What is considered "best practice" in how we would recognize and reward sales managers for covering open districts?

I think the question of appropriate arrangements for sales managers with open positions (/territories) needs to be handled differently in different situations:

For sales managers who are expected to keep their territories fully covered, maintaining a pipeline of candidates and connections, it makes sense to expect them to continue to produce sales out of an open territory, which would mean no quota adjustment, extra credit, etc. Their ability to meet their quota would almost certainly be impaired by an open territory, but then they haven't maintained a full staff - so some penalty is appropriate.

For sales managers who are not expected (or allowed) to hire staff to support an open territory, and who expect to fill the open position within a few months (3-12 perhaps), they could either cover the open territory using others from their team, or cover the open territory themselves.

If they cover the open territory using others from their team, then their team members should receive credit and compensation for the sales to the assigned opportunities (or zip codes) outside their territory, and the manager may or may not need to have a quota adjustment (depends on how long the condition is expected to persist).

If they cover the open territory themselves, then the manager could receive individual contributor type compensation for sales into that territory, but probably at a reduced rate (50% of that generally paid to individual contributors?), and perhaps a somewhat reduced total team quota (again depending on how long the no-hire situation is expected to continue).

For sales managers who are expected to downsize their staff until market conditions change (a year or more), reassigning territories among their team members to "absorb" the open territory is probably the right approach. The quota should be adjusted as needed to reflect the market conditions that led to this change and reasonable productivity expectations for the newly reduced team size.

Do sales incentives actually motivate people for the long run?

Regarding whether or not incentives actually help at all, the best piece I've read on the subject is Rewards and Intrinsic Motivation by Cameron and Pierce. It's dense and academic in tone, but I've read the whole thing and found that the key points relevant to sales compensation design from the book are the characteristics of effective rewards. According to Cameron's and Pierce's research, incentives and rewards are most effective when…

1) Used for the benefit of the employee (not just to create benefits for the employer)

2) Focused on challenging activities (not on activities that employee sales people already like to do)

3) Tied to specific reasonable, objective, and attainable standards of performance

4) Accompanied by celebration of significant successes by the organization.

In addition they note that, "Reward systems that are discretionary, subjective, or based on pleasing the people in charge are often seen as unfair and coercive. What is 'good' today may not be good enough to earn a reward tomorrow."

There is substantial written work questioning the effectiveness of incentives in creating sustainable healthy motivation. This book takes this question on, focusing mostly on the education and compensation application of the principles.

Are companies adjusting sales comp plans due to the slow economy?

From our experience, I would say that most companies are making some kind of adjustment due to the economy. If your expected total sales are down, you have several options that we've seen recently:

1. Reduce quotas and...
a. Hold commission rates constant (sales people would then earn less when they hit quota than they did when quotas were higher)
b. Raise commission rates (to keep sales people whole year over year)

2. Hold quotas constant, along with commission rates and...
a. Add earnings opportunities in the form of MBOs or SPIFFs to keep sales people whole and reward them for building for the future (training/preparation to sell complex products or improve selling skills, introductions to prospects who can't necessarily buy this year, but maybe next year,...)
b. Reduce the number of sales people so that fewer people cover larger territories and those remaining can actually have productivity and earnings levels similar to prior years (at a cost that is affordable to the company)
c. Make no changes and expect sales people to under-perform and under-earn, but be ready when the market comes back with sales people to serve your full market potential

Among our clients, we are mostly seeing 1.a. and 2.b. - with ample discussion of the other options.

New Business vs. Account Management roles in Professional Services

In professional services, do you compensate differently in your sales plans for "new" business vs. maintaining an account to incent your best "prospectors" to develop new business? What are the best and worst elements of plans you have seen that do this?

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I'd say that your best course would depend on both the company strategy and the way you have defined your selling roles.

If your strategy is focused on penetration of existing accounts, then the sales you most value might be those in your current accounts (this tends to be true with mature companies who have some kind of relationship already with most of their key prospects).

For the majority of our clients, new business is very important. You'll have to be clear about what counts as "new" - a new "logo" (new company name...), a new buying entity (maybe a new division/location in an established customer could be counted as new), a new service offering (generally one that does not replace an older legacy service they have been buying). Generally "new" business (however you define it) takes more time and effort to win than renewal or penetration business, and for that reason you'll need to reward for it at a higher level in order to keep sales people focused on it.

