Generally speaking it's a good idea to align the payout frequency with the length of the sales cycle. If sales cycles are under a month, monthly payouts should be considered.
If sales cycles are 1 to 3 months, then consider a quarterly payout. For sales cycles of 3 to 12 months you should probably consider an annual plan paid quarterly based on year to date performance.
If sales cycles are longer than 12 months you can get into a trickier situation. If a typical sales person closes many deals per year, even though the sales cycle is long you might use a quarterly year-to-date payout as well. However, if the sales cycle is very long (> 12 months) and if there are few deals per year (less than 10 or so), you may need to consider other options. Here are two:
(1) A more base-rich pay mix with a "kill bonus" approach: The sales person has a base pay that is close to their market value, and receives a handsome "bonus" payout upon closing one of those large deals - either a small percent of the deal value (commission) or a fixed amount per deal (bonus), depending on how much influence they have over deal value. If they strongly influence deal size or deal value (margin), then a percent of the margin expected from the deal can be a good measure. If not, a fixed bonus may be a better approach. This is most appropriate for large deal “hunter” roles.
(2) A commission on revenue or margin payable as the revenue is recognized: This will be paid out over the first year, first two or three years, or the “life” of the deal. This will have the effect of creating an annuity stream for the future, will help to retain good talent, and may make it less appropriate to continue to pay that high base once a few deals are landed. This is appropriate for sales roles in which an ongoing account management (“farming”) emphasis is expected. If this is your situation you should consider the early-on high base as more of a non-recoverable draw against earnings which will disappear after the first 18 to 24 months in the job.
Thursday, January 22, 2009
Thursday, January 08, 2009
Should the cost of customizing our product be deducted from sales credit?
Regarding the cost of customization, now you are talking about paying on the margin of the deal, not the revenue value. That's fine too - but would probably result in a higher commission rate. If you can accurately predict the margin value of the deal, it is an even better measure of the value created by the sales person. Many companies avoid this, however, because it results in hair-raising accounting at a contract level and lot of discussion and argument that can actually cut into your sales capacity. But if you can do this in a straight forward way, it is a great way to measure sales people.
What is the difference between revenue, bookings and sales credit?
REVENUE is what you report for tax purposes based on the local applicable accounting rules.
BOOKINGS is also often reported to Wall Street quarterly for software companies and is a great leading indicator of their financial health. For our example above, this would be $500k reported in the month in which the deal was signed.
SALES CREDIT is whatever you use to measure your sales people. While it is most often tied closely to bookings, it is also common to credit the sales people only when revenue is recognized, or to provide credit based on the margin generated. You could also split credit among members of the selling team. This piece is totally up to you and is part of your comp plan design.
BOOKINGS is also often reported to Wall Street quarterly for software companies and is a great leading indicator of their financial health. For our example above, this would be $500k reported in the month in which the deal was signed.
SALES CREDIT is whatever you use to measure your sales people. While it is most often tied closely to bookings, it is also common to credit the sales people only when revenue is recognized, or to provide credit based on the margin generated. You could also split credit among members of the selling team. This piece is totally up to you and is part of your comp plan design.
Monday, January 05, 2009
What's a good formula for a commission plan based on obtaining orders?
So you want to implement a commission based acquisition system, based on obtaining orders/circulations of products/consumer goods in bulk.
Here are some suggestions about when a particular commission plan might be most beneficial:
A percentage of the first order/circulation
Use when:
Use when:
Use when:
By far, the most common sales incentive design is based on a percentage of each order. However, depending on the way you have designed your selling model, there may be good reason to measure and reward in one of the other three ways you mention.
Here are some suggestions about when a particular commission plan might be most beneficial:
A percentage of the first order/circulation
Use when:
- The sales person influences the size of the first order, and a larger first order is both strongly desirable and indicative of the long-term value of the new customer relationship
- There is a fulfillment/retention channel separate from the new customer sales channel that is responsible for ensuring re-ordering and growth of the account. This could be a call center or a self-service online capability, for example. In this case, the sales person's job is to get that first order, acquire new accounts - and another part of the organization takes it from there.
Use when:
- The sales person is responsible for the first sale, the ongoing relationship, the growth of the account, or
- A team of sales people are working to take in as much transactional (not relationship-based) business as possible, and different people may sell to a given account at different times - for example, a call center with calls routed based on language or simply availability.
Use when:
- The first order generally results is a satisfied customer and repeat business
- The first order may be sold at a significant discount
- The sales person has little influence over the size of the order
- Any first order, regardless of size, takes about the same amount of work.
A fixed sum for each order/circulation
Use when:
- The sales person has ongoing responsibility for processing orders/ transactions as quickly and efficiently as possible
- All orders have about the same value (profit) to the company
- The sales person has little influence over the size of an order.
By far, the most common sales incentive design is based on a percentage of each order. However, depending on the way you have designed your selling model, there may be good reason to measure and reward in one of the other three ways you mention.
How should sales be credited for SaaS sales?
The principle to apply here is that the sales person should be paid at the point at which (1) you can reliably state the value to the company of the sale, and (2) you want the sales person to disengage and move on to the next sales opportunity. For most SaaS models with solid contracts selling to solvent companies, this is following the close of the initial contract (regardless of local revenue recognition laws).
In helping our clients design their sales compensation plans for this model we generally recommend that they credit 100% of first year revenue + a reduced percent of out-year revenue (perhaps 50%) so that the sales person receives 200% of annual revenue credit for a three year contract, for example. Then the sales person is paid their full incentive compensation for the deal soon after the deal closes.
