Commission Plans
Last week's MBA Mondays post about Bookings, Revenues, and Collections generated a number of comments and questions about sales commission plans. So I decided to ask my friend and AVC community member Jim Keenan to write a guest post on the topic. Jim's blog, A Sales Guy, is a great read for those who want to get into the mind of a sales leader. So with that intro, here are Jim's high level thoughts on setting up commission plans. I know the discussion on this post is going to be a good one. So make sure to click on the comments link and if you are so inclined, please let us know what you think on this topic.
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I get asked a lot how to build a good commission plan. I give the same answer every time. Keep it simple and align it with company goals.
It amazes me how often companies screw this up.
Sales people are coin operated. Tell them they get a buck if they go get a rock, you'll get a rock, a whole lot of rocks. Tell them they get two bucks for red rocks, you'll get a lot of red rocks, but fewer rocks in general.
Sales people don't hear what you say; they hear what you pay!
Commission plans need to do two things; motivate sales people and sell product. They should align what you say, with what you pay.
The killer commission plan starts with two critical questions;
1) What do you want to sell?
2) How do you want the sales team to behave?
Commission plans drive behavior, get it wrong or don't align commission incentives with the company’s goals you’ll get everything you don’t want and little of what you do want.
What do you want to sell? Do you want to sell your existing products or your new products? Do you want to sell your services or your software? Do you want more revenue or higher margin? Answering these questions up front matters. Whatever you put in your commission plan you WILL get. Build your plan for what you want to sell.
How do you want the team to behave? Do you want new accounts and new business or more business from existing accounts? If you want new accounts pay for hunting, if you want them to work the accounts you already have, then pay for farming. What ever you pay for you WILL get. Build your plan for how you want the team to act.
The key is to sit down with finance, product and marketing with the budget in hand and ask the questions; what do we need to sell by the end of the year? Where do we need the business to be? How much revenue do we need? How much margin do we want? How many new customers do we need? How much growth are we looking for? How do we define success at the end of the year? Once these questions are answered, incent the sales team to do exactly that. What ever you pay for you will get.
Once the incentives have been nailed and properly aligned, make the plan dead, stupid, simple. Don’t overcomplicate it. Don’t try to be sophisticated, creating fancy algorithms and fancy spreadsheets filled with if/thens. Make the plan "simple stupid."
A plan is simple stupid if a sales person knows exactly what they will be paid on a deal without looking it up. Simple plans motivate sales teams. They know what their deals are worth and chase them accordingly.
Complicated plans de-motivate. When sales doesn’t know how much they will get paid on a deal, motivation is nipped. Make sure it’s easy for sales to figure out what they get paid on a deal by deal basis.
In addition to being dead, stupid, simple, all plans must have accelerators. Don’t be greedy. Don’t look to cap sales earnings. If they are selling more, pay them more. Accelerators are when more commission is paid for a deal after a certain threshold is met, usually quota.
Finally, AND most important, once the plan is done DON'T MESS WITH IT. Nothing is more detrimental to a sales environment than changing the commission plan on the fly. You have to live with what you have.
Commission plans are the lifeblood of a sales team. Get them right; start counting the money. Get them wrong; it’ll be a long year.
Remember; Sales people don’t hear what you say, they hear what you pay . . . so pay right.
Comments (Archived):
One of life’s great mysteries is how incredibly rationally salespeople behave when it comes to money.Some may struggle setting-up a mail merge, or changing the cartridge in a laser printer, but they’ll beat any algorithm when it comes to maximizing their commissions.
Hi David…The one thing that is dependable is that sales people will find exceptions. Guaranteed.Giving sales leadership controlled flexibility to decide how to figure out these seemingly endless corner cases is really key.
Hi Arnold, I wasn’t so much thinking about exceptions, but the mix.Say you had 3 products selling for $1m, $100K and $1000 respectively, and each paying 10% in comm. Rest assured a good salesperson will quickly figure out which mix will maximize returns.For that reason, it’s essential to make sure both the company’s and sales team’s interests are always aligned in all scenarios.For example, the sales team may maximize returns by closing just one big sale, or alternatively focusing exclusively on the cheapest product. In both these cases, the company would be less happy.
Thanks for clarifying.This makes me think of customer life cycle management as another example of making the plan work.One of the hardest things to manage for me was to build a plan that dealt with follow on revenue and life cycle of a customer once sold.You buy from a person as sales is a person to person dynamics…deal is closed, time goes on, upgrades are needed, client management changes. Who owns the deal over time? Not a lot of money for the sales person in managing but essential to the account.This is where it always gets squishy and complicated as the add-on dollars get smaller.
I am dealing with this challenge now. When we land a new customer, that deal is a seed that needs to be nurtured and grown and it’s take a new name sales person to plant that seed. As Keenan stated, there is a fundamental difference between a new name sales person and an account manager. I am attempting to develop a plan that encourages a hand off to an account manager once that seed is planted so more seeds can be planted.A good new name sales person is very hard to find. Good one’s have the cajona’s, integrity and acumen to persuade a company to change the way they do business for the better. They hate to lose and are very tenacious. If your comp plan doesn’t reward them they are gone.I have had this challenge before but the initial sale was a large enterprise one with less upside after the initial hand off to account management. The upside is greater in this case.Any ideas?