Another approach successfully employed by companies with enough sales people to do this is to separate "Account Management" from "New Business Sales" so that different people/teams are responsible for those different selling activities. This may not be practical in a small sales force - but once a company achieves enough scale to operate this way it allows the focus of those who love the new business hunt to be where they do their best work, and those who love the longer-term relationships and more nurturing selling role can focus on managing and growing existing accounts. If you do end up splitting the role into Account Managers and New Business Hunters (sometimes called Sale Executives), you will probably want to have different pay plans for those two roles (e.g., quota bonus with a threshold and significant acceleration for over-quota performance for Account Managers; first dollar commission with lower quotas and less acceleration for New Business Sales).

What percentage of annual gross revenue should come from new business?

I need benchmark data on what percentage of annual gross revenue should come from new business and should be allocated to sales force compensation. For example, if in insurance or other annuities there is a commission on first year premiums only and not on renewal business or a reduced rate on renewals. I assume that the 1st year budget for acquisition is higher than maintaining existing customers, but I am curious is that is really the case or if there are any good benchmarks to use as a reference. Can you help?

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I believe your question is about sales roles with a new business focus when the acquired business generally turns into a long-term annuity type relationship. Examples from my experience include insurance policies, ASP software offerings, software leasing, online test delivery contracts, EDI services, data and voice communication subscriptions. In all these cases, the company most values the acquisition of new business, and counts on the quality of the service delivered to retain it.

In these business models, new business sold earlier in the year contributes more to in-year revenue than that sold later in the year as the revenue is generally recognized monthly. For this reason, much of the incentive design effort may be aimed at rewarding those who acquire significant new business early in the year by measuring "in-year new revenue." Retention is sometimes the job of the new business sales person, but is often assigned to a different Account Manager or Client Services role. If the same person is doing both new business and account management, the total revenue from new business may be very small compared to the total revenue from the existing assigned book (5% - 20% of the total). Often the new business is commissioned (based on new in-year revenue or total contract value), and the retained business is handled more as a quota bonus, with the weight on each component proportional to the expected time allocation.

But to get to your specific question, the budgeted sales comp % revenue is likely all over the place, depending on industry and company stage of growth. In very high margin businesses (software, data services), you are likely to see a higher comp % revenue. Similarly, large deal sellers (deals in the millions, tens of millions and more) would see a smaller percent of revenue as their comp; and small deal sellers (I've seen deal sizes in the thousands of dollars) would earn a larger percent of revenue. And in earlier stage companies you are also likely to see higher comp % revenue. The right comp % revenue is really based on the market value of the job (numerator) and the selling model, which generates a reasonable sales productivity expectation per person (denominator).

How to handle compensating Territory Sales Managers who have additional responsibility to coach and train new hires or poor performers.

So just to summarize your previous company history, you have given base salary increases in the past, however, going forward, the duty will be held on a 1-year rotational assignment rather than an on-going responsibility, so you are seeking an appropriate alternative.

First of all, you are wise to avoid adding permanently to the base salary in recognition of a transient responsibility. My suggestion is to provide a separate incentive compensation opportunity based on the sales results of the person being coached. It should probably be about 20% of their total incentive opportunity if you want them to maintain focus on their primary individual selling job. And it should be structured simply. For example, earn 50% of the target incentive if the "coachee" is at least 80% of quota, 75% at 90%, 100% at 100%, 125% at 110%, 150% at 120% or better. I'm not at all sure the performance range here (80% to 120%) is right for your business - so you should adjust those depending on the aggressiveness of your quotas and the predictability of your business.

The next question is whether or not the coaching incentive opportunity should be in addition to their regular comp plan or carved out of it. If they receive a reduced personal quota in recognition of the time they will need to spend on this, there is an argument for a carve-out (reducing their regular comp plan incentive at target to offset the coaching incentive). But more likely they are top performers with typical/healthy quotas, and this is an added responsibility. If this is the case, then the incentive opportunity should be in addition to the regular variable pay plan.