Many companies pay in alignment with cash coming in, or with their local revenue recognition rules. However, over the long run this will have the effect of creating an annuity "tail" which continues to pay the sales person for success in prior years. While some companies believe this creates a retention incentive, it eventually has two serious negative effects: (1) the company ends up concurrently administering multiple compensation plans (one for the current year, one for the prior year to pay on all deals that closed in that year, another for two years ago to pay on those deals, etc.), and the administration becomes expensive and confusing, and (2) the sales person has relatively little risk in their compensation this year based on their performance this year as they are continuing to earn on deals closed in prior years, making them too comfortable with sub-par performance and giving the company leadership less latitude in directing sales effort towards the most important results.
In helping our clients design their sales compensation plans for this model we generally recommend that they credit 100% of first year revenue + a reduced percent of out-year revenue (perhaps 50%) so that the sales person receives 200% of annual revenue credit for a three year contract, for example. Then the sales person is paid their full incentive compensation for the deal soon after the deal closes.
Many companies pay in alignment with cash coming in, or with their local revenue recognition rules. However, over the long run this will have the effect of creating an annuity "tail" which continues to pay the sales person for success in prior years. While some companies believe this creates a retention incentive, it eventually has two serious negative effects: (1) the company ends up concurrently administering multiple compensation plans (one for the current year, one for the prior year to pay on all deals that closed in that year, another for two years ago to pay on those deals, etc.), and the administration becomes expensive and confusing, and (2) the sales person has relatively little risk in their compensation this year based on their performance this year as they are continuing to earn on deals closed in prior years, making them too comfortable with sub-par performance and giving the company leadership less latitude in directing sales effort towards the most important results.
Monday, December 08, 2008
What are the advantages of using a non-commission sales comp plan in mature companies?
The top 3-4 reasons why management, within a mature company, may want a non commission plan are the following:
1. Mature companies with successful business strategies and an efficient go-to-market approach should, over time, see sales person pay go up with the labor market while sales productivity goes up faster. This means that comp % sales goes down. You have more control in continuing to align pay with the labor market and productivity with company expectations using a cost-of-labor plan (not a cost-of-sales = commission plan). If you have a commission plan, you are stuck communicating a lower commission rate every year (or at least every few years), which makes sales people nuts.
2. Market leaders with strong brands and value creating products have the right to claim the value they have created over time. This means they have the right to assign a sales person to a territory/book, expect them to maintain and grow it, but not expect to pay for the size of the territory/book in a linear fashion. So a person assigned a $6M territory should make more than a person assigned a $3M territory, but not twice as much. It is much more straightforward to manage the dampening of the comp delivered to keep that relationship non-linear in a quota-based cost-of-labor type plan.
3. True commission plans take a lot of tinkering and often involve a fair amount of discretionary adjustment, complicated mechanics and side deals. This becomes unwieldy in a significantly large sales organization. How fair can management be with such a system across 700+ people?
And if you'll allow me a fourth:
4. In a complex sales model with multiple people involved in the sales process by design, a commission plan does end up double-paying when you offer credit to multiple individuals. A quota bonus type plan will allow you to directly manage your cost of comp as you hold the right people accountable for their contribution to securing the business.
1. Mature companies with successful business strategies and an efficient go-to-market approach should, over time, see sales person pay go up with the labor market while sales productivity goes up faster. This means that comp % sales goes down. You have more control in continuing to align pay with the labor market and productivity with company expectations using a cost-of-labor plan (not a cost-of-sales = commission plan). If you have a commission plan, you are stuck communicating a lower commission rate every year (or at least every few years), which makes sales people nuts.
2. Market leaders with strong brands and value creating products have the right to claim the value they have created over time. This means they have the right to assign a sales person to a territory/book, expect them to maintain and grow it, but not expect to pay for the size of the territory/book in a linear fashion. So a person assigned a $6M territory should make more than a person assigned a $3M territory, but not twice as much. It is much more straightforward to manage the dampening of the comp delivered to keep that relationship non-linear in a quota-based cost-of-labor type plan.
3. True commission plans take a lot of tinkering and often involve a fair amount of discretionary adjustment, complicated mechanics and side deals. This becomes unwieldy in a significantly large sales organization. How fair can management be with such a system across 700+ people?
And if you'll allow me a fourth:
4. In a complex sales model with multiple people involved in the sales process by design, a commission plan does end up double-paying when you offer credit to multiple individuals. A quota bonus type plan will allow you to directly manage your cost of comp as you hold the right people accountable for their contribution to securing the business.
Monday, December 01, 2008
How do you know what the right commission rate is for your industry and area of the country?
Answering this question is harder than it looks. The answer depends on the nature of the selling role, the level of maturity of the business, and the cost structure of the company.
At its most basic, a commission rate is derived by taking the total compensation you intend to deliver and dividing it by the amount of sales you expect. The result is the commission rate. Many companies then add motivation-enhancing mechanics such as acceleration at high levels of achievement so that commission rates may increase over the course of a quarter or year. But the starting place is those two key ingredients: the amount of variable pay you would like to deliver through the commission, and the amount you expect a person to sell in order to earn that much.
