make a difference, and excited about the prospects.
   

Of course you can move to such an arrangement gradually over time, holding base constant, adding a few percentage points of base to the incentive at target each year (5% or so), improving your goal setting abilities, and learning to manage under a commission program.

Hiring your first sales person

For most small companies, your first sales hire is hard to do well. You don't have a sales leader to help you confirm you have the right skills and temperament for the job. You're not sure what to expect in terms of productivity. And you don't have a pay structure or comp plan to tell you how much this person should earn, what kinds of special arrangements are needed (car, expense account), etc.

We'll leave a lot of that to your other advisors and focus here on the compensation piece. Here are the basic steps you need to complete to arrive at the right comp plan for your new hire:

1. Your first step is to determine a reasonable level of total compensation for a sales person in your business -- that's what their W-2 says at the end of the year. This is undoubtedly tied, in the thoughts of company management at least, to how much the person should be able to sell in that first year -- the cost needs to be associated with a reasonable return. You'll get better at that as time goes by, but you'll have to start with some kind of working assumption based on others in your industry, leadership's experience in selling your products or services, even to a certain degree the perspective of your top candidates for the role and/or a recruiter who may be helping you to fill it.
2. Next you need to decide how the risk will be shared -- how much of that target total compensation will be in a fixed base salary and how much in the incentive at target. For early stage companies, the fixed portion may be relatively low, even 30% to 50% of the target total compensation. However, if you are trying to attract a well-established resource to bring their network, skills and experience to your company, you may have to offer a higher base since their choices include many with less risk.
3. Now you know how much the incentive at target will be, so your next step is to be very clear about WHAT you expect your new sales person to PRODUCE per year. This is usually measured in revenue dollars, but may be measured in units sold or even gross margin dollars in some industries. Whatever the measure(s), you need to design a plan that delivers the target incentive amount for getting to the productivity goal. This is most typically communicated as a commission (to calculate the rate, divide the target incentive by the productivity expectation). There's more to consider in designing the payout table than this article can address, such as threshold levels of performance (below which no incentive is earne), acceleration and deceleration in payout rates at over-goal levels of achievement, etc. You will also need to be clear about payout timing (monthly, quarterly, etc.), and measurement periods (independent or year-to-date).
4. Your last design step is to check the plan's appropriateness across a broad range of possible levels of productivity, and be sure you're comfortable with both the cost to the company as it relates to results and the income level for the sales person. You will very likely make some kind of adjustment after this review, which should probably involve someone from your Finance group or the company's owner.
5. Once you feel you have the right design, your next step is to carefully document the plan in a Plan Document to be signed by both the sales person's manager and the sales person. Here, you should probably ask for a review by your legal counsel.
6. And finally, determine how you will administer the plan - where the data will reside, what reports will be run, who will do the initial calculation, who will review and approve it, and how the information will be communicated to your payroll processors.
   

Then after you've been living with the plan for a few months or quarters, have a look again to see if it's meeting your needs. Always include a clause in the plan document claiming the right to adjust as needed, then don't adjust during the plan year unless you've got a BIG problem. But do consider adjustments each new plan year. As your business grows and changes, the perfect sales comp plan will also change.

Sales Manager bonus plans

The bonus program that is the best one for your business depends on what your reasons are for offering the bonus. If you are looking for a way to provide additional income for your sales managers in years when it is affordable, and to keep them at least interested in the overall company performance, then a year-end bonus tied to overall company results may be the right answer for you.
However, if you want to motivate and reward for results they themselves are capable of generating, giving them meaningful at-risk pay to "penalize" those who don't deliver and exciting upside to reward those who really ring the bell, then you might want to consider tying their variable pay more directly to results they can personally control. A more typical sales management variable pay plan would tie a fixed value incentive opportunity to achieving a sales or gross margin goal, with ...

...no payout for performance before some threshold value (50% - 90% of goal depending on goal setting accuracy and company/market maturity),

...increasing (but linear) payout between the threshold and the goal,

...accelerated payout (more $/percentage point of goal achieved) for over-goal performance, and

...deceleration or a cap at a very high level of performance (110% - 150% of goal, again depending on goal setting accuracy and company/market maturity).

Account Managers vs. Business Developers: Key comp plan differences

Have you decided it's time to specialize in your sales team? One of the first ways companies do this is by separating the Account Management role from the Business Develoment role. If you're thinking of this approach, and if you have a reasonably short sales cycle so that your business developers close at least several new customers per month on average, these tips are for you.

1. Pay mix and upside: Selling to new clients generally relies more on the initiative, skill and creativity of the sales person than does managing existing clients. Existing clients continue to buy partly because sales people do their jobs well, and also very much because the company has delivered value to them in the past. What this means for comp plan design is that the business developer generally has more at-risk pay as a percent of Target Total Compensation than the account manager. The business developer also generally has more upside (more acceleration above target performance) than the account manager.
   