Hi VictorKeenan is the pro on this.But without knowing the details (everything lives there!) it is hard to say.From my experience though the following, in general, is usually true:-Great anything is hard to find…but salespeople especially move in packs. They move around more than most, they follow the same leaders and they bring their A-teams with them when they sense a real opportunity. It’s a club and if you have a star…he/she prob knows another.-Hand offs are hard…necessary but hard and there are a bunch of ways to handle depending on the product, lifecycle, lifetime value of the customer, and on and on. Dumping accounts into the bullpen of acct managers though rarely has worked for me. Tieing the hunter and the farmer together in some way will be necessary. By team, by region….Sorry…without depth of understanding there is only rule of thumbs to share;)
Yes.
Amen brother,I say this applies to all people, however sales is one of the few professions where it is true pay for performance. It’s pay for performance that really drives behaviors.
Great article ‘Sales people don’t hear what you say, they hear what you pay’ reminds me of my ski instructor when he said ‘You will ski where you are looking, so don’t look at that tree’ 🙂
The variant I got on that was in the army, “barrel follows eyes”. If your eyes look left, but the barrel is still pointing right, you are shooting the wrong way if you see something, and if something comes from where the barrel is, no way you can see it.
Funny thing is jim Keenan is also a ski instructor at Vail on the weekendsI’ve skied with him and he kept me away from the trees!
LOL!That’s funny!
Ha! Never thought of the analogies, but I’ve taught a few to wakeboard over the years and this “rule” always comes up: If you want to fall down the wake, look down the wake. If you want to go across the wake, look across the wake.I guess it’s pretty universal: We go towards that which we are focused on.
I went to B-school with Steve Holton, who is a great sales guy (and a great person), currently running sales for Webroot, ran sales from zero to IPO for RightNow Software. He also emphasized how important the sales mentality was for the whole company, but also how sales is driven by clear and simple incentives.On a separate note: Norm Brodsky, the long-time Inc columnist, author of The Knack (www.theknack.info), and founder of CitiStorage, states pretty clearly that he is against sales based on commissions, thinks it creates negative internal competition and pressure, and avoids leveraging talents, e.g. one salesperson who is good at opening doors working with another who is good at closing the deal.Thoughts?
Every sales leader I have worked with disagrees with that. They tell me theycannot recruit the best sales talent without a good commission plan
Fred…I agree. Commissions are the lifeblood of the sales org and in some ways the core of how well a company will do. Keenan is right…nothing is more important than the thought that goes behind keeping the plan on target and the clarity in rolling it out.
If you only pay salary, I wouldn’t expect to get any good salespeople without a salary that is significantly higher than your average commissions would be.I can see the value in paying mostly salary to an “opener” if your business needs one, but this isn’t really a true salesperson, more biz dev or relationship manager role- you could design a commission plan for this if you wanted but I suspect it is not as necessary and maybe even a drawback for this initial relationship builder since their contributions are generally more abstract than “sold x dollars”
Hmm, thinking further, I suspect it depends on what you are selling. If you are selling newspapers at $1/paper, it may be different than selling enterprise software for $100,000/unit. I have gone into many retail locations and bought much enterprise technology. I have often found the service – and honesty – better when there are no commissions. Admittedly, this is anecdotal, would not pass muster for statistically significant, but on the retail side, I have found commission-based organizations to have more hard-sell, worse service, get you buying and move you on. Well-paid and trained but non-commission-based have had the opposite. What does that mean? Not sure. It could mean some industries are better with non-commission, or that certain types of transactions, or possibly that culture of the organization – customer service, excellence, etc. – matter more than the incentive structure?
Agreed.But common in early stage…or early selling is to pay a draw to build the market that you will sell into.Never 100% but a good strategy to get smart sales people on board early if you feel the market is going to tip and you want a headstart.
I was careful not to advocate for his position, just to stir up the pot with an alternative view.Personally, I know I have not done enough in sales (has anyone?) to know more than the people who have succeeded at it time and again. The three best sales people I know all believe firmly in commissions, so I defer to expertise in this case.Nonetheless, it is interesting that someone with as much experience as Norm would advocate commissionless sales. It is also interesting that he advocates hiring great salespeople, but not hotshots.
Theoretically, it makes sense, however not in practice.The issues he states are leadership issues and incentive development issues not issues inherent to commission plans in general.
Ha! Cannot tell you how many companies – startups and established alike – I have seen brought to their knees because of the CEO’s insistence on following theory in the face of hard facts. Just saw it last week, barely saved because the Chairman got a whiff that the execs were unhappy, even though the Board loved the CEO, and he decided to go about doing some digging of his own.
Great post! Every sales team, product or web service needs to follow the KISS – Keep It Simple Stupid!
Any advice on sales (vendor) commission on hardware products (starting mass production in October/November).We have kept sales commission as 12% of selling price. Original selling price is 3x BOM (bill-of-material). 1-BOM for materials1-BOM for us (profit margin)1-BOM for sales/marketing/production etc.,etc.,So out of 33% …12% goes to vendor/sales. Is this a right or can you suggest something better. Should we pay 20% to keep the sales guys happy and squeeze our other cost?Am I being simple and stupid? or simply stupid!! 🙂
Probably depends on how expensive your product is and how salesperson-intensive it is to make your sales? 12% doesn’t sound bad at all though assuming the product is relatively expensive per sale.Feel like breaking out production costs and including them with materials might better show your cost structure- spending 15% on production then you’re left with half the gross rev to market and pay salespeople.For some reason I’m wary of thinking margin is a category for which to budget- it is what it is but if you have to pay 30% commission to sell a product mix which leads to the max profit, then you have to do it.Salespeople often love to discuss commission structures, so if you can find a few experienced in your industry I’m sure they would be willing to give feedback on market rates- if they drop everything to come work for you, it’s likely too high 🙂
thanx for your suggestion. Yes that is what we are currently experimenting with some vendors. If a vendor keeps coming back … then we conclude the % is little high than the market price and so negotiate better with the next vendor. We tell everyone that we are processing all vendors and will close vendor selection in couple of months.