To determine the amount of money you want to deliver through the commission you must decide what the total compensation should be for on-target performance, and divide that appropriately between any base pay you will guarantee and the variable piece. In more mature companies it is more likely that there would be a substantial base pay level. Also, for very skilled selling roles, it may be necessary to offer a meaningful base pay in order to attract the talent you want into the role. And, in general, the more direct control the individual contributor salesperson has over the sales results on which they are measured, the more appropriate it is for them to have a high level of variable pay and a low level of fixed pay. Conversely, if the sales are made by a team, or if the brand is strong, or if a strong marketing function guarantees a steady flow of warm leads to which the salesperson must simply respond well, then a higher base, lower variable, and lower upside for over-performance arrangement would be appropriate. So that's a very high level overview of some of the issues around determining the total variable pay to be delivered through the commission, your numerator in determining the commission rate.
For the denominator, the total sales you're expecting from them, this is a function of how you are selling, the level of skill required, the characteristics of the market into which they sell, any support systems you have in place, the effectiveness of your competition, and your basic selling strategy. Knowing what your competitors expect of their sales people might be helpful, but do they have a teamed inside/outside pair, or only a Field sales person with no inside resource? Do you have a strong marketing department and a great lead flow while your competition expects their sales people to generate their own leads? Much goes into determining a productivity expectation for a salesperson, but this must be estimated, and will serve as the denominator for your commission calculation.
While it seems like a simple question, a lot of thought must go into getting to the right answer.
At its most basic, a commission rate is derived by taking the total compensation you intend to deliver and dividing it by the amount of sales you expect. The result is the commission rate. Many companies then add motivation-enhancing mechanics such as acceleration at high levels of achievement so that commission rates may increase over the course of a quarter or year. But the starting place is those two key ingredients: the amount of variable pay you would like to deliver through the commission, and the amount you expect a person to sell in order to earn that much.
To determine the amount of money you want to deliver through the commission you must decide what the total compensation should be for on-target performance, and divide that appropriately between any base pay you will guarantee and the variable piece. In more mature companies it is more likely that there would be a substantial base pay level. Also, for very skilled selling roles, it may be necessary to offer a meaningful base pay in order to attract the talent you want into the role. And, in general, the more direct control the individual contributor salesperson has over the sales results on which they are measured, the more appropriate it is for them to have a high level of variable pay and a low level of fixed pay. Conversely, if the sales are made by a team, or if the brand is strong, or if a strong marketing function guarantees a steady flow of warm leads to which the salesperson must simply respond well, then a higher base, lower variable, and lower upside for over-performance arrangement would be appropriate. So that's a very high level overview of some of the issues around determining the total variable pay to be delivered through the commission, your numerator in determining the commission rate.
For the denominator, the total sales you're expecting from them, this is a function of how you are selling, the level of skill required, the characteristics of the market into which they sell, any support systems you have in place, the effectiveness of your competition, and your basic selling strategy. Knowing what your competitors expect of their sales people might be helpful, but do they have a teamed inside/outside pair, or only a Field sales person with no inside resource? Do you have a strong marketing department and a great lead flow while your competition expects their sales people to generate their own leads? Much goes into determining a productivity expectation for a salesperson, but this must be estimated, and will serve as the denominator for your commission calculation.
While it seems like a simple question, a lot of thought must go into getting to the right answer.
Tuesday, September 23, 2008
My employer thinks I made TOO much last year therefore he has a new pay package for me which caps my sales commission!
My employer thinks I made TOO much last year therefore he has a new pay package for me which caps my sales commission! I am paid a percentage of the profits from my sales.....how can I make too much?
Unfortunately, we don’t have a quick easy answer to make all employers rational sales comp designers. We have to just help the clients who want help, one at a time. That said, here are two principles that may be relevant:
1. No caps. We rarely recommend a sales comp plan be capped – no need to take your top performers’ motivation out. But we do recommend deceleration at high levels of attainment, per-deal caps, caps on the % of margin on a deal that may be paid to the rep, etc. – these keep pay rational even in case of windfalls and large deals that were sold with “help” from company leadership.
2. Over time, sales people generally should earn more money each year – with pay going up as the labor market rates go up (about 3% per year on average these days). In a well-run company, sales productivity should go up much faster than the labor market rates for the sales people due to the investments the company makes in broadening the product line, building the brand, selling tools and systems, etc. As a result, compensation plans that are communicated as commission (% of revenue or margin sold) generally have to be adjusted so that the payout rates decrease. That’s the only way the math works.
So… you are right that caps aren’t a great idea. But your employer may also be right that there should not be a linear relationship between your compensation and your productivity over the long run.
Unfortunately, we don’t have a quick easy answer to make all employers rational sales comp designers. We have to just help the clients who want help, one at a time. That said, here are two principles that may be relevant:
1. No caps. We rarely recommend a sales comp plan be capped – no need to take your top performers’ motivation out. But we do recommend deceleration at high levels of attainment, per-deal caps, caps on the % of margin on a deal that may be paid to the rep, etc. – these keep pay rational even in case of windfalls and large deals that were sold with “help” from company leadership.
2. Over time, sales people generally should earn more money each year – with pay going up as the labor market rates go up (about 3% per year on average these days). In a well-run company, sales productivity should go up much faster than the labor market rates for the sales people due to the investments the company makes in broadening the product line, building the brand, selling tools and systems, etc. As a result, compensation plans that are communicated as commission (% of revenue or margin sold) generally have to be adjusted so that the payout rates decrease. That’s the only way the math works.
So… you are right that caps aren’t a great idea. But your employer may also be right that there should not be a linear relationship between your compensation and your productivity over the long run.