2. Measures: For account managers, measures typically include both revenue and some measure of account (/territory) profit contribution – maybe gross margin or gross profit. For business developers, it is less common to emphasize a measure of profitability as long as it is within acceptable bounds. The message is that the business developer gets the new customers in, then the account manager works over time to grow the value of the relationship to both your company and the customer.
   
3. Incentive form: Depending on the industry you’re in, the market position of the company, and your compensation philosophy, you may be using a commission type incentive (percent of sales, percent of margin, etc.) or a bonus-type incentive (fixed dollar payout for achieving the assigned goal, less for less, more for more). Bonus type incentives are more common in account management roles, and commission type incentives are more common in business development roles.
   
4. Payout frequency: Because the business developer has less fixed pay and is more personally and immediately accountable for results, they are often paid more frequently than the account manager. The business developer may be paid monthly, for example, while the account manager is paid quarterly.

Appropriate cost of the sales force

Question: Our sales force's compensation is 38% of total company compensation. Is that appropriate?

Answer: There's not really any useful benchmark I know for sales compensation % total compensation. It depends very much on your industry, company stage and basic competitive strategy (technology driven, operations driven, market driven).

The right place to focus is on the value of the sales force and how that relates to the cost. Even if what they are paid is market-competitive, it could be that you don't have a sustainable selling model if the rest of the economics of the company (marginal profitability of the next sale, cost of supporting the sale, overhead structure, other channel costs, etc.) don't align to create value for the owners.

There are useful ratios that hold within industries like total sales compensation should stay below xx% of revenue -- but even these are useful guidelines at best.

One key idea to keep in mind is that, as a company matures, the sales people should continue to earn more money each year. But their productivity should go up even faster than their earnings so that sales compensation as a percent of revenue declines gradually over the very long run. This is because the company is adding to the sales person's ability to be productive every year by building their product line, cost efficiency, market presence, selling tools, etc.

First year comp plan for a new experienced sales person

Question: We need a comp plan for the first year for a new experienced sales person.

Answer: My suggestion is that you first be clear about the long-term nature of the role, the expected level of productivity (e.g., sales/year), and the amount of total compensation you feel would be appropriate for that level of productivity. You can then design the "steady state" comp plan for the longer run.

Once you have designed the long-term comp plan, you will be able to clearly state the base pay amount as the base for that long-term plan. Let's assume it's $60k base with a target total compensation of $100k. Then you would offer a non-recoverable first year draw of $40k with the expectation that the second year, any pay in addition to the base would have to be earned based on the mechanics of the incentive plan.

Where are the sales comp plan templates?

Many people would like to find a book of sales plan templates -- but there's not one I know of. That's probably because it's sort of like asking for someone to provide a copy of their house plans for your consideration. It could be just the thing for you, but more likely isn't. There are so many variables, so many options -- usually many right answers for most situations, but also even more wrong answers.

There are principles, common industry practices, and a long list of common mistakes. And there's what has worked and what hasn't in your company. All these things, along with your current business imperatives and the role of the sales organization in executing them, will guide your plan design.

A couple of good sales comp books

HR/Compensation professionals are often asked to learn about sales comp as part of their job. One good place to start is with a book, and I recommend both "The Sales Compensation Handbook" edited by Stockton Colt and "Compensating New Sales Roles" by Colletti and Fiss. In addition, there is a very helpful course offered by World at Work, "Elements of Sales Compensation."

Sales compensation design is exciting and challenging, but it is high-stakes work. There are terrific ways to really create value for your company, as well as wrong answers that can create a disaster. If your company's challenges are significant, a consultant can help.

Basic principles guide sales comp design

In comp design, the possibilities are endless, but the principles are few:

1. Ensure that the incentive offered is meaningful enough to drive desired results (but no so "meaningful" that problems arise with quality, integrity, etc.).
2. Make the goals/ criteria for earning the incentive clear and explicit -- and achievable. If goals aren't seen as achievable, no one is going to reach for them.
3. Align measures with top priorities for the company -- remember that your incentive plan is a powerful communication medium. If you pay for activities, you will get activities. If you pay for results, you will get results.
4. Document and communicate the plans well. Track and report more frequently than you pay. Publish the reports in an understandable format.
5. Keep it as simple as it can be and still reflect the requirements of the business. In the tradeoff between Simple and Fair (meaning perfect reflection of value created by the employee), err on the side of Simple.
6. Keep your eye on these principles, and consider revising the plan every few years. Your business priorities change, your messages to employees change -- so should your plans.