Would need to understand more before I could answer. Can the selling price change?Seems to me, if I am a manufacturer, margin is what I would pay on. Manufacturing has only so much margin, don’t let the sales person give that away to make the sale.Feel free to email me a keenan(at)asalesguy.com
Sure will do.
You have forgotten the most important thing about sales people: they will game the system.Which is another argument for keeping it simple, yes, but it also means you have to have a serious conversation with everyone about what will happen if the intent of the comp-plan is violated. For example, if you pay 100% commission on new customers and 50% on existing and your sales guy works with an existing client and books the deal on a wholly owned sub that is a different legal entity, guess what commission rate he’s expecting?Sorry, years of experience in large/small companies owning sales, sales operations, and doing sales myself, so I can’t help myself.I would also suggest that you consider “hold backs” on the monthly/quarterly payments as well as “pay on receipt” as opposed to “pay on book.” This has to do more with the occasional scam artist and the bum client. For example, Salesman Sam arranges with a friend to book a $1M sale of digital dishtowels (cleans all your bits!) with monthly deliveries and a 30 day return clause. You see what will happen a month after the first delivery? Yep, Sam leaves and you’re holding the dirty end of the towel.My last observation is that the contracting has to be standardized and very separate from the sales organization and that there has to be some sort of order-by-order check to make sure there aren’t any side-deal-letters. Again, Salesman Sam has sold the dishtowels, but he’s provided the customer a side letter assuring him that if the defect rate is over 5% then the shipment is free. This may not be legally binding but will certainly cost you money and, probably, a customer. It will also bonk you during your M&A discovery.You not only have to get sales right, you need the right framework around it to ensure the overall health effect of the sales.-Cliff Elam
Thanks for that CliffNothing like years of experience to teach you about human nature
Is it possible that “right framework” equates to a bigger picture – one that inspires and gives direction – something with purpose? where financial remuneration is just a means to a more meaningful end?
Cliff,”this has to do more with the occasional scam artist and the bum client”I wanted to address this in the post as well, but in the spirit of keeping it tight and short, I opted out. I also opted out because I disagree with this point of view. What you describe here is better dealt with in the sales leadership category not with the commission plan.I would have said, as it relates to the sleazy sales guy, is DON’T build a commission plan to protect against the lowest common denominator. Punishing the entire team with delayed payments, funky payouts etc, only demotivates. Most sales people are honest.I handle these situations in the hiring process, and the firing process.My experience says comp plans designed to prevent the scam or that start with sales people will cheat you create a VERY negative and antagonistic sales environment.Your point is SPOT ON, I just look to deal with it at the leadership, management level.
I think the leadership has to be there, but they need air cover for when a sales guy does NOT get comp’d. We have this silly legal thing here, you know, where a departing employee can nail you.I like to give the sales leadership 100% of their time to helping close deals and up-skill the sales force. I can pay guys $60K/year to make sure the deal paperwork is perfect and guys in Bangalore $15K/year to make sure that the pipeline reports are perfect. My $250K/year sales guys should be selling.Funny story: I used to collect business cards, tapes, voicemails, faxes, receipts, and cocktail napkins and ship them to India for data entry. We’d attach the image to the contact for reference but I’d rather have my sales guys out on the golfcourse than huddled over ACT.-XC
In other words, incentives matter.Which is the most important lesson in almost anything, from government to finance.
They do and they don’t. 😉 I can’t find the study, but research was recently done that shows there’s a difference between how “knowledge workers” perform versus “manual/laborers” perform when given incentives. The startling conclusion was that knowledge workers performed more poorly when given incentives (like accomplish more and get paid more) than did laborers. Part of this may be the “simple stupid” theory, in that manual labor is more quantifiable (e.g. I’ll pay you $1 for every brick you lay) versus knowledge work which is open to interpretation.But the biggest conclusion of this study was that knowledge workers were actually DEMOTIVATED by pay-for-performance incentives. And I think this was due to a psychological “deer caught in the headlights” condition. These workers stressed out so much that they couldn’t get the job done as effectively. Conclusion: Make your sales process a step-by-step procedure – make it *appear* as though it’s a manual process. Do “A”, then do “B”…if “X”, then “Y”. Successful sales operations have a replicable process with a predictable outcome.
You are referring to Dan Pink’s excellent book Drive. And I do agree with Pink’s argument that financial incentives can often mess things up, whether it be creative knowledge workers or customer fans/evangelists. However, sales people are different. Sales people are built to work off of a very clear scorecard of success, and that is money.
agreed. sales is generally an algorithmic function (much like manual labor).Jim: the demotivation occurs when the function is heuristic.
This is a myth: that salespeople are somehow different than others. Here is what is different: sales are measurable. Despite the best efforts of the Balanced Scorecard Collaborative or other performance management think-tanks, performance in other types of jobs are not easily measurable.The heart and soul of a sales job is to create revenue. What is the heart and soul of marketing? Or development? Or accounting? You may be able to define this, but you can’t measure it simply. You can create a set metrics that approximate the measurement of performance in these areas, but there are too many factors at play and too many unmeasurable objectives. If you try to create a pure performance based comp plan for non-salespeople, you end up confusing employees and demotivating them… exactly as Jim K discussed in the original post re: keeping sales comp plans simple. So this is 100% compatible with Dan Pink’s ideas.The sales profession gets a bad name because of this “salespeople are coin operated” myth. (And perhaps greedy unprincipled people are attracted to the profession because of this, so maybe it is self-fulfilling.) But great salespeople are no more coin operated than anyone else. It’s just that their jobs are set up in such a way that goals are very clear, and you can pay them objectively for performance against these goals.I’m in sales, and I’ve worked with some truly excellent salespeople. When talking to a great sales rep, you feel as though you are talking to a CEO.
