Monthly Archives: September 2013

Startup Sales 101: Establishing Commission Plans

In 13 of the past 15 years, I had the opportunity of working with a VC backed startup that we took from initial funding to commercialization to exit. Along the way we tried various sales organization deployment models trying to find the silver bullet model that would hyper-accelerate our sales growth. Like most start-ups; we were chasing revenue and the number of total clients we had in our fold.

We were fortunate that our VC firm gave us plenty of exposure to other portfolio company models and resources to learn from. In the 13 years I was involved with sales, sales planning and sales management – we tried all the variations you can think of for deployment models; some successful – some not but we learned from all of them. The variations we tried, but not limited to, included:

  • Regional Deployment
  • Industry Type / Segment Deployment
  • Inside Sales / Field Sales
  • Hunter / Farmer Splits
  • Book of Business Management (AE owns the account after their initial sale)
  • Strategic Account Targeting
  • Telemarketing for appointments
  • Telemarketing for entry-level sales

All these different deployment models and job roles required a corresponding compensation plan – and I was responsible for authoring, delivering and revising them. Compensation plans can be a headache, but my experience has absolutely convinced me the greatest way to influence account executive behavior is through their compensation plan.

The best designed compensation plan for the sales team is easy to communicate and track, it attracts and retains top sales talent, rewards the behaviors that tie to company objectives, improves morale, enhances customer service, and increase revenues.

If the current model for your business assumes an average annual sales revenue contribution per active sales head and you value regular deal volume over the year versus fewer, larger transactions at the end of each quarter or worse, the year – you need to leverage both commission and incentives to achieve this desired result.  Whether you have a hunter / farmer or a book of business philosophy to sales deployment – a comp plan based on annual sales performance with incentives leveraged to even order flow over the year has proven to be the most effective in my experience. The commission is rooted to the annual sales expectation while the incentives are used to achieve smoother sales production over the year.

The below are a few variations and samples of comp plans that I’ve found the easiest to explain and track – while driving the behaviors needed and expected from a sales organization.

 

Yearly Revenue or Sales Order Based Commission Plans

The commission portion of this plan helps drive overall full year performance while the incentives try to drive an overall consistent order flow. The accelerated commission rate drives Account Executive (AE) retention for strong performers who are rewarded incrementally for attaining and surpassing target quotas.

Example: Yearly quota with weighted target variable commission that starts at “dollar one”

This plan works for someone with a full year target quota and is product mix agnostic (“a dollar is a dollar” to the business). To even order flow, quarterly incentives are leveraged – however this could be broken into monthly incentives based on desired outcome.

This plan is best authored by first determining an appropriate target commission payout (also referred to as “on target commission” or OTC) for the specific annual quota performance. Said more simply; you need to determine what achieving annual quota is “worth” to the business and thus what portion you would pay to the AE. Please note; this is more complicated than I’m laying it out to be – I’m ignoring contribution margins etc. but you get the idea I’m sure.

Based on this OTC; create a weighted index commission rate that pays commission on each sales dollar and accelerates payout rate as account executive nears annual quota target.

The annual quota should then be broken into reasonable quarterly targets for incentive purposes. This requires some business or domain specific insight for your specific market. In my prior company – Q4 was the largest portion of the quota, followed by Q1, Q2 and then Q3.

Example 1A – Retroactive Commission

  • Establish individual target quota; in this example we’ll say that number is $500,000.
  • Break this quota into quarterly components; in this example we’ll do that as follows:
    • Q1:30% ($150,000)
    • Q2: 20% ($100,000)
    • Q3: 15% ($75,000)
    • Q4: 35% ($175,000)
    • Set On-Target Commission (OTC) payout commensurate with this quota attainment. In this example we’ll set it at $50,000 in OTC for 100% quota.
    • Set quarterly incentive payouts commensurate with this quota attainment. In this example; we’ll use 20% of annual OTC or $10,000 total; separated equally per quarter ($2500/per quarter).
    • OTC and Incentive at target would be $60,000 on top of base salary.

Commission Portion:

In a straight line commission plan – the AE would simply earn 10% commission in order to earn $50,000 from $500,000 in sales. However this type of straight line plan has no weighting to drive behavior towards goal, it has no ‘penalty’ for below plan attainment; nor does it have ‘stretch’ components to drive over plan performance.

To drive all the above; weight the commission rate downward until a certain minimum tier or tiers are achieved; whereupon the commission rate accelerates and pays additional retroactive commission to “catch up” commissions for earlier sales. This also has a nice “reward” component of hitting quota as the retroactive commissions really drive towards quota attainment. This plan also doesn’t overpay too much for over plan performance but also doesn’t stop the account executives’ drive for every dollar post-quota.

We’ll use a single tier at 80% to quota to keep things simple. After 80% to quota, commission rate will adjust to target commission and retroactively pay earlier sales incremental commission to “catch” up to target commission rate. I’ve seen as many as 5-tier plans, but that feels a bit much, 1-3 tiers are enough in my opinion. This plan will also continue to pay at the “final” elevated commission rate for all sales over quota; so it helps push the AE to keep going even after hitting quota.