Reducing sales compensation for bad debt

How do most companies handle sales compensation when there is a write-off for bad debt. Do they charge them back on the cost the company is out, or the gross profit they would have made if the customer paid?

Most of our clients do charge back the sales credit for deals (or portions of deals) that are written off for bad debt. If you are paying based on the sales value, then the sales value is what would normally be reversed. If you are giving sales credit and paying based on deal margin, then the margin value of the deal that was originally credited (or an appropriate fraction of it if the write-off is partial) is what is reversed out of sales credit. The tricky part is whether you reverse either (1) the compensation that was earned on that deal at the time it was credited, or (2) the sales credit for that deal so that it reduces compensation in the measurement period in which the credit is reversed. The right answer to which of these to implement would be based on the detailed mechanics of your compensation plan.

What is the best way to compensate for multi-year maintenance contracts, including Managed Services?

The first question about the multi-year maintenance contracts is whether the role for which you're compensating is a new business role or an account management role. If its primary focus is gaining new business (new name accounts, or as some say "new logos"), and if there is a capable account/project manager to take the relationship once it's established, then you'd like to pay the sales person relatively close to the time of the signing of the contract for the new business. A typical arrangement might be 50% paid once the contract is signed + 50% paid once the service is stable and the monthly/quarterly fees are coming in (perhaps 3 - 6 months later, or based on achievement of a specific milestone). The sales credit which forms the basis for the payment should take into account the annual value of the contract and the contract term. One common approach is to credit 100% of the first year value + 50% of the 2nd and 3rd years, with less or no credit for terms beyond 3 years. In addition, the expected profitability of the deal may also affect sales credit to the extent that the sales person controls pricing and the profit can be reliably predicted. This doesn't address all the issues around upsells, renewals, contract extensions, etc., which would also have to be addressed.

If the role to which you refer is more of an account manager who lands the business only to manage the account and grow the relationship over time, then the ideal measure is recognized margin (the margin value of the revenue recognized). If margin is controversial or hard to measure or calculate on an account by account basis, then revenue may be the better measure (and it is certainly the more common measure for this reason). In this case, the person may be paid based on attainment of a quota customized for their book, or based on growth in the value of the assigned book over prior years (through more volume to existing accounts or addition of new accounts).

What are some best practices for compensating sales-related positions such as Account Managers, Bus Dev Managers, and Tech Sales Support Specialists?

You are asking a question that has challenged many companies and over the 12 years I've been in the field I've seen this pendulum swing all the way to one side and back again. As I often tell clients, "the great thing about incentives is they work, the bad thing about incentives is they work" and often they work so well for one set of positions that the company decides if it is good for the sales force it must be good for the whole company, and before you know it administrative assistants are being paid based on number of emails answered. Banking went through this trend several years ago (you may remember being "sold to" by your teller when you were just trying to make a deposit). There was a time when banks considered just about every employee a sales person and had them all on some type of sales incentive plan.

The roles you ask about (account manager, business development manager, technical sales support specialists, and sales engineers) are more in the gray area in terms of eligibility for "sales-type" incentive plans. I would need to know more about the exact job descriptions before I could give an opinion about whether or not the role should be on a sales incentive plan or a corporate-wide plan based on overall company performance as Account Manager (which is a very common selling role title with best-practices all its own in terms of incentive design) may not mean to your company what it means in other companies.

That being said, here is some general guidance that may be of help. If performance in the role is OBJECTIVELY MEASUREABLE on an individual basis and the result of that performance has SIGNIFICANT BUSINESS IMPACT then you should seriously consider investing the time and expense in developing a customized incentive program. If you can't objectively measure individual (or small team) performance and/or the performance impact has limited business impact, then you are better off leaving them on the corporate-wide plan. Developing sales-type incentive plans (often referred to as customized plans for non-selling roles), takes significant time and effort and can be complicated to track and administer. You have to be sure that the resulting change in behavior that you may get from the plan is worth the added administrative expense.