Sorry to disagree, Pete – but having spent over a decade as a stockbroker, I can guarantee that most of my colleagues had no real interest in the markets, and they freely admitted they were in it only for the money.
My point is that salespeople are no different than anyone else in this regard, and the truly great sales people–the ones you want on your team– are more than just money grubbers. Take a walk over to your accounting or marketing department and ask someone at random if they are “in it for the money”. If they responded truthfully, most people would say yes. Mostly everyone I know would quit their jobs in a second if it weren’t for the paycheck.
I know quite a few people who moved from the back office to the front office because they thought “If I’m going to do a boring job, I may as well earn as much as possible”.In my experience, sales attracts a very specific kind of person.Of course, I’m not saying there aren’t many exceptions to this rule..
I’ve seen people take that attitude too, which doesn’t show much respect for sales as a profession. But then, those people aren’t showing much respect for themselves, either.Sales does attract a specific kind of person. I think some key traits of good sales people include a talent for listening, and motivating and working with people, the ability to close sales, and a comfort with the risk/reward profile. The latter is similar to the large company vs start-up decision.
My point was not derogatory. I have been a quota-carrying sales person too, with pride, and still consider myself in sales even if I wear many hats. But I do think classic (and successful) sales people are very different from a personality and motivation perspective – that is why they became sales people in the first place, rather than some other profession.
Giff, I didn’t take your comment as derogatory at all. What you are saying is considered common knowledge, but I take a slightly different view. I can’t argue with you that sales people have different personality traits… but we’d all probably agree that so does everyone else, hence stereotypes– accountants, lawyers, VCs, developers, etc. My divergence with common wisdom is my view that salespeople are as innately money oriented as anyone else.
If something/some job/someone has heart soul then you can be sure it isn’t about creating revenue.
Good post; Apply that to the company, not just the sales process: Long time ago, we got a new Global VP of Sales and we were at the annual sales meeting. The guy came from the engineering side of the house, but no matter, he was a smart guy and he did not create the deck. Just delivered it. It went something like this:1. We are going to meet and exceed our revenue numbers2. We are going to build the best support organization3. We are going to hire and train the best people4. We are going to build the best productsIt occurred to me that he needed to invert those bullets, and since I am not shy…I stopped him after the meeting and told him that if he did invert them, he would not have to worry about #4…it would just happen.If you start out telling people the first thing they have to do is begin at the end it is confusing. Simple, I know. By the time he presented to the general audience…he had switched them. It bothers me when I see that in a job description. It makes me think they don’t understand how it works…
Keeping it simple is key. But I think the good advice in this post is best suited to companies that have “grown up” (if I may reference y’day’s post). IOW, not applicable to most start-ups.Start-ups are evolving their products. With a changing product (and usually changing business strategy), it’s often impossible to set the commission plan and then “don’t mess with it”. There are also the uncertainties of the marketplace when start-ups begin selling to them. With a new (untested) product, it’s often a crap shoot figuring out whether or not the market will buy and how large that market is. And this complicates the strategy of reverse engineering sales numbers based on “what do we need to sell by the end of the year?”. There’s no direct correlation between a start-up’s needs and market adoption.
Definitely true….good point Jim.
I am sad for (sales-)people who’s work-motivation is defined and dominated by monetary reward and for companies represented by such people. I wouldn’t want to have anything to do with such people or companies. Truly sad.
It isn’t that they are defined and dominated by money. It is that their performance is tied to achieving specific goals so that they can earn the compensation they need. Sales people are not paid base salaries that can sustain them. They are paid much less. So they need to focus and execute – just like all employees. However, in this case there are financial penalties for non-performance.And many of them are professionally fulfilled by helping create a business…you know, building stuff. But in this case “building stuff” doesn’t mean programming code. It means building the business through partnerships with customers that love your product so much that they’re willing to pay for it.
“It is that their performance is tied to achieving specific goals so that they can earn the compensation they need” – isn’t that fancy wording for defined (in their work) by money?Why aren’t sales people paid base salaries that can sustain them?Why are sales people penalized for non-performance while, to follow your example, programmers who(for example) create many bugs are not?Aren’t these choices rather then facts? Choices tend to resonate out and … to quote another commenter create a reality where sales people are expected/forced to “game the system.”?
Are waiters and bartenders defined by money? They make a very low wage, but can make a living when they get lots of tips. Compensation with a variable component typically forces the base salary downward.Sales people are paid a lower base salary – generally speaking – because they have a commission plan which will make up the difference…and then some. It’s incentive theory – which may not always work…see one of my other comments on this post. Are programmers motivated by money? Sure they are. Ask any programmer if s/he’d rather make $75,000 or $100,000.Certainly it’s a choice.Should other workers be compensated based on performance? I think they are. Bad programmers get fired. Great programmers get raises or move to other companies where they get paid more.I think the gaming the system is the exception, not the rule.
