A very controversial topic within many software and other tech companies is how to best compensate the sales force. How much is required? How much is too much? What’s the best mix of salary and incentive comp?
If you’ve read anything I’ve written before, you’ll find my next comment very familiar:
It all depends on your particular situation.
There is no across-the-board best practice for optimizing your sales force’s performance via compensation strategy. Every company, market and competitive landscape is different in ways important to this discussion at any given point in time.
Let’s take a look at some of the more common variables and how they might affect your compensation strategy:
Established brand vs. startup
If you’re a startup, plan on paying your sales reps more if you wish to get the same quality of rep as an established company. It will be harder to attract great reps as a startup, unless you are in a special situation with an incredibly hot new product (of course, every startup CEO thinks this way about their product!). You may need to pay reps a higher base, and certainly richer commissions than your established competitors. Some of this can be mitigated if you are offering an equity opportunity, as discussed later. But for sure, prospective reps need to believe that there is a good chance they can make more money at your startup, or you won’t be able to compete with established companies for the same level of folks. That’s just a fact of life. Many startup management teams don’t feel this way and tend to “skimp” on sales force compensation. They will end up with inferior reps as a result, which can greatly retard the company’s growth path.
If your price points are higher you may need to pay a higher base salary, if the total number of sales made will be low. Lower price points lend themselves to higher commissions and lower base salaries, because the rep will be able to start making money sooner and more regularly.
Length of sales cycle
The sales cycle aspect is pretty straightforward and tied closely to the price point discussion above. Price points and sales cycles almost always have a direct relationship. High price points generally lead to longer sales cycles and low price points often accompany shorter cycles. It’s harder to compensate heavily on commission if there is a long sales cycle, because sales reps need to eat regularly, too. If you have a product that takes a long time to sell, make sure that you have a decent base salary for your reps–if you want to keep the good ones.
Initial sale vs. ongoing revenue
Similar to the growth vs. harvest discussion below, sometime you are selling a product that has upfront revenue as well as ongoing revenue, typically from updates, replacements or customization services or software-as-a-service (SaaS). I generally want to pay higher commissions for the upfront portion than you do the ongoing revenue. A good example of this is a traditional software license with an annual maintenance fee. If you pay commissions on the maintenance portion at all, in most circumstances the payout should be lower than the incentive on the upfront license fee. Another example would be for the first year of revenue for a SaaS-based software offering which you’d want to compensate richly for, vs the ongoing downstream subscription revenue which you should pay less for — if at all.
Commodity vs. missionary sales
Commodity sales lend themselves to high commissions and low (sometimes even zero) base salaries. This is because sales cycles are usually shorter for commodity products/services. Since they are by definition big markets it’s easier each month to make a base level of sales and resulting commissions, even for a relatively new rep. Even for new reps in commission-only situations, it’s common to have 3-6 months of “guarantee” or “draw” to allow for the transition into the new position. I’d like to note hear that I’m not generally a fan of “commission-only” sales jobs in technology markets in most situations, even when the products are commodity-like. Lot’s of people try to hire reps on this basis (usually companies run by folks with no sales experience or no money) and it ends in failure at an extremely high rate.
By the very nature of commodities the rep’s service level is often a major differentiating success factor in the sale, so a comp mix toward commissions rewards the exceptional rep to really work hard. Missionary sales, on the other hand, require a great deal of patience by the rep, as well as a lot of hand-holding and relationship building. To keep good sales reps in such a situation, it’s important to have base salaries which are adequate to enable the best sales reps to exhibit patience with the long sales process. Missionary sales are an area that really demands both high bases and strong commission structures, as they are one of the most demanding forms of selling.
Growth and Hunters vs. Farmers
Companies generally highly value reps that can sell new products and into new accounts–they want to pay for growth. So the more you are asking your reps to do what is considered to be the hardest thing in sales — sell “new” whether that means new products or new accounts– the higher the overall compensation structure should be. Selling “new” is the highest form of risk in sales, and it should be compensated by the highest reward. Selling established products and selling into established accounts (harvesting) is not as risky and as a result can often carry lower overall compensation structures.
This situation is often referred to as “Hunters vs. Farmers”. Hunters obtain new accounts while Farmers maintain and maximize the sales into existing accounts. In addition to the difference in difficulty and risk, these two situations require two different sales personalities and the compensation package structure should as a result be different as well. The hard-charging hunter will require a good base salary, but really needs the higher commission structure to keep him motivated. The Farmer is likely to be a more stability-oriented, relationship-building style of rep. For Farmers, the base salary should be the dominant component; a lower commission component is usually more comfortable for reps in this situation.
Equity participation in technology companies
In most cases, the playing field is slanted toward established companies when it comes to attracting sales reps; brand, money for compensation and stability all play a role. Equity participation can be the great equalizer for startups in creating attractive sale rep compensation plans. Every company has a different view of how broadly to offer equity. But a startup that offers attractive equity participation to its sales force can often give up less in cash compensation. For risk-taking reps, equity can even be the deciding factor in some cases. The lure of equity that might grow into a significant stake at a successful startup can help pull a rep from a more established job.
So what specifically should you be paying your reps? Laying out actual numbers is beyond the scope of this discussion, because there are too many factors and potential situations to generalize. All the factors above come into play in structuring a sales compensation package, as well as factors such as inside vs. outside sales. Every situation is different, and competitive factors also come into play if you’re competing directly with your rivals for reps. Local market circumstances, as well as the overall economy, can also play a strong role in setting the final package.
Above all, if you want to optimize the performance of your sales force using compensation as a tool you must do your homework. Don’t just quickly come up with something that “sounds good” or is “how you’ve done if before”. Analyze the unique situation of your company at this particular point in time, and at certainly consider at a minimum the factors mentioned above.
That’s my thinking on how to compensate your sales force–what’s yours? Post a comment below if there is a particular situation you’d like to discuss.
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