Topic: General Posts

Subject: Salesperson compensation
John Marshall
Member: 2004
Posts:3
Submitted on 08-03-10 10:59 am
Message:
We recently promoted a sales manager to full P & L responsibility for the sales operation of a small ($2million) software sales organization. We are looking to pay a base salary with a shared commission on new accounts and a percent of department margin. I could use some suggestions about structuring the full package. Any assistance would be greatly appreciated.
 
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Replies
Jack Heil
Member: 2009
Posts: 1

Subject: Re:Salesperson compensation

Submitted on 08-03-10 11:48 am.
Message:
John, I would stay away from compensation calculations based on gross margin and keep the sales compensation very simple such as based on a percentage of gross sales. In addition, I would be very careful giving a true salesman a fixed compensation salary. I have seen to many highly paid salesmen negotiate a fixed salary and never generate the new sales they are suppose to bring home. I hope this is helpful to you and good luck.
 
Rex Fountain
Member: 2010
Posts: 2

Subject: Re:Salesperson compensation

Submitted on 08-04-10 9:27 pm.
Message:
I would agree with the previous reply, keep the sales comp as simple as possible. A straight percentage eliminates fruitless discussions on actual calculations. One additional additional suggestion if you do agree to a fixed portion is a mandatory minimum hurdle before variable kicks in. Another suggestion would be to insure your top variable incremental rate is lower than your overall targeted unit cost.

You can always treat targeted results on the P&L side as a straight add-on to the sales compensation.
 
Carline Shaw
Member: 2010
Posts: 2

Subject: Re:Salesperson compensation

Submitted on 08-05-10 9:39 am.
Message:
Simpler is not necessarily better. It is too easy for salespeople - especially those who don't need a manager to approve their quotes - to make sales that don't make the company any money. When it takes a year on the job to make the contacts and really learn the product well enough to successfully sell, simply firing them for not considering the company's health is not good enough. In this case, the saleperson is being given responsibility over the health and accuracy of the P&L, so I would connect the results of the P&L to the compensation package.

I structured incentive packages to try to include all elements the salesperson was responsible for. For instance, start with Gross Margin (GM), then include depreciation on assets the salesperson has authority to purchase. Sometimes I used GM Dollars ($), but had a threshold they needed to pass before receiving any incentive. Sometime I used GM percent (%), giving them a % of the amount they earned more than a threshold %. In this example I would always have a threshold because there are overhead expenses that must be covered even though this salesperson doesn't have direct responsibility for those expenses. Yes these incentive plans are more complicated and difficult to administer, but a person at this level must be aware of needs of the company.

I made sure the line items in Direct Costs mirrored the expenses the salespeople were already using in their estimates. They were able to monitor where they were at any time, and the plan stated the incentive wouldn't be paid until the books were closed for the year - allowing those late vendor invoices to be posted and recognized in the proper period. Also, the incentive calculated was the Gross dollar payroll - their normal taxes and deductions were withheld.

When the incentive plan is a substantial percent of gross pay, draws will need to be set up. However, be VERY clear these are draws, and will need to be repaid if not actually earned. To minimize that eventuality, I set up a draw calculation that limited draws to about 75% of what appeared to be earned.

Another consideration is how to deal with Bad Debt. I retained authority over customer credit limits, and didn't deduct nonpays from their incentive bonus, but all salespeople knew they were expected to assist in collections. If company culture was different, that would have been added.

The incentive plan is your strongest leverage to communicate with the salespeople exactly what you expect from them, and is the 'teeth' to keep them 'company longevity' focused. Don't waste it.
 
Carline Shaw
Member: 2010
Posts: 2

Subject: Re:Salesperson compensation

Submitted on 08-05-10 9:50 am.
Message:
I just reread the original question and realized I failed to address the 'new account' issue. Please be clear what the definition of a 'new account' is. For instance, is a customer that hasn't purchased in a year a new account, or should it be five years? If a customer splits into two entities, is the 2nd entity a 'new customer'?