I’ve sold on 100% commission multiple times and when it is the 20th of the month and you have nothing booked, and a family at home, it is VERY motivating. It was once described to me as “beating them with a carrot”.Your question: “Why aren’t sales people paid base salaries that can sustain them?” is the key. There are many cases where the base salary could be higher and that would likely make for a more sustainable balanced employee. However, there are just as many cases where the company absolutely needs the growth NOW and balance and sustainability are intentionality chucked out the window. The point is that commission plans are simply a tool. Sometimes you need one kind of tool, sometimes another.
I think that companies should not be in a position to need growth “NOW”. Growth is planned. There are lots of caveats in-between (missed queues by management etc.etc.etc.) Simply; no revenue is a result of poor leadership.
Ronen,I am too. I completely agree with you. I wrote about this a year or so ago. http://asalesguy.com/2009/0…I don’t hire people motivated by money.What I’m talking about here is incentive.Jim Hirshfield does a good job explaining it.
Jim,Thank you for your attention and the link. I’ve read it twice, this post three times, Jim Hirshfield’s comments – I’ve even opened a dictionary – and I still don’t see the distinction you both seem to be making between incentive and motivation. Can you help me with this?I agree with your post – keep it simple, keep it honest, keep your eye on the ball – that’s good advice all around. What I am missing (maybe because I am not really into sales?) – is more in the lines of “What game are you playing?”.When you ask “How do we define success at the end of the year?” – I sense an underlying assumption (insinuated in the previous questions) – that the answer is in numbers and sales figures … that’s part of why I walked away from business.I know this blog is a “place of business” – but I cringe when questions like Jim Hirshfield’s “Ask any programmer if s/he’d rather make $75,000 or $100,000.” are accepted as legitimate. It is an ill-conceived, narrow-minded, blinding and misleading question. Ask any programmer/person what kind of life s/he’d like for her/himself – surely there are things that go beyond an extra $25k (those things that money can’t buy!?) – and too often those things get tossed out the window for an extra $25k.In a similar way – I am wondering if, when it comes down to a number based commission plan, what kind of things are left out – un-valued and unappreciated? How, for example, do you factor in quality of customer relationships that are established, should you? Sales people are often the first front a customer meets. How about customers you are better off walking away from (“Sell to perception or accept your customer is wrong and walk away.”) – are those rewarded too? should they be?There is an anecdote in software that you can fulfill a customer’s wishlist point for point and still end up with lousy software (that the customer will reject). I have a feeling that if you stick and fulfill a numbers-based-commission plan – that you could do the business more harm then good.From your other comments I am guessing you would point a finger away from sales to other aspects of the business. But I have a feeling that everyone is pointing their fingers somewhere else – and what really matters gets lost.I don’t know if the commission plan is the place to tackle this – but then again why not?Thank youRonen
Ronen,Don’t look at incentive and motivation as being zero sum.Another way to look at it is to look at it in terms of priority.Ex: I don’t think you would have started BOXEE (I assume this is the same Ronen) if you couldn’t have made money. The motive wasn’t money, but without it would you have started the company? Another example is; I have turned down multiple opportunities that paid more because I didn’t like a bunch of the other things about the gig. Money was an incentive, the motivation was happiness, opportunity to be successful, the people I would work with etc.Incentive is a tool to guide behavior. Using my “rock, red rock” analogy, incentive guides where I spend my time and effort. I have little motivation to get either as I think they are both valuable. So, incentive tells me which the company prioritizes. Incentive is the guide.Motivation is the reason. When money is the key or primary motivation little else matters. Anything that doesn’t make money is disregarded. I want money so I go get the rocks, and if along the way I can make more money getting green rocks, even though I know it’s not in the best interest of the company, I will.Incentive guides behavior, motivation dictates behavior.This is a very difficult distinction, I’ll try to tackle it on my blog this week. Maybe some other folks will chime in.Good and bad motivators can be like porn, I don’t know how to define it, but I sure know when I see them.Hope this helps.As for other incentive elements other than financial you bring up, absolutely they can be part of a sales persons commission plan. When I said “How do you define success at the end of the year” I meant it literally. I wasn’t suggesting it had to be just $$$. Just what ever you decide, customer satisfaction, forecasting accuracy, implementation accuracy, employee satisfaction, etc make sure it aligns with how you incent the team.I’ve been part of a number of sale orgs where we had more than just revenue or $$ as quota.The company decides; revenue, customer acquisition, customer sat, retention, implementation etc But, what ever is decided, you have to own.Good questions Ronan.
I’ve been a commission sales guy and manager in high-tech for a long, long time. Might be interesting for those who wonder about incentives vs salary only to hear what motivates me. It’s mostly the freedom I get from being in a position where my performance is easy to measure and objective. The freedom derives from having a significant part of my income be based on that performance, which means that my job is measurably valuable to my employer. None of that has kept me from keeping the customer first on my list of priorities – I’ve always known that that was the road to success.
I am not the Boxee Ronen :)I’m going to have to read this a few more times over a few days … see what emerges from it.On a personal note – if I am not motivated (direction that comes from inside?), then I don’t respond to incentive (direction that comes from outside?). If I am motivated – then incentive doesn’t matter. The closer I have moved towards direction that comes from the inside the less I can relate to outside incentive.Thank you Jim – I am grateful for your attention.
The best design always comes out of quick iterations with real-world feedback… so how does that fit in with the DON’T MESS WITH IT admonition? Is there a way to design a commission plan iteratively, or do you really only have one bullet in that gun?
Interesting question.
