Your business’ future success depends on the decisions you make at pivotal points in its growth. One of these important decisions is how to compensate your sales team. Getting the compensation right is key for maximizing your sales, attracting high-caliber talent, and motivating your reps. A well-written comp plan rewards exactly the behavior you want from your team – it gives you a set of knobs and dials you can tweak to get the best results. A poorly written comp plan, however, can leave you paying out a lot of commission for very little value for your business. Whether you’re thinking about When to Make Your First Sales Hire (the topic of my last blog), or you’re about to ramp up your sales team, you have to give careful consideration to your compensation strategy.
The sales profession is as old as civilization itself. From the ancient Egyptian cotton merchants to today’s high-tech sales organizations, there are a million different ways to sell things. Selling, in general, is not rocket science, but there are several styles of selling and compensation options for various business models.
So, what is your business model? Are you selling products? Services? A combination of the two? Is this a one-time transaction or a monthly recurring service? Not every type of comp plan will work for every type of sales. Whether you’re trying to get new business or upselling existing customers should also be reflected in your comp plan. For purposes of this blog, let’s focus on how to compensate sales reps that generate new business in the monthly recurring services model.
In the recurring services model, you’ll often find the sales roles of the Hunter, Account Manager, and Appointment Setter, each of which has their own style of comp plan. Appointment Setters, as mentioned in last month’s blog, are a relatively low-cost resource and can be compensated according to the number of appointments they’ve set, along with a bonus component for each appointment that converts into a deal. Hunters – the seasoned bag carriers who go out to meet prospects and close new business deals – are typically compensated in one of these two ways:
- Pay commission equal to the first month or two of whatever they sell. This is a really simple model that many Managed Service Providers (MSPs) follow. The sales rep profits immediately from closed deals, while the organization sees returns after that initial 1-2 month investment. The primary benefits of this model are its ease of administration and clear focus for the sales rep on acquiring new customers.
- Pay commission based on achievement versus a sales quota. This is typically the model for larger teams, as it gives executives more “knobs and dials” with which to control the broader sales effort. The sales rep is compensated monthly or quarterly as they reach their assigned MRR (Monthly Recurring Revenue) quota. Accelerated commissions may be offered for products that are especially high margin for the company. There may be additional contests or bonuses awarded for particular wins, such as when getting a customer to prepay for a year or more of monthly services. The quota-based comp plan is harder to manage – there is a lot more administrative effort required, and it takes a seasoned sales executive to set targets with the right balance between aggressiveness and achievability.
If you have a jack-of-all-trades salesperson managing multiple aspects of generating new business, upselling to current customers, and sharing account management responsibilities, compensation becomes more complex. I’ll talk about what works well for this type of situation, as well as compensation for the Account Manager role, in a future post.