Tuesday, July 29, 2008
Are there any design principles you recommend I use to differentiate between existing products to new customers and new business/new products?
Generally a sales comp plan may pay differently for new products or new accounts in order to recognize a few typical characteristics of these sales:
1) They may take more time and effort on the part of the sales person, so should pay more as a percent of sales to make them worth that time investment
2) They may pull sales people out of a comfort zone, and so should be more attractive to help them focus on new behaviors
3) They may be more difficult from a goal/quota setting point of view, with little/no history to use as a basis, and so goals/productivity expectations may have serious accuracy challenges compared to the base business.
Here are the typical comp mechanics to recognize these challenges:
Characteristic of the sale: Takes more effort
Comp mechanics: Pay a slightly higher rate – 15% to 50% more than base business is about right, depending on the degree of difficulty
If the “more effort” is only a startup challenge, make it clear that in the future it will revert to a lower rate – so they have every incentive to get these sales going quickly (for new products); if it will always take more effort, the rate should probably not revert (new customers)
Characteristic of the sale: New / out of comfort zone
Comp mechanics: Pay a higher rate on the new stuff and a lower rate on the old stuff – to provide “carrots” and “sticks” – so ignoring the new stuff would mean less earnings than last year for the same results as last year; and meeting expectations on both old and new would result in slightly higher earnings
Again, make it clear that rates will not stay this high on the new stuff forever, so it will be in the sales person’s best interest to get a fast start
Characteristic of the sale: Difficult to set goals
Comp mechanics: Pay on the new stuff (products/customers) from first dollar, without a lot of dramatic acceleration or bonuses around quota/productivity expectation. If you know your goals are rough, don’t make attainment of them a high-stakes event for the company or the sales person. In fact, a straight commission (at an attractive rate) without any acceleration is a reasonable arrangement in the first year.
1) They may take more time and effort on the part of the sales person, so should pay more as a percent of sales to make them worth that time investment
2) They may pull sales people out of a comfort zone, and so should be more attractive to help them focus on new behaviors
3) They may be more difficult from a goal/quota setting point of view, with little/no history to use as a basis, and so goals/productivity expectations may have serious accuracy challenges compared to the base business.
Here are the typical comp mechanics to recognize these challenges:
Characteristic of the sale: Takes more effort
Comp mechanics: Pay a slightly higher rate – 15% to 50% more than base business is about right, depending on the degree of difficulty
If the “more effort” is only a startup challenge, make it clear that in the future it will revert to a lower rate – so they have every incentive to get these sales going quickly (for new products); if it will always take more effort, the rate should probably not revert (new customers)
Characteristic of the sale: New / out of comfort zone
Comp mechanics: Pay a higher rate on the new stuff and a lower rate on the old stuff – to provide “carrots” and “sticks” – so ignoring the new stuff would mean less earnings than last year for the same results as last year; and meeting expectations on both old and new would result in slightly higher earnings
Again, make it clear that rates will not stay this high on the new stuff forever, so it will be in the sales person’s best interest to get a fast start
Characteristic of the sale: Difficult to set goals
Comp mechanics: Pay on the new stuff (products/customers) from first dollar, without a lot of dramatic acceleration or bonuses around quota/productivity expectation. If you know your goals are rough, don’t make attainment of them a high-stakes event for the company or the sales person. In fact, a straight commission (at an attractive rate) without any acceleration is a reasonable arrangement in the first year.
Tuesday, July 15, 2008
What type of itemization/documentation is an employer required to provide to sales people paid variable compensation?
There is no requirement to provide documentation in this country (US). You are free to provide additional compensation whenever you’d like, based on whatever criteria you establish (or change). However, to maximize the motivational value of your plans, it is a good idea for both the employer and the employee to see the plans as a serious commitment by the company, and to have a written document showing exactly how it will work (measures, amounts, frequency, handling of disputes, eligibility, etc.). If you have such a document, that is in the form of a legally binding plan document, then you will also need to protect the company with language about management discretion, employee termination, when an amount is considered earned, etc. And you will probably want to run it by your legal counsel.
There are companies that successfully manage their sales forces without written plan documents. Typically their plans are very straightforward, and they don’t have very large sales forces. But the norm (and the best practice in most instances) is to have a good plan document that makes the “rules of the game” clear and serves as a helpful reference for all involved.
There are companies that successfully manage their sales forces without written plan documents. Typically their plans are very straightforward, and they don’t have very large sales forces. But the norm (and the best practice in most instances) is to have a good plan document that makes the “rules of the game” clear and serves as a helpful reference for all involved.
Wednesday, June 11, 2008
What are some of the key principles when putting product and program managers on incentive pay plans?
Many companies are considering putting employees with non-sales roles on some kind of incentive plan. You mention putting your Product and Program Managers on variable pay plans and this is what I suggest:
1. Be clear on how much and for what measures the managers involved can "move the needle," with a direct effect on the company's financial results. Product Managers could be measured on product line gross margin or operating income, with a similar measure for Program Managers, for example. But make sure the measurement and reporting systems will support robust measurement of their results.
2. Be sure you have enough incentive to actually motivate and drive behavior towards the results you want. Anything less than about 15% of target cash compensation may not be worth the cost of designing, reporting and administering the plans (in terms of the effect on results). This can be tricky if you are offering incentives for the first time as you probably don't want to reduce base to fund them. If you can redeploy budgeted money from a broad-based employee incentive plan to help fund it, you can bring the pay mix in line over time through reducing the increases in base and putting them towards the variable portion.
