In my last post which summarized the session I ran at the Momentum Summit, I discussed some of the issues involved in scaling up the sales effort. In this first in a series of follow-ups, I'm going to cover things to think about in setting up a sales commission plan.
All of my sales management experience has been in high-tech start-ups, including Digital Lumens, which is a mixture of high-tech and cleantech. I don't think that my advice would necessarily apply outside of that environment.
First of all, why do sales people get commission? Everyone who works at a start-up is expected to work hard, and everyone gets measured by results. Engineers don't get paid by completed working software modules. Support people don't get paid by completed support calls. They work hard and work long hours. Why do sales people get aggressive incentive compensation, and the others don't?
I don't want to get overly philosophical in this post because some people may argue that everyone should get incentive compensation. And, in some sense, it's traditional that sales people earn commissions. The best sales people expect it. So, it can't be avoided.
The one thing about sales that doesn't apply to most other positions is that it can be measured by the numbers. Trying hard, making lots of calls, doing lots of demos, working long hours and asking for lots of orders doesn't count. What counts is getting POs that the company accepts (no crazy terms or pricing, etc.). So, sales, in one sense, is the easiest to measure and to be subjected to incentive compensation.
Also, in most sales jobs, your work is never done. There is always one more call to return, one more lead to follow-up on, and one more prospect to check-in with. The incentive compensation keeps you motivated to continue to chase down every opportunity.
Lastly, the company really needs the sales people to hit their revenue targets. Obviously, everyone's job in a start-up is important. But, once companies get to the revenue stage, measuring revenue vs. plan becomes one of the first things that a Board does. So, the CEO, who feels the heat from the Board if the targets are missed, really needs to know that the salespeople are doing everything they can to hit the numbers.
But, what numbers are they trying to hit? The most important thing about sales compensation planning is to make sure that you are motivating the salespeople to produce what the company needs. In a single product company, it's pretty straightforward. The company needs to generate a certain amount of dollars of revenue, and that is divided up among the sales teams. I'd advocate keeping the sales comp plan very simple so that it can be explained in no more than a few sentences. The more complicated it is, the more likely that the salespeople will find a way to hit their number that doesn't necessarily help the company hit its number. If that's not clear, let me know in the comments, and I'll try to come up with a specific example.
There are two related ways that I like to structure simple commissions. In both cases there is a goal or quota for the sales person. The easiest way to pay the sales person is to give them a percentage of everything they sell up to the quota and then a higher, accelerated percentage on everything over the quota. Never put a limit on what a sales person can earn. If you grossly underestimate the sales potential of your product, rejoice in the fact that the salespeople can sell twice as much as you expected and are making a lot of money this year. In most sales roles I had, I was the highest paid person at the company. And, the CEO was thrilled to pay me!
The second similar way to structure these plans is to identify what a salesperson's on-target earnings level is. If they expect to earn $50,000 in commissions when they are 'on-target', you can structure the plan with a floor (i.e., if they sell less than 50% of their quota, they earn nothing), and an accelerator. Above the floor, whatever share of quota they achieve becomes their share of the on-target earnings they get. Above quota, the accelerator kicks in and they get a higher percentage (i.e., with 110% achievement, they get 120% of commissions).
I like the second method better because I don't like people to get attached to a percentage of sales. As your team and company grows, you'll be splitting territories and readjusting quotas and commission plans. Someone who starts off earning 1% of sales will eventually get less than that. But, if you target them for $50K in commissions, you can always adjust your quotas so that they have a chance to earn that.
There are lots of other topics coming up, including the split of salary vs. commission, how to compensate teams when multiple people work on the same accounts, how to structure sales compensation when resellers are involved, and more. Stay tuned.