In my previous post, I listed some questions related to general company compensation plans. This post is about sales-specific commissions and compensation. It does not delve into the intricacies of every factor involved, though. This is a primer on commissions from my perspective with a few brief examples at the end of the post.
First, let’s look at this question: “Should everyone in the company be eligible for a commission?” Yes. Everyone working at the company has an interest in its continued operation. People may not always think of the company and its well being, but once a person has a taste of the red meat of commission, a new desire is known. You could use a commission as one element in a strategy to convert people from thinking “I have a job” to “I’m building a career at this company”.
The sales team should happily give up a portion of its commission to the person who helps bring in new revenue.
Next, let’s look at the make-up of those involved in a sale and how they might be commissioned. Typically, a professional services firm will have various “levels” of consultants and no true “all I do is sales” people. Everyone is supposed to bring in business, but its the senior partners who are really in charge of this process along with other management responsibilities. These senior execs do not often handle the technical work performed though. We now have a situation where the following can occur:
- Mr. Big lands an account while golfing with some club buddies
- Mr. Next in Line scopes the work and performs the grunt work involved in contracting the account
- Messrs. Just Hired and Just Got My Visa actually perform the work contracted.
So here are four people who should get some form of commission. These people also require administrative support and I believe everyone should get a piece of the contract if his part is successfully executed.
Here is what I’d like to see in a new project, new client deal:
|Mr. Big (the Hunter)||10% gross profit (main annual comp comes in the form of profit sharing)|
|Mr. Next in Line||3% gross profit (higher base salary than those lower on the totem pole)|
|Messrs Just….||5% gross profit if its a profitable project (see below)|
|Administrative Support||3% gross profit split amongst all support staff|
|Bonus Pool||Everyone splits extra gross profit if the project comes in underbudget and the client is extremely happy|
These are examples related to a firm that has recurring business and does not desire to grow like a weed. The commissions are designed to give everyone a piece of a contract.
The thinking behind this plan is that Mr. Big is going to continue to look for deals, Mr. Next in Line wants Mr Big’s cash comp and will learn the ropes of contracting prior to promotion, and Messrs Just will try their darndest to make it a profitable project. Administrative support should seek to provide as much assistance possible and keep the number of their staff low so the commission is split with fewer people.
If this was not new project, new client, but rather new project, existing client then I would make sure to compensate the person who brought that client in to the firm originally, too, even if he is no longer servicing the client. Why? Because everyone should benefit from thinking about new sales. The commission should only be about 1-3% if he is no longer working with the client.
Next, what factors really affect the achievement of new revenue? Is it the number of appointments? Is it referrals from existing clients? Make sure to factor this into your compensation (not commission) plan. If its number of new appointments, then reward the person who is setting the most new appointments.
Next, what type of business do you want people to focus on? New sales, repeat sales, sales of things, sales of services, local sales, sales in an industry vertical, etc… Make sure you grant greater commission on the types you want and make it clear why. I met a guy who actually paid less on larger deals. Um, yeah, let’s keep the deal size small…
Next, do you need “pure hunters” — those people who only bring in new leads and close business deals? This is a sticky subject with some firms. The reason why is because they often make the most money and other staff perceive them as not working as hard since they are out of the office a great deal. This is a results-only position. Effort does not matter. I like the idea myself, but it is very difficult to do in a professional services firm where relationship building is critical. If you can do it, your company will reap the benefits of a successful hunter and rich client relationships.
(For those of you interested in the hunter’s perspective this video is a funny take on selling activities.)
Other factors to consider with commissions:
Do you pay a pure sales person full commission if a project he sold turns out to be a money-losing deal?
How long do you pay a commission? For the life of the account or for a finite time period?
Do you pay commission when a contract is signed or after the project is complete and profitable?
What do you do when a client is late in paying an invoice?
Brief Commission Examples
Small Company interested in attracting new clients
pay sales more for new clients; pay support for retaining business
Direct sales software firm interested in its stock price
pay higher commissions on sales of new licenses and support plans, but lower on professional services (this increases revenue without increasing cost)
Small professional services firm (10-50 people)
pay great commissions for new clients
Large professional services firm (over 100 people, but not a behemoth)
pay great commissions on recurring business with existing clients and new projects with new clients
I’d love to hear your thoughts on the idea in this post. If you are interested, I can dissect a real sales compensation plan for a small It services firm to give you an example of the pure hunter compensation.