Spoken like a true developer or technologist.I love iteration, I use it with in sales planning and the execution piece, but not commission plans.When it comes to commission plans constant iteration creates fits and stops. It undermines momentum and frustrates sales people.Iteration needs to come on a yearly basis, with few exceptions. Huge errors or misalignments warrant a change. But otherwise suck it up and use the knowledge learned for next year.The key is to do the work upfront. Don’t take the planning lightly.
One of those great salespeople I mentioned once sold software for a very large firm into large enterprises, was a great salesguy. The “top management” realized that their best salespeople were doing hard work to get in, but then not so much to hold onto the accounts afterwards, so their relative compensation in years 2-4 was much higher than in year 1 (when they made the sale). Desiring more sales, of course, they restructured the plan to have the best salespeople do year 1, and then move them on to new challenging accounts once the deal was done, while handing the follow-on (and easier upsales) to the less effective people. So… you do all the work, you get the big deal, and someone else gets all of the commissions years 2+. I am sure it was done with the best of intentions (and theories) – get the best closers onto new deals all of the time – but the effect was to convince everyone that you got only the first year of the hard work on the deal and nothing else.Effort dried up, salespeople left, and the theoreticians (wasn’t there an official Party Communist Theoretician in the Politburo in the Old Days?) could not figure out what went wrong with their “perfect” plan.
A company should put a professional salesforce in place once the sales process has been proven, and an annual comp plan is possible. The “don’t mess with it” rule applies to companies with a proven sales process and a professional salesforce. Once you have these things, management must avoid the temptation to tweak the annual comp plan in the middle of the year. I 1,000% agree with this sentiment that changing a comp plan mid-year is extremely demotivating. It takes a lot of effort to develop customer relationships and build pipeline. Changing the comp plan mid-stream on a sales rep is analogous to having the VC’s randomly change the equity structure on the founders. It is damn near stealing from the sales reps to do so, and is viewed as such.
Great reminders. As a CFO who ran a hosting sales team for 2 years, I can vouch for the need to keep it Simple Stupid. Complicated makes everyone’s life more difficult, encourages gaming, misaligns incentives, and makes tracking and accounting an onerous task.Also make sure you pay commissions on time with an accurate and simple statement of how much is being paid on a deal by deal basis. Giving a draft of this statement out before checks are cut is a good way to make sure they are accurate and meet expectations. Make sure you show in the statement all deals which have been booked but not yet eligible for commissions.Oh, and if you underpay a salesman $0.50, expect to hear about it. Quickly. If you make a mistake and overpay them $500 don’t expect to be told about it by the sales person.
Having led the board selling lots of stuff, from cars to routers to IDS to high availability (and more), I use the following analogy to describe salespeople. It may not be so applicable to the current trend in products. (How do you sell Foursquare? I think PR and Marketing is that answer). The sales profession is like hospitality. There are waiters at TGI Fridays and waiters at LeCirque. They are both waiters but you would not want a guy in suspenders and funny buttons waiting on people expecting a fine dining experience. One is not better than the other…it is just that one is waiting tables as a means to an end, the other is a professional waiter.As it relates to gaming the system, when I was a professional salesperson I had more trouble with sales managers gaming the system. Maybe that is because we were professional sales people…but I had one “manager” that shipped equipment to sales peoples houses and asked them to keep it in their garages until the S1 was filed. I am pretty sure his comp plan was tied to “time to IPO”.In support of the comment regarding you WILL get what you incent, the last institutional “job” I had ran a contest just after I began at the company. The deal was whoever put the most number of evals out into the field in 30 days would win $500. As is generally the case, I can sell more than most companies can deliver so, I won. As we were discussing the contest totals by region (the installs and support of the projects) I expressed a concern that our one sales engineer for the east coast would not be able to support all concurrent installs at client location without some help. These were financial marquee clients for appliance solutions. I suggested that we pre-plan the whole coast of installs to assure that we had adequate engineering time for each region. After the weekly sales call in which I said that, my sales manager called me directly and asked that I never expose any flaw in what he was doing again, in a call or otherwise. I did not think that was what I was doing at all. I though I was being pragmatic and impacting the success of the installs, in hopes of actually converting them to sales. I tell this story to suggest that professional sales people care about more than just money. They care about the process that delivers a great solution to a client with a pain point. Mostly because no matter who we work for, we will be seeing them again with the next early adopter technology. If we can get that job.
kelley – what do you do now?i really enjoy your approach and attitude
Hi Fred, thanks. Appreciated, validation is good. In short, I off-ramped my career several years ago to parent. There is a lot of story from there to here, but right now…I am circling the loop, or in this case riding the A Train, looking for the On-Ramp and it is pretty freaking hard to find. I have been “consulting” for startups but they all need you to work for free, and frankly, I have no more runway for that. Btw, I also have some pretty good baseball metaphors.I am an XX and that creates unique challenges despite what others may believe. The main thing I am concerned with right now is the dearth of opportunity for women like me who need to get back to work and struggle to find the ramp. I have only recently begun to comment and have written about my experience in comment to Charlie’s blog, (http://bit.ly/9Dm5nU) which riffed off of Terezas original XX rant (http://bit.ly/bZeFIx).All to say; I am also currently drafting an outline to research what would really be of value to “On Ramp” women who have taken time off to care for family or otherwise into entrepreneurial endeavors or otherwise, though the timeline may be too long to help me. My recently begun blog about my Lean Startup Experience is here…http://bit.ly/arhcUQ.That said, I am working on an idea to pitch at StartUp Weekend. Though a repeat win is unlikely as Justin Isaf says he will kick my ass no matter what I come up with!If you are entertained now, I am certain you will be fascinated later so let’s have a coffee tomorrow at 1 (or 3) and see what we learn about each other. You in? (Professional sales 1001..go for the close, move the deal forward, always look for a referral…you see where I am going with this??? ;>)
I’ll be interested to know if you got the meeting.