Good Luck
 
Randy Miller
Member: 2009
Posts: 5

Subject: Re:Salesperson compensation

Submitted on 08-05-10 1:45 pm.
Message:
Given the size of your company, I agree with you on the base plus structure.

Is your manager also responsible for generating sales, or is he/she just managing the sales force? Also, is it a high-volume, short cycle situation, or low-volume, long-cycle? The first is going to be more conducive to a low-base, high-incentive plan whereas the second requires a more balanced plan.

If he is just a manager, I would look at base plus an override on sales; if he is also selling, then you probably have a 3-tier structure of base plus commission plus override. In the past I have used an override based on 10-15% of the sales commission.

I do disagree with the idea of a draw for a manager. Draws work for a new salesperson in a ramp-up period, but ongoing basis they are a tremendous pain to administer. And ff your salesperson can’t make it without a draw after that ramp period, they probably aren’t worth keeping.

On the department margin side, I would look at what your baseline margins are before the promotion and set up a bonus schedule based on improvement of the margin. I am generally not big on rewarding someone for maintaining the status quo. Plus you might consider incentives based on increasing sales (for example, a tiered override that increases as new gross sales levels are reached).

Not to make the issue too complicated, but I also think you need to look at the company’s short & long-term goals in determining the comp plan. If you promoted your manager because you are growing and you are really interested in building sales revenue and market share, then the incentive plan should be weighted towards that end; with the understanding that while sales need to be generally profitable, you are not going to punish for the occasional “loss leader” or competition-buster. If you are more interested in margins than growth, then you need to weight towards cost efficiency and your manager needs to know that each sale has to reach a minimum margin level.
 
Karen Lamoureux
Member: 2008
Posts: 2

Subject: Re:Salesperson compensation

Submitted on 08-08-10 8:16 pm.
Message:
Hi John,

I am a Controller at an IT Consulting company. Our organization created a sales compensation program with a base salary +15% commission on all sales for the first year. the 15% is calculated from the net profit the company will make from the sale. After the first year, commission is decreased to 5%. The second year is considered old business. This keeps the sales department motivated enought to bring in new sales.

Karen
karenlamoureux@sbdne.com
 
Tony Gruber
Member: 2010
Posts: 6

Subject: Re:Salesperson compensation

Submitted on 08-17-10 12:38 pm.
Message:
I was the controller of an IT company for 7 years. I agree with the sentiments to keep things simple:
1. There will be some pressure to make the definition of a new client complicated. Make your rule and stick with it. When an exception is made, that becomes the new rule; so stick to your guns.

2. I like the idea of paying a bonus based on company profit. But again; keep it simple. Clear definitions. No exceptions to rules.

Also: Try to keep the sales staff's pay a secret from the rest of the company. Successful sales execs make a ton of money and they make it look easy. The staff usually doesn't understand that the sales-clowns are among the most important and valuable people in your business, so they can easily get jealous or bitter.

At 2mm, you've already achieved an impressive level of success, so congrats!
I hope our comments gave you some direction, and perhaps supported your instincts about these important issues.

Good luck!
 
Stephen Massel
Member: 2007
Posts: 1

Subject: Re:Salesperson compensation

Submitted on 08-25-10 8:43 am.
Message:
Hi John,

Sounds like you are the software developer and not a reseller. For VP sales, if you are the developer, I would consider a structure where the base is low and then have incentives that would more than double the base. A structure based upon gross revenue makes the most sense to me and I really would not be too concerned with attaching his variable compensation to the net contribution of his sales organization. Growthing the customer base in start ups is the most important and letting your VP of sales focus on getting the right sales team, which is the real challenge in my experience, will ensure long term growth and success.

Good luck,

Stephen Massel, CA
 
Bill Sorotsky
Member: 2003
Posts: 1

Subject: Re:Salesperson compensation

Submitted on 08-29-10 2:23 pm.
Message:
I disagree with the person who said no base salary; that is heartless and not a wise business decision as you will lose a lot of qualified people who will not even apply.
 
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