3. Be careful with target setting. You need to aim for about 60% of your employees on variable pay plans to be at or above target, or it won't motivate much.
4. Offer enough upside. If you are putting people in an at-risk pay situation, possibly for the first time, you need to be sure a few people really ring the bell and get a handsome payout (1.5-2.0 times the target incentive), and publicize and celebrate these successes -- it helps motivate everyone.
5. Be sure the people in the role have the risk profile to find thismotivating (or that that is the sort of person you want in the role, and are willing to make the needed adjustments). Not all solid employees are "coin operated."
1. Be clear on how much and for what measures the managers involved can "move the needle," with a direct effect on the company's financial results. Product Managers could be measured on product line gross margin or operating income, with a similar measure for Program Managers, for example. But make sure the measurement and reporting systems will support robust measurement of their results.
2. Be sure you have enough incentive to actually motivate and drive behavior towards the results you want. Anything less than about 15% of target cash compensation may not be worth the cost of designing, reporting and administering the plans (in terms of the effect on results). This can be tricky if you are offering incentives for the first time as you probably don't want to reduce base to fund them. If you can redeploy budgeted money from a broad-based employee incentive plan to help fund it, you can bring the pay mix in line over time through reducing the increases in base and putting them towards the variable portion.
3. Be careful with target setting. You need to aim for about 60% of your employees on variable pay plans to be at or above target, or it won't motivate much.
4. Offer enough upside. If you are putting people in an at-risk pay situation, possibly for the first time, you need to be sure a few people really ring the bell and get a handsome payout (1.5-2.0 times the target incentive), and publicize and celebrate these successes -- it helps motivate everyone.
5. Be sure the people in the role have the risk profile to find thismotivating (or that that is the sort of person you want in the role, and are willing to make the needed adjustments). Not all solid employees are "coin operated."
What is your advice re: "sales compensation" for non-profits (e.g., underwriters in non-commercial radio)?
In the non-commercial radio world, there is a role that is referred to as underwriting staff. They go out and solicit contributions from businesses for a mention on the air. It is basically sales in the non-profit broadcasting business. One station's staff has always been salaried and now they are thinking of going to a commission structure.
My suggestions:
My advice is to offer some variable pay, but move slowly. My guess is that you want a collaborative non-profit approach by your “underwriting staff,” not an aggressive sales-y approach. Their degree of aggressiveness and their level of effort may go up as you offer them incentives; but your ability to control them and their tendency to work collaboratively with their team and the rest of the company may go down. You also need to assume that you have people already in the role who chose it because they liked the reliable low-risk pay environment. Too much at-risk, and you could scare them away – which is OK if that’s what you want to do, and if you have the ability to re-fill those positions quickly.
So, that said, I would suggest that you move to a fixed dollar payout opportunity at target – same value for all of them – we’ll call that their bonus. Then set a goal in “underwriting” that they have to achieve to get it. Start paying some variable pay around 70% of goal (since it’s the first time you’ve set these goals), and offer 150% of the target at around 130% of goal. The payout should probably not be funded by reducing base salaries in the first year you do this, as that could also be scary. If you are already paying below market, you may have room to offer a bonus by paying a little more in total and putting the entire annual increase into the bonus. Even $5,000 in the first year will start to get things going and capture their attention. $10,000 would be better. And over the long run you are probably headed towards a pay mix that is about 60% to 70% base and 40% to 30% at-risk.
My suggestions:
My advice is to offer some variable pay, but move slowly. My guess is that you want a collaborative non-profit approach by your “underwriting staff,” not an aggressive sales-y approach. Their degree of aggressiveness and their level of effort may go up as you offer them incentives; but your ability to control them and their tendency to work collaboratively with their team and the rest of the company may go down. You also need to assume that you have people already in the role who chose it because they liked the reliable low-risk pay environment. Too much at-risk, and you could scare them away – which is OK if that’s what you want to do, and if you have the ability to re-fill those positions quickly.
So, that said, I would suggest that you move to a fixed dollar payout opportunity at target – same value for all of them – we’ll call that their bonus. Then set a goal in “underwriting” that they have to achieve to get it. Start paying some variable pay around 70% of goal (since it’s the first time you’ve set these goals), and offer 150% of the target at around 130% of goal. The payout should probably not be funded by reducing base salaries in the first year you do this, as that could also be scary. If you are already paying below market, you may have room to offer a bonus by paying a little more in total and putting the entire annual increase into the bonus. Even $5,000 in the first year will start to get things going and capture their attention. $10,000 would be better. And over the long run you are probably headed towards a pay mix that is about 60% to 70% base and 40% to 30% at-risk.
Tuesday, June 10, 2008
What do you consider to be the key principles are important in considering role-based incentive plans?
Role-based incentive plans are used to motivate and reward those who have a direct effect on company financial results, in both sales and non-sales roles. Keep these key principles in mind when designing a role-based plan:
1. Pick measures that are linked directly to income generation for the company (e.g., revenue, units sold, margin) rather than activity level (e.g., number of calls).
2. Pick as few measures as possible to cover the primary accountabilities of the role. One or two would be a good number for a newly-instituted plan. Three might be OK. More than three would have to be well-justified as it dilutes both the message communicated by the incentive plan and the payout value of accomplishing any of them.
3. Design the plans with line leadership's involvement so that they introduce them with a message like, "Here are our new incentive plans. We are thrilled to share them with you because we believe they will significantly increase both your income and that of the company. Let me show you how . . ."