Not yet, but the day is not over…and one ask is not really trying very hard! Thanks for playing today…I enjoy your comments here as well.
Interesting post Kelley, sounds like an opportunity!There has to be tons of opportunities for experienced salespeople to work on commission in tech businesses, right? With your experience and skillset, there should be plenty of startups who have hit customer development product/market fit and are ready to bring in orders that could use your skills. The key is finding them efficiently.Maybe network with Sean Ellis about opportunities with his clients who are ramping up.Another idea – maybe you have a network of similarly situated great salespeople, spread out geographically. You could organize into a national network of “salesforce on demand” service and contract with companies as a group. More leverage for your group, nationwide presence for the companies, and pay for performance limits downside risk for your clients. Also with a group structure, you may be able to craft more flexible schedules and work hours for your group members, while still providing “coverage” for your clients.
Looks like you are trying to help me kick Justin’s ass at Startup..great idea!I actually had this idea many years ago when I was benefit of one call appointments into Exxon, Texaco, Chevron, American Airlines and yes, I even have a WalMart badge! (Though Cisco is still probably the Mayor there). Been off the road for a bit too long to actually pull it off…but the name I had picked out was “Thoroughbreds”.In reality, I just used my political capital to get one more job done before I went to middle school. Off ramp.
I like your style, Kelley (and your comments/thoughts).
where are you based?coffee tomorrow (or today as it were) isn’t going to happen but i’d like to meet youmy wife (aka gothamgal.com) has been talking about the on ramp issue for yearsshe was one of the best salespeople of all time before she stopped working to raise kidsand she’s been staring at the on ramp in one way or another every sinceit’s a huge topic, maybe the most important one for women right now
I am in NY, and will take that raincheck, and hopefully you can get Gotham Gal in for the meet. Very kind and look forward to meeting you then. Ok, so NOW this is my shortest post ever…
where are you based Kelley?
Good Morning Fred…I should have said I am in NYC (and am often around Union Square). I thought a lot about my response to you above, and appreciate that you are gracious in reading it. I wrote a post led by my exchange with you here, and also a simultaneous exchange. An interesting paradox. Read it here if you like. http://bit.ly/ieatelephants. How about coffee with Kelley next week?
This is very well-said. And I remember some of Gotham’s (to use Howard’s abbreviation) posts on this subject. I have not taken the off-ramp, but watching about half the mommies I’ve met hurling themselves down the off-ramp after wrestling with an infant for a few months — it has been eye-opening. According to a long NYT magazine article a year or so ago, the American workforce is very flexible for mothers, compared with that of other countries — nations need either a generous welfare state OR a flexible labor environment to keep the birth rate up, it said — but Gotham’s and Kelly’s experience tell a different story. “Staring at the on ramp …”
@karen_e, Kelley, Fred:Check out “In Sweden, Men Can Have It All” -> http://ow.ly/2u0f6 The article mentions how the Swedish government had to create incentives for fathers to take parental leave to offset the opportunity costs imposed by society. Here are some powerful excerpts:Companies have come to expect employees to take leave irrespective of gender, and not to penalize fathers at promotion time. Women’s paychecks are benefiting and the shift in fathers’ roles is perceived as playing a part in lower divorce rates and increasing joint custody of children.In perhaps the most striking example of social engineering, a new definition of masculinity is emerging. […]A study published by the Swedish Institute of Labor Market Policy Evaluation in March showed, for instance, that a mother’s future earnings increase on average 7 percent for every month the father takes leave.[…]The higher women rank, the more they resemble men: few male chief executives take parental leave — but neither do the few female chief executives.[…]For many companies, a family-friendly work pattern has simply become a new way of attracting talent.“Graduates used to look for big paychecks. Now they want work-life balance,” said Goran Henriksson, head of human resources at the cellphone giant Ericsson in Sweden, where last year 28 percent of female employees took leave, and 24 percent of male staff did. “We have to adapt.”
KellyThe best sales people aren’t motivated by money. I won’t hire someone who is. My thoughts on motivation and sales people can be found here: http://asalesguy.com/2009/0…I like your waiter analogy.As I said in an earlier comment, gaming the system, unscrupulous managers and sleazy sales people etc are leadership issues.I don’t believe in using a commission plan to “manage” the unscrupulous. It lumps and penalizes the good reps with the few bad apples.
Hi Keenan, I stumbled across your blog a few days ago unrelated to here and liked what you had to say. I appreciate your comment and the link back to your post.I find there is a disconnect these days when it comes to the topic of being motivated by money. While I sell stuff to solve business problems, I work for money. If I have no money…it ain’t workin’ for me!As I am looking around for the on-ramp back to profitability / career restart as it were, what I have found is “work for me for free” and if we get funding I might hire you. You can read here and so many other places about how “known” teams get funded, and they bring those teams from gig to gig…so where is the on ramp into just working back up. It is almost like if you want to make money somehow you can’t get on a team. And don’t get me started about the ecosystem of people who have not graduated from college starting companies while their parents are paying their tuition, room and board. I am not saying that is bad, and is really not the point of your comment…so seriously, I won’t get started.I am highly motivated by money, and I think most professional sales people are. I make the most when I sell stuff, and I sell the most stuff when I solve business problems. I am thinking if you know of a company looking for someone with this attitude feel free to hit me back on that. ;>)
Kelly I’m assuming you’re in NY?I know of somebody in Wilmington, DE (1hr train ride from Penn Station) looking to sell a SaaS to Chief Corporate Counsel’s of Fortune 500 corps. Very well established company. You probably could work from home going to HQ twice a month.My very best salesperson ever and that a lot, KarenD had the same exact background as you.