Details:

  • From $1 to $400,000 – commission rate is set at 6%
  • From $400,001+ – commission rate accelerates to 10% for sales above $400,000 and an incremental 4% for sales $1 to $400,000 to “catch up” commissions for hitting quota.
  • Commissions over quota continue to pay out at accelerated commission rate

1A. Commission Payout Table

Sales Performance

Total Commission Payout Earned

$350,000

$21,000 (6% x Performance)

$400,000

$24,000 (6% x Performance)

$475,000

$47,500 (10% )

$500,000

$50,000

$550,000

$55,000


Incentive Portion

With the $2500 per quarter incentive; simply tie the full payout to the full quarterly expectation. Since this is incentive vs. commission; there should be a narrower range of performance where incentive is earned. To clarify, an incentive is tied to a target – you either hit that target or you don’t. That being said, you can provide a minimal amount of downside protection if desired; for example at 90% to quarter – 50% of bonus is earned but there is no reason to overly reward a result that doesn’t equal the target needed for an incentive to be paid. This is an incredibly important mindset to have, the incentive portion of an account executives compensation plan needs to not be perceived as “guaranteed” like commissions; its incremental earnings for meeting performance expectations. Likewise, there isn’t a need to provide upside on this incentive either IF you allow them roll-forward over performance or catch-up opportunities for missed quarters to mitigate sand bagging. Let me explain each of these a little cleaner:

 

  • Roll-Forward: Let’s say the AE could blow out their Q1 target based on the timing of a huge deal. The AE might expect a larger quarterly incentive payout since they surpassed their quarterly goal. Instead, cap the payout at $2500 but allow them to roll-forward the over quota amount towards their Q2 target so that your incentive payout for the full year would never surpass the budgeted amount of $10K for the year. Roll-forward applies to Q1, Q2 and Q3 only – never roll payouts from one-year to the next; it gets messy.
  • Catch-Up: Let’s say the AE skunks their Q1 and earns no quarterly incentive but blows out their Q2 so at the end of Q2 their performance equals what was expected for both Q1 and Q2 combined. Pay the full Q2 @ $2500 and, depending on your philosophy, 100% of Q1 missed or some % of Q1 missed as a “catch-up” opportunity. From my perspective, you are trying to manage order flow timing so I would pay a portion of Q1 only vs. full 100%. Catch-up payments are good to use if only to manage against an account executive throwing in the towel in a quarter where they aren’t performing well and sandbagging for the next quarter.

Example 1B (no retroactive payout):

Like the first example; this plan is best authored by first determining an appropriate target commission payout (OTC) for the specific annual quota performance and create a weighted index commission rate that pays commission on each sales dollar and accelerates payout rate as account executive nears annual quota target. There is no retroactive component; so the accelerated commission rate ONLY applies to those sales over the tier(s).

  • Establish individual target quota; in this example we’ll stay with $500,000.
  • Break this quota into quarterly components; I’m using the same as in the first example:
    • Q1:30% ($150,000)
    • Q2: 20% ($100,000)
    • Q3: 15% ($75,000)
    • Q4: 35% ($175,000)
    • Set target annual variable commission payout commensurate with this quota attainment. In this example we’ll keep it at $50,000 in on target commission payout (OTC).
    • Set quarterly incentive payouts commensurate with this quota attainment. In this example; we’ll continue to use 20% of OTC or $10,000 total; separated equally per quarter ($2500/per quarter).

Commission Portion:

In this example; we’ll use a single performance tier set at 80% to quota, or $400,000. After $400,000 in sales, commission rate dramatically accelerates so that target $50,000 in commissions is paid on $500,000 in sales attainment.

  • From $1 to $400,000 – commission rate is set at 6%
  • From $400,001+ – commission rate accelerates to 26% for sales above $400,000 only; there is no retroactive component.
  • Commissions over quota continue to pay out at accelerated commission rate

1B. Commission Payout Table

Sales Performance

Commission Payout

$350,000

$21,000 (6% x Performance)

$400,000

$24,000 (6% x Performance)

$475,000

$43,500 ($24,000 for 1st $400,000 + $19,500 for $75,000 over $400,000

$500,000

$50,000 ($24,000 for 1st $400,000 + $26,000 for $100,000 over $400,000

$550,000

$63,000 ($50,000 for quota attainment plus 26% for every dollar over quota)

For over plan performance; this plan is a rich one; so make sure you set performance tier(s) appropriately.

Incentive Portion

No change from the incentive described in the 1st example.

Additional Notes:

Document, Document & Document: Document your comp plans and get peer review to make sure no portion of it is ambiguous. Your written plan documents should include plan goals, definitions, commission and incentive payment structure, exceptions, assigned quotas and examples. Make sure whoever leads the compensation meeting allows ample time and is prepared to answer all questions posed by the sales team. It’s incredibly valuable to use examples when rolling out a compensation plan; use 3 scenarios – slightly under plan, on plan and exceeding plan to show the difference in earnings for the account executive.

Stretch Bonus Targets: If you want super stretch targets; consider using a bonus payout vs. change in commission structure. The bonus would be incremental to commissions. Some $ payout tied to hitting 110% or 115% to full year quota; this would be an “all or nothing” stretch bonus incremental to their calculated commissions.

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