If your Account Managers are individually responsible to manage and grow a defined set of accounts, with objectives such as upselling, retention, penetration, and growth of those accounts then this role should be on a sales incentive plan (but the plan would look very different than plan for a sale reps plan who is out selling widgets every day, and might not use a commission structure at all, but instead use a goal-based bonus approach).
Business Development Managers could be low level lead generators, or could be out closing really large new business deals on their own. My hunch is that it is likely this role would be on a sales incentive plan, but the exact nature would depend on the accountabilities and expectations of the role.

Technical Sales Support Specialists (if this role is similar to what I've seen elsewhere) are often paid using a less variable pay mix (80/20 or 85/15) and are paid based on the results of the sales reps they support. This is also the case for Sales Engineers, although these roles often support the entire sales organization w/o being directly aligned to a team of reps, so their individual contribution becomes even less clear. For these two roles, the line starts to blur between corporate plan and sales plan, and often you end up with a hybrid. Part of their plan is like the corporate plan, but there may be a portion that is tied to the overall performance of the sales team as a whole or the sales region or team they support. There can also be a small individual performance modifier, but this often based on subjective manager evaluation.

How should I go about switching from an annual payout to a quarterly payout?

While it is generally better to pay as close to the selling event as possible, it is not always the case that more frequent payouts are better. All one needs to do is consider the most extreme circumstance (daily incentive payments ?!) to see how you can have too much of a good thing. When companies are considering switching to a more frequent pay cycle, there are several factors to consider:

1) Is the pay mix changing at all? Often more frequent payments can be a way to alleviate some of the sting of a change to a more variable pay mix (if you have had to make reductions in base salary, increasing the frequency of incentive payments can help your reps meet their regular financial obligations).

2) If the pay mix is not changing, what impact will smaller more frequent payments have on your reps' perception of the incentive program? Will the amount paid still be meaningful or will it get sucked into their regular expense budget and not be as noticeable as a larger lump payment would be?

3) Can your company handle the increased administrative burden of more frequent payments, and what are the limits? Most companies would not find it cost-effective to make daily incentive payments, although I have known some to make weekly payments (against my advice).

4) How will more frequent payments change the reps' behavior - are there any unintended consequences and can these be alleviated through selection of the appropriate design option?

On point 4, there are typically two choices for performance period when switching to payments that are anything other than annual in frequency: discrete and year-to-date (YTD). In all our examples below we will assume the change is from annual payments to quarterly payments, as per the initial question. However, the same logic could work for monthly payments that are on an annual, semi-annual, or quarterly performance period.

We'll start with discrete periods first. In this method each incentive payment corresponds with the end of a performance period, and the next payment starts fresh with the next period. There is no carry-over of performance from one period to the next. This type of plan is common in highly transactional, high frequency selling environments where sales are made regularly and there is little ability for the rep to game the timing of sales crediting. If the rep can control when sales are credited, you will likely see peaks and valleys in performance from one period to the next, where reps are pulling or pushing sales to maximize earnings. If your plan has thresholds (that require a minimum performance before payment is earned) and escalators (where payment increases for increased performance) and you are using discrete periods, you are very likely to experience some of this "porpoising" as reps figure out how to get the most bang for each sale. The end result of this behavior is an overall annual performance that may be below target, while the rep has been able to earn above target pay by using the escalators to his/her advantage in high volume periods. If there is little possibility of this behavior, using discrete periods is the most straightforward mathematically and often the most motivating in the short term for the reps.

The most common solution for this problem is to use a YTD mechanic instead. This requires that performance be tracked against a longer performance period and that each payment is calculated against an annual YTD target incentive amount as well. While the mathematics on this can be a bit daunting at first, once reps and managers understand that pay is not "lost" in a bad period, but may be earned back, they quickly see the advantages. In a typical YTD approach, an annual quota is divided into four even amounts as is the annual target incentive. We'll use $1,000,000 as the annual quota and $10,000 as the annual incentive. A quarterly YTD approach would work as follows:

Q1 Quota: $250,000
Q1 Target Incentive: $2,500

Q2 Quota: $500,000 (Q1 + Q2)
Q2 Target Incentive: $5,000 (Q1 + Q2)

Q3 Quota: $750,000 (Q1, Q2 + Q3)
Q3 Target Incentive: $7,500 (Q1, Q2 + Q3)

