Resources / ,

How To Do Compensation

,
qtq80-KMTBtI

How to do compensation?

At least for sales.

In the last 8 weeks, four companies have asked me about compensation design for salespeople. The reasons for the conversations varied from company to company.

In one case, the role the CEO had imagined for sales had changed, and he needed to invest more in post-sales service. In two others, the behaviors of the sales team weren’t achieving the company’s goals. And in another, the CEO needed to make sure his rep was actually profitable.

The companies ranged from distribution to benefits to insurance. Some were direct, and some were sold through channel partners or retailers.

But all needed to re-think compensation.

In each of these consulting engagements, management wanted a clear answer. Spoiler alert: there wasn’t one that was quick for any of these companies. All had to make trade-offs and do some thoughtful analysis to get there.

Below, I share my thoughts on how to think about compensation and a misconception that can create some issues if left unaddressed.

 

Don’t let your personal view of money drive the creation of the comp plan for other people.

Too often, entrepreneurs and founders design comp plans that would motivate them. Or someone in another department who hasn’t sold before puts together the comp plan assuming, “Salespeople are all coin-operated.”

Here’s a prevalent truth: not every salesperson really wants to make 500k or 1mm+ per year. They may like the idea, but they may be much happier at more modest numbers. In fact, the majority of people in some selling capacity are happy at 100k, 200k, or 300k.

Now, you may be thinking, “Well, I don’t want them working for me.” And you’re entitled to that thought. But you may want to think long and hard about how firmly you’re going to hold to that position. Do you really want to turn over the entire sales team? (There are times to do this, though.) And can you afford in the near term to go poach the type of people who earn that sort of money?

Here’s a quick hack: spend some time talking to salespeople about their lifestyle, their personal goals, and what they want in a comp plan. It won’t solve everything, but it’ll give you an idea of how they’re wired.

And maybe keep you from building a plan that has them camping out at 180k/year in earnings, when you want and need them to be at 400k/year in earnings.

 

Principles on comp design.

These are tools for thinking about compensation, not any specific answer per se on the right comp for your company. If you have questions after reading this, feel free to reach out to me.

  • Know your breakeven on a rep.
    • This is crucial early in the company lifecycle when cash can be tight, and it’s really important if you’re trying to ramp. Companies need to know what a rep should produce to actually be a positive investment. This is why some businesses have thresholds a rep has to clear to start earning commissions: it’s the point at which a rep is now paying for himself.
  • Understand where you are in the lifecycle of the business.
    • If you’re a startup (and you can be 5 years in and still a startup), you may not have the boondoggle comp freedom of major players in your industry. It’s foolish to try to play their game on throwing around money. There are other ways that aren’t comp specific to compete with big players, but that’s outside the scope of this article. See below on rungs, accelerators, and incentives.
  • Margin, margin, margin.
    • Know this, talk about this with the team, and comp based on margin. It’s simple, but you don’t want the sales team getting paid the same no matter what the margin is they agree on with the buyer. Pay on this vs. total revenue when you can.
  • Determine when value is created.
    • There are some instances when the value of a customer is realized in the future. In those cases, it may make sense to create a trail of payments for the sales rep rather than paying them out upfront. If this is the case and you pay a trial, think long and hard about having performance hurdles to access residual income. Otherwise, it becomes a tax on the business.
  • Focus on collected, not booked.
    • I’m against clawbacks for many reasons, not the least of which is my own anxiety about having to pay money back. But generally, we just want to pay when we’ve collected the money. That keeps reps dialed into finishing the sale, which occurs when the money hits your bank account.
  • Accelerators.
    • They’re not the silver bullet, but they help in certain situations. For instance, I recently worked with a company who have an accelerator at the point where a sales rep clears a certain number of dollars collected in a year. This follows their focus on breakeven – when the rep is now a financially positive investment that given year, they began making more money. The rep is focused on getting there as quickly as possible, and everyone wins.
    • In other cases, an accelerator makes sense if you need reps to produce quickly, or smooth out production over the course of a year. If there’s a temptation for a rep to coast on past/residual production, or to wait till later in the year to hit their target, set up an accelerator that is large enough that they want to hit it as quickly as possible to get into more money.
  • Look to create more rungs on the ladder.
    • I learned this from Brian Kavicky. There are times when simply doing more isn’t desirable. A rep making 300 may not want to work that much harder to make another 30 or 50k: the work is incremental. However, if there are more accelerators, the rep can see that earning that next tranche of commission can be more lucrative than the prior. For example, in my past life, it took as much effort for me to make any 50k in commission. I got to a certain point and said, “Yes, I can make another 100k, but I have to work the same amount to make it as I did the last 100k.” Even though I was becoming increasingly profitable for the company. Want them to keep going? Put more rungs on the ladder so they believe it’s worth it to keep going.
  • Think quota, stretch, brass ring.
    • Again, credit to Brian Kavicky of Lushin in Indianapolis. His thought is that in setting quotas, it needs to be something they know they’re going to hit. That sets the stage for a solid mental outlook. Then, there’s a stretch goal they can get to with a little more work and thinking. And finally, there’s a brass ring that’s beyond the stretch goal but provides remarkable rewards.
  • Two numbers to chase help everyone win more.
    • Ever seen someone hit their number on one deal? Not bad, is it? Other than that it creates a concentration problem. Everyone wants the rep to keep going, but if they’ve hit their number, why? This isn’t a fit for everyone, but for many companies, it’s good to have a revenue goal and a new account goal. If they’re hitting the revenue (or margin) goal, AND they’re nailing the new logo/account/customer goal, what more can you ask? But revenue (or margin) alone can be misleading.
  • Incentives.
    • Dave Kurlan taught me this. There are times when you put in some contests to help with a slow season, to move some more of a product the team isn’t as excited about, or simply to have some fun. A few thoughts from Dave:
      • Things trump money. The things need to be things the reps want but won’t spend their own money on. In terms of spending their own money, if you just give them cash, after they pay taxes, it goes to something like paying bills, and that’s not satisfying.
      • Experiences trump things. A weekend getaway or a week-long trip (not necessarily with the company) will fire up a rep (and often their spouse) more than steak knives.
      • Have more than one winner. If it’s the total sales number, everyone knows who is winning that one before it begins.
      • Have different categories: most pipeline; most new accounts; most of X product sold; most services sold; most upsell; highest margin; etc…. This gives others a chance to win and gives management a few levers to pull.

 

At the end of the day, the financial incentives aren’t everything.

Too often, executives seek to solve everything through the comp plan. In a perfect world, it would solve everything. But human behavior isn’t perfectly rational.

Here’s the truth: managers still have to manage. Most of what they need to manage is behavior, especially when it comes to the undesirable work of prospecting, or early work in the sales process. People don’t want to do it.

Some finance managers can say, “Well, when they see how much money they’re going to make, they’ll do it.” Ask that finance manager how many cold calls they’ve had to make, or how many times they’ve been kicked in the teeth in a sales call. There are reasons you need to pay people to sell.

In a few recent conversations with executives, they kept trying to cover every possibility with sales. Many of those needed to be handled by a manager who simply said, “This is what we’re doing, and it’s part of your continued employment with this company.”

Yes, I know “#greatresignation” and all, but when you’ve got the right people, they get it.

 

 

 

 

Want to explore compensation more? Shoot me a note at adam@thenorthwoodgrp.com.

Adam Boyd