4. Provide great materials to communicate the plans -- since the reason you're doing it is to motivate and excite the eligible employees.
5. As soon as you have an idea of what the final design may be, start planning for accurate and timely administration of the plans and great reporting. You risk losing much of the motivational value if employees don't see a frequent and easily understood connection between their results and their earnings.
1. Pick measures that are linked directly to income generation for the company (e.g., revenue, units sold, margin) rather than activity level (e.g., number of calls).
2. Pick as few measures as possible to cover the primary accountabilities of the role. One or two would be a good number for a newly-instituted plan. Three might be OK. More than three would have to be well-justified as it dilutes both the message communicated by the incentive plan and the payout value of accomplishing any of them.
3. Design the plans with line leadership's involvement so that they introduce them with a message like, "Here are our new incentive plans. We are thrilled to share them with you because we believe they will significantly increase both your income and that of the company. Let me show you how . . ."
4. Provide great materials to communicate the plans -- since the reason you're doing it is to motivate and excite the eligible employees.
5. As soon as you have an idea of what the final design may be, start planning for accurate and timely administration of the plans and great reporting. You risk losing much of the motivational value if employees don't see a frequent and easily understood connection between their results and their earnings.
How can I reward project managers who bring projects in on time and within budget?
This high-end residential remodeler wants to reward project managers who bring projects in on time and within budget. Given that they have a great deal of control over on-time, on-budget project completion, it was a great idea to provide them with incentives to make that happen.
I suggest the following:
1. In order for incentives to really drive behavior, they need to include both an element of risk (they would earn less than their full market value if they didn't earn the incentive) and potential for upside (they have an opportunity to earn more than their full market value if they beat their goals).
2. In addition, the incentive opportunity at target (for at-goal performance) should comprise at least 15%, and probably more like 20-25% of their total compensation. Moving to this sort of pay mix isn't something to be done all at once -- gradually over time is probably best -- a value closer to 10% of base as an incentive opportunity in the first year would be a good place to start. Then in future years, base increases could be withheld to fund a more meaningful incentive opportunity.
3. Identify the measures and mechanics of the plan. If the incentive at target is $10k per year, and if a typical Production Lead is responsible for 5 projects per year, then the "plan" could be a simple as $2000 for each project completed on-time and on-budget, payable following customer sign-off. Consider adding some upside in the form of additional payments for savings vs. budget (e.g., $1000 for each $10,000 in savings) -- but be careful about what behaviors are rewarded when choosing this path -- you don't want to jeopardize quality. Also consider paying a portion of the target incentive for almost-there performance (from our example above, you could reduce the payout by $500 for every day late, for example).
The possibilities are endless, but the principles are few.
I suggest the following:
1. In order for incentives to really drive behavior, they need to include both an element of risk (they would earn less than their full market value if they didn't earn the incentive) and potential for upside (they have an opportunity to earn more than their full market value if they beat their goals).
2. In addition, the incentive opportunity at target (for at-goal performance) should comprise at least 15%, and probably more like 20-25% of their total compensation. Moving to this sort of pay mix isn't something to be done all at once -- gradually over time is probably best -- a value closer to 10% of base as an incentive opportunity in the first year would be a good place to start. Then in future years, base increases could be withheld to fund a more meaningful incentive opportunity.
3. Identify the measures and mechanics of the plan. If the incentive at target is $10k per year, and if a typical Production Lead is responsible for 5 projects per year, then the "plan" could be a simple as $2000 for each project completed on-time and on-budget, payable following customer sign-off. Consider adding some upside in the form of additional payments for savings vs. budget (e.g., $1000 for each $10,000 in savings) -- but be careful about what behaviors are rewarded when choosing this path -- you don't want to jeopardize quality. Also consider paying a portion of the target incentive for almost-there performance (from our example above, you could reduce the payout by $500 for every day late, for example).
The possibilities are endless, but the principles are few.
Friday, June 06, 2008
Can the role-based principles that apply to sales compensation design also apply to variable pay plans for non-sales roles?
Role-based incentive plans are used to motivate and reward those who have a direct effect on company financial results, in both sales and non-sales roles. Keep these key principles in mind when designing a role-based plan:
1. Pick measures that are linked directly to income generation for the company (e.g., revenue, units sold, margin) rather than activity level (e.g., number of calls).
2. Pick as few measures as possible to cover the primary accountabilities of the role. One or two would be a good number for a newly-instituted plan. Three might be OK. More than three would have to be well-justified as it dilutes both the message communicated by the incentive plan and the payout value of accomplishing any of them.
3. Design the plans with line leadership's involvement so that they introduce them with a message like, "Here are our new incentive plans. We are thrilled to share them with you because we believe they will significantly increase both your income and that of the company. Let me show you how . . ."
4. Provide great materials to communicate the plans -- since the reason you're doing it is to motivate and excite the eligible employees.
5. As soon as you have an idea of what the final design may be, start planning for accurate and timely administration of the plans and great reporting. You risk losing much of the motivational value if employees don't see a frequent and easily understood connection between their results and their earnings.
1. Pick measures that are linked directly to income generation for the company (e.g., revenue, units sold, margin) rather than activity level (e.g., number of calls).
2. Pick as few measures as possible to cover the primary accountabilities of the role. One or two would be a good number for a newly-instituted plan. Three might be OK. More than three would have to be well-justified as it dilutes both the message communicated by the incentive plan and the payout value of accomplishing any of them.