Q4 Quota: $1,000,000 (full year)
Q4 Target Incentive: $10,000 (full year incentive)

While there are many ways to arrive at the amount earned as a percentage of target, the common mathematical element critical to the success of a YTD plan is to calculate the percentage of the YTD target incentive earned and then subtract any prior payments already made. This creates the "true-up" which ensures that sales which may fall later in the year still "count" toward the reps overall annual payment. Those who are mathematically astute will quickly see there is a potential for ending the year in arrears using this method. Therefore we recommend capping Q1-Q3 payments at 100% of target, and saving any payments for performance above 100% until the full-year results are in. That way a strong start to the year and weak finish will be less likely to create the need for a rep to "pay back" money already paid.

There are some variations on this approach, which combine different aspects of a discrete plan and a YTD plan. Here are two:

1) Use discrete quarterly periods for payments up to 100% with a year-end bonus that rewards for any full-year performance above 100%. This avoids the need to do the true-up calculation which causes some organizations communication difficulty. It does not, however, eliminate the potential for reps to play with the timing of sales to increasing their earnings, but it reduces it by keeping all the "upside" until the end of the year. As with the traditional YTD approach this also acts as a retention tool for anyone running above 100%. Should they leave prior to year-end they will be walking away from any upside the plan may provide.

2) Software companies sometimes use YTD quotas while paying using a discrete quarterly target incentive. This encourages more balanced performance throughout the year, but puts a pretty high premium on the accuracy of quarterly quotas. If business is steady and/or seasonality is highly predicable, this may be an effective way to get even performance throughout the year (as there is no true-up opportunity, it really does matter more WHEN the sale happens, not just that it happened sometime during the year). There is another advantage to this method in that it puts more emphasis on sales that happen earlier in the year. If a rep can "fill the bucket" as quickly as possible in the year, he/she will have the best chance of being in the "sweet spot" of the plan design (where the escalators are the steepest) for each quarterly payment period. As there is no true-up, there is also no chance of ending the year in arrears. There is, however, the possibility that a rep who starts out slow but ends strong will make less money than a rep who had a very strong start but ended weak. Consider which outcome is better for your business when selecting between the traditional YTD approach and this variation.

Words of caution:
It is common for incentive plans to include hurdles and modifiers. These can become especially challenging when dealing with the traditional YTD plan (using a true up calculation). You must be very cautious to do any modifier calculation AFTER the YTD calculation has been completed and you have the final quarterly payout calculated. Whether the modifier increases or decreases the quarterly payout, you must include the ORIGINAL quarterly amount (prior to modifier) when calculating your next quarter's YTD payout. If your plan has complex calculations including modifiers, hurdles, and any other type of linkage between elements (especially if they are using different performance periods), you should make the choice to use a YTD calculation very cautiously. If it is important to your business to go this direction, you may need to change some of the other elements of your plan design to ease the calculation complexity and ensure your reps have a clear understanding of how they will get paid.

What percentage levels for sales manager commission overrides are appropriate?

The consultant answer is "it depends" but unfortunately that really is true this time! For starters, I'd ask how much time the manager is spending managing vs. doing. You want to allocate his/her incentives accordingly. If 75% of his/her time is spending being a player, then 75% of pay should come from his/her individual performance (on the sales rep plan) and the other 25% should come from duties relating to managing the team (coaching).

Overrides can be problematic as a way to pay a sales manager, although they are very common because they are easy and economically straightforward (just take the % you can pay in total for a sale and split it up between reps and managers - your CFO will love the economic simplicity and direct alignment to profits). The problems arise because the manager ends up with a little "empire" of people that, if they are good, the manager will not want to have transfer to any other division even if that is best for the employee and the company. Also, managers can get "fat and happy" on an override plan without too much accountability. It is better to set a goal for the team's performance and hold the manager to attainment of that goal rather than give them a % of the total team's sales. Also, your managers likely have higher base salaries (less variable pay mix) than the reps, so you may not need to pay them as much (or as soon) from an incentive standpoint. It's not uncommon to pay managers quarterly when their reps are paid incentives monthly. However, this varies from industry to industry and some industries are "locked in" to paying managers monthly on a plan that looks and feels much like a sales rep plan but is based on overrides.