3. Design the plans with line leadership's involvement so that they introduce them with a message like, "Here are our new incentive plans. We are thrilled to share them with you because we believe they will significantly increase both your income and that of the company. Let me show you how . . ."
4. Provide great materials to communicate the plans -- since the reason you're doing it is to motivate and excite the eligible employees.
5. As soon as you have an idea of what the final design may be, start planning for accurate and timely administration of the plans and great reporting. You risk losing much of the motivational value if employees don't see a frequent and easily understood connection between their results and their earnings.
Do you have any tips on developing a business lead incentive program for a non-sales employee?
Companies typically use a referral fee as the vehicle to pay a non-sales employee who identifies an opportunity, refers it to a sales person, and it closes and becomes new business for the company. Lead referral incentives can be great to motivate the rest of the company to feed good leads to sales, similar to bonuses offered to employees who identify an external candidate for an open position. Here are a few guidelines to maximize the effectiveness of your program:
1. Offer a meaningful reward, but not one that will encourage non-sales people to focus so much on this earnings opportunity that they neglect their key accountabilities. For example, if the eligible employee has total compensation without the lead bonus of $50k/year, then an award of $100 - $200 for a lead that turns into business would be about right (assuming their opportunity to hand off these leads would come up only a few times per year, and the deal value is such that the referral fee is affordable).
2. Start the program for a limited time – six months or a quarter for example. This gives people a sense of urgency to find some leads, and also gives you a chance to adjust if it isn’t having the results you want. You can always declare success and extend it.
3. Only pay the award for results that hit your income statement. If you pay for leads, you may get a lot of leads. If you pay for closed deals resulting from leads, your lead quality will be better.
4. Watch for any pattern that would indicate that suddenly all leads have come from an eligible referral source. Some companies have had the experience that, when such an incentive is offered, it appears that there is an attitude that someone may as well get the referral bonus so let’s be sure to code someone to get it every time.
5. A few months into your program, check with your sales people about the quality of the leads they are getting. Be sure you are clear with your referrers about what constitutes a good quality (well-qualified) lead. It will make everyone’s efforts more productive and the whole program more satisfying.
1. Offer a meaningful reward, but not one that will encourage non-sales people to focus so much on this earnings opportunity that they neglect their key accountabilities. For example, if the eligible employee has total compensation without the lead bonus of $50k/year, then an award of $100 - $200 for a lead that turns into business would be about right (assuming their opportunity to hand off these leads would come up only a few times per year, and the deal value is such that the referral fee is affordable).
2. Start the program for a limited time – six months or a quarter for example. This gives people a sense of urgency to find some leads, and also gives you a chance to adjust if it isn’t having the results you want. You can always declare success and extend it.
3. Only pay the award for results that hit your income statement. If you pay for leads, you may get a lot of leads. If you pay for closed deals resulting from leads, your lead quality will be better.
4. Watch for any pattern that would indicate that suddenly all leads have come from an eligible referral source. Some companies have had the experience that, when such an incentive is offered, it appears that there is an attitude that someone may as well get the referral bonus so let’s be sure to code someone to get it every time.
5. A few months into your program, check with your sales people about the quality of the leads they are getting. Be sure you are clear with your referrers about what constitutes a good quality (well-qualified) lead. It will make everyone’s efforts more productive and the whole program more satisfying.
Thursday, June 05, 2008
Do you have any experience/insight into draw against bonus in the software industry?
If you referring to a bonus plan that is paid at year-end and is available broadly across the company to people in leadership and technical roles, then you should know that many technology companies do pay more frequently than once/year. Many pay quarterly. The question of whether the payment is a “draw” or a payment for year-to-date results may be one of semantics.
Some technology companies pay quarterly for results that quarter. In this case, each quarter stands alone and there is no concept of a draw.
Some pay quarterly as long as year-to-date results meet certain criteria – this version could be considered a draw in the sense that the plan design is an annual plan with a quarterly payout mechanism. Usually any accelerated over-target payout is reserved for year-end when the total year results are available and overall over-performance can be verified.
I have assumed here that you are not asking about sales compensation plans, where draws are more common. These are generally offered in roles where sales people have a smaller portion of their total target compensation in a fixed base (less than 60% or so), and a highly seasonal business. For these roles, the draw is needed to keep cash flow stable during the “off season.”
Some technology companies pay quarterly for results that quarter. In this case, each quarter stands alone and there is no concept of a draw.
Some pay quarterly as long as year-to-date results meet certain criteria – this version could be considered a draw in the sense that the plan design is an annual plan with a quarterly payout mechanism. Usually any accelerated over-target payout is reserved for year-end when the total year results are available and overall over-performance can be verified.
I have assumed here that you are not asking about sales compensation plans, where draws are more common. These are generally offered in roles where sales people have a smaller portion of their total target compensation in a fixed base (less than 60% or so), and a highly seasonal business. For these roles, the draw is needed to keep cash flow stable during the “off season.”
When should commission rates decrease, and why?
We generally recommend that rates decrease at a very high level of performance, well above goal. And the decrease should continue to hold the rate above the "base rate" (immediately below goal rate).
I agree that this is not always appropriate, but should be considered when:
1. The plans are goal-based and goal setting is "loose" so that some people achieve, for example, 200% of the goal. In this case, the high level of achievement could be due to a bad goal.
2. The sales people sell very large deals, which could tend to make performance "lumpy." Often times these deals are closed with help from senior leadership in the company, and often also at a lower marginal profit. While it may be harder to close a $4M deal than a $2M, it's probably not twice as hard (and it may not be worth twice as much to the company).
3. The company has a history of capped plans. Deceleration is always much preferable to caps.
The other philosophical principle here is that you want to put as much money as you can right above goal so that the reward for getting to and beyond goal is the opportunity to live on a wonderfully accelerated slope. In fact, it's great to put so much money there that the company would not choose to afford it indefinitely. So when you do decelerate, the rate is still quite attractive. This will serve to pull your OK performers up and over goal without causing unaffordable windfalls in comp.
I agree that this is not always appropriate, but should be considered when:
1. The plans are goal-based and goal setting is "loose" so that some people achieve, for example, 200% of the goal. In this case, the high level of achievement could be due to a bad goal.
2. The sales people sell very large deals, which could tend to make performance "lumpy." Often times these deals are closed with help from senior leadership in the company, and often also at a lower marginal profit. While it may be harder to close a $4M deal than a $2M, it's probably not twice as hard (and it may not be worth twice as much to the company).
3. The company has a history of capped plans. Deceleration is always much preferable to caps.
The other philosophical principle here is that you want to put as much money as you can right above goal so that the reward for getting to and beyond goal is the opportunity to live on a wonderfully accelerated slope. In fact, it's great to put so much money there that the company would not choose to afford it indefinitely. So when you do decelerate, the rate is still quite attractive. This will serve to pull your OK performers up and over goal without causing unaffordable windfalls in comp.
Wednesday, June 04, 2008
What are the advantages and disadvantages for paying for activities vs. paying for results?
Some sales comp plans pay for activities instead of, or in addition to, paying for results. What does your comp plan pay for?
In designing a sales comp plan, we strongly recommend paying for results, financially measurable results (as opposed to activities). Sales compensation, to be really motivating, generally involves significant cash and upside -- and you want to be sure that those payouts are rewarding sales people for results that more than cover the money to be paid.
With that said, other great measures besides just sales/bookings/revenue are often used, generally they have to do with the quality of the sales dollar. Some sales dollars may be more valuable to your company than others -- like sales of more profitable products or services, or sales of strategically important new products, or sales into an important targeted industry segment.
Also, sales over goal are generally more lucrative for the sales person than those below goal. And consistent sales performance is often valued over sporadic sales performance. These are just a few of many alternatives to just paying on sales. Picking the right one is all about aligning the rewards with what is most important to the success of the business.
In designing a sales comp plan, we strongly recommend paying for results, financially measurable results (as opposed to activities). Sales compensation, to be really motivating, generally involves significant cash and upside -- and you want to be sure that those payouts are rewarding sales people for results that more than cover the money to be paid.
With that said, other great measures besides just sales/bookings/revenue are often used, generally they have to do with the quality of the sales dollar. Some sales dollars may be more valuable to your company than others -- like sales of more profitable products or services, or sales of strategically important new products, or sales into an important targeted industry segment.
Also, sales over goal are generally more lucrative for the sales person than those below goal. And consistent sales performance is often valued over sporadic sales performance. These are just a few of many alternatives to just paying on sales. Picking the right one is all about aligning the rewards with what is most important to the success of the business.
How do you design sales comp plans for sales roles that have to do two different things well?
When sales people have competing objectives.....imagine the following scenario:
A company has two different products for banks: core processing systems and lending products. For the two products, there is a large difference in the incentive opportunities. For example, the incentive opportunity on $1.5M processing system sale is $75,000 (5% commission). The incentive on a lending product sale may be only $5000.
Question:
How do you motivate the right focus and results, limit “elephant hunting," and keep both product lines productive?
Several possible approaches:
1. If there are skilled "elephant hunters" on staff, a role could be carved out for them that tolerates, even rewards that behavior. You would probably then also need a designated lending-only role. So... split the roles and play to strengths.
2. If you want to have one person cover both, and if it is indeed essential that they do both, then you need an "And-type Comp Plan" -- a plan where they have to do both to really make the sweet money. And that means linked components.
Linkages can be as severe as
(a) No over-goal payout until $xx in lending products are sold, or
(b) Reduced commission rates on both until both reach some threshold.
Linkages can also be as gentle as
(a) Hold back 10% of core commission until a threshold level of lending product is sold (something like 75% of goal), or
(b) Add 10% additional to core commission once lending products are at or above goal, or
(c) both (a) and (b).
A company has two different products for banks: core processing systems and lending products. For the two products, there is a large difference in the incentive opportunities. For example, the incentive opportunity on $1.5M processing system sale is $75,000 (5% commission). The incentive on a lending product sale may be only $5000.
Question:
How do you motivate the right focus and results, limit “elephant hunting," and keep both product lines productive?
Several possible approaches:
1. If there are skilled "elephant hunters" on staff, a role could be carved out for them that tolerates, even rewards that behavior. You would probably then also need a designated lending-only role. So... split the roles and play to strengths.
2. If you want to have one person cover both, and if it is indeed essential that they do both, then you need an "And-type Comp Plan" -- a plan where they have to do both to really make the sweet money. And that means linked components.
Linkages can be as severe as
(a) No over-goal payout until $xx in lending products are sold, or
(b) Reduced commission rates on both until both reach some threshold.
Linkages can also be as gentle as
(a) Hold back 10% of core commission until a threshold level of lending product is sold (something like 75% of goal), or
(b) Add 10% additional to core commission once lending products are at or above goal, or
(c) both (a) and (b).
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