The other thing to consider is a "Coaching Effectiveness" bonus whereby the manager is paid for the % of reps on his/her team who achieve target performance in their key financial metric. This encourages the manager to work with all members of the team to manage everyone to a higher standard (or get rid of the ones quickly who can't get there). A plan based purely on an override formula can make a manager a lot of money based on the performance of one superstar on his/her team without pushing the manager to work with everyone on the team. I almost always recommend the inclusion of a 20% element for Coaching Effectiveness for my clients and universally they report that this is a great measure and fills in a missing link in the sales manager's incentive plan.

If you do want to calculate a comission rate for an override plan (in spite of my warnings above) then you do that much the same way you do for the sale rep plan. You need to approach it from 2 directions. First, how much can the company afford to pay as a % of revenue or profit and how should that be allocated among reps and managers and second, how much do you need to deliver in pay at target performance to attract and retain top sales managers. Often we start with the second question, which gives you the numerator ("our managers need to make $50K in incentive pay at target performance"), then ask productivity questions to determine the denominator ("and we expect a good manager to generate $10M"), and the result is a starting point for a commission rate (in this case 0.5% or 1/2 a percent). Then you check this against the answer to the first question and see if it lines up with what is feasible to pay and still generate the requisite profit for the company. If it doesn't, then you may need to adjust the assumptions you used to generate the numerator and the denominator. However, this is often the point in a design discussion where some compromise is needed (or a change in the staffing model - maybe for $50K the manager needs to manage 15 reps each generating $1M rather than just 10 - which which case his rate would now be 0.33%; or maybe the reps need to generate $2M each instead of $1M). Just be sure you model out the results, factoring in the reps' commission payments as well as the managers' to make sure your plan is affordable and will help you continue to attract and retain top talent.

Are sales organizations utilizing more attainment thresholds in their sales compensation plan designs as the result of the current recession?

Among our clients I would say that companies are about as likely to lower thresholds as to raise them.

The logic for raising thresholds in this economy would be to protect profit. The logic for lowering them is that we are not nearly as confident in our quota setting accuracy in this economy - so while we "knew" that 70% of quota was unacceptable performance last year, this year we're not so sure where the unacceptable attainment will fall. (And, by the way, that is the point at which the threshold is often set - the level of performance below which the sales person is clearly not performing acceptably, and likely to be on formal notice.)

How do you go about incentivizing Solution Sales?

We have worked with several clients where solution selling is (or is becoming) a priority. By “Solution Selling” you probably mean a sale that:

• Incorporates several product or service offerings tailored to meet the specific needs of the prospect
• Involves more than the individual sales lead including multiple specialists involved to match company capabilities to the needs of the prospect
• May be one of relatively few large sales closing in a quarter or year (the sales person is managing a small number of large opportunities, not a large number of small opportunities)
• Is a strategic buy for the prospect, with the opportunity to become more of a partner than a vendor over the long run
• Requires an understanding of both your company’s offerings and the business problems they solve, including the basis for an ROI type justification for the prospect’s investment
• Can be months or quarters in time to close (not weeks or months).

There are probably other characteristics that matter – but these are the hallmarks of the solution sale. The person executing this sale well is usually experienced, well-educated and highly compensated for an individual contributor sales person. They typically have a substantial base salary, with meaningful upside available when those large deals close. They also typically have significant influence over the profitability of the deal and/or the longer term relationship through a combination of pricing, product/deal configuration, and real value creation by matching capabilities with prospects’ needs. For this reason, they often are measured on deal profitability and/or account profitability. Typical plan design characteristics include:

1. Quarterly payouts (vs. monthly) in recognition of the longer sales cycles
2. Commission type plans (% of what is sold), as opposed to quota bonuses – because the deals are large and infrequent, so goal setting accuracy would be difficult
3. Capped at a deal level (not in aggregate) at a very high payout, perhaps 1 to 2 times the base
4. Profit/contribution measures (vs. bookings or revenue), perhaps in addition to bookings or revenue.

How often should sales people be paid?

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.

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.

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:

• 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.

A percentage of each order/circulation

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.

A fixed sum for the first order/circulation

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.

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.

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.