Hi Phil…you are kind to post this. I am definitely interested in investigating all opportunities, and have had a few people reach out directly with inquires. In fact, very busy today following up. Yay! Reach me offline, directly with data and you can rest assured I will follow that up. msksboyd (at) thinkexperience.com. Much appreciated.PS: Thanks Fred Wilson / AVC community.
Great post.You echo my own experience that you will get what you pay for…and you better make sure that is what you want….your red rock example is perfect.Couple of comments:Eventually though every plan does break. Be it the DNA of great salespeople, the changes that successful markets engender. Whatever…but things change and how you evolve is how well your sales folks will stay motivated or stay with the company period. We used to say that in multichannel situations (which most get to), eventually you will have channel conflict and when you do, you’re starting to win the market.Sales orgs are a club (almost like high school) and ‘top dog’ leadership is essential. Sales folks know who adjudicates the corner cases (which there will always be many) so giving the sales exec that parameter is key. The smart CFO or CEO will give the sales exec the leeway to interpret. In my experience the best parameters for the leeway is margin. And lastly, thanks for saying the “M” word, marketing. It is something that doesn’t get enough time on Fred’s blog. Great marketing folks know that they market to the sales team first…and great salespeople know that marketing is the one that brings the market to them. And in my experience at least, sales and marketing was always a blended budget. Commissions on one hand, market building dollars on the other.And finally, I can always get to be a better skier so I’ll ping you for a lesson next time I decide to ski the back bowls in your area.Again, thanks for this.
you are right we don’t talk about marketing enough here at AVCfunny thing is AVC is my marketing department 🙂
And a very effective one because you market by sharing, not by pitching. Reputation is the new currency and reputation management has effectively replaced ‘marketing’. And I am a marketing guy!It would be interesting to have people share some of the ridiculously convoluted sales comp plans out there…
Hi MartinYup reputation management is certainly the umbrella that marketing twirls. No question.But I would nudge you back that that doesn’t mean that its all ‘build it and they will come’.Surprising that there are literally thousands of blogs that provide lists of advice on social approaches and social techniques but so few get it right and so few folks really understand both the core premise and the tools that you have to help build a dynamic place for that marketing magic to happen.
All the marketing in the world is wasted if the product, service or company’s reputation isn’t good. In a socially transparent world conventional marketing is marginalized. IMHO of course!Off topic: Why is it when I get an email notice from Disqus with a Link to Comment link it doesn’t take me to the comment thread, instead taking me to the blog post? Meaning I have to wade through hundreds of comments to find my thread? Is this a bug?
it is a bugwhat browser are you using?it works for me in some browsers and not in others
It’s a browser issue (since the link is always the same).The trick is to not touch the browser whilst the comments are loading.Some browsers (eg Chrome) will ignore the identifier part of the url (#….) if the user scrolls (etc) before the page has loaded.
Current version of Safari on a MacBook Pro. I tried letting everything load but it still took me to the top of the page.
Same here, only with Chrome.
Important topic MartinWho said anything about conventional marketing?Marketing isn’t by definition either conventional or pejorative. And neither by definition is a social or community approach one of laissez faire.And in the spirit of a ‘sales post’ the topic of lead gen and pipeline creation in a world that is socially transparent gets more interesting…and more misunderstood.Thanks for prodding this.
The way I have been thinking about it is this: We now work in a world where everything we do is globally public, searchable and a part of the ‘permanent record’.A lot of marketing and, particularly PR, people are having a really hard time with this. Witness the way BP handled the spill early on. It literally cost them billions overnight in lost market cap.It’s a fascinating time to launch a business because of this.
Couldn’t agree more Martin.I blog on this so check it out if you’d like.
Yes, the idea that marketing is largely about giving, generosity, etc. is not very well understood. It’s not new.
Agree on both points and that’s what’s fascinating…not new, not understood and absolutely critical.
And a perfect one at that!Gets a lot more complex when you are starting from scratch or relaunching to find the community part of a legacy ebiz.Fascinating how hard it is to do it right…and AVC.com is both a rarity and a wonder for the dynamics that you’ve created here Fred.
marketing department…recruiting department…
You call it marketing to the sales team, we (in architecture/engineering/landscape architecture, etc.) call it internal marketing. Same thing. Here is this week’s post from the blog of my professional organization, SMPS Boston. http://smpsboston.wordpress…. [And I’d love some feedback on the blog if anyone has any. The committee I direct got it up and running while I was on maternity leave. We need to get some traction, so click away, friends!]
Hi KarenAlthough certainly your sales team are internal, I don’t think of it as internal marketing…I think of it as channel marketing.Sales folks talk and socialize and are hands down one of the most important channels for communications. In fact, I would bet that in most cases, the sales team talks to more people, for longer periods of time than anyone else.So, yup internal, but I treat them as a channel fully expecting that everything that is provided will part of the chain letter effect and keep going.Just a point of view but I think it makes a difference.
“And lastly, thanks for saying the “M” word, marketing…”Especially meaningful when included in a post about sales!
Can’t talk about one without the other in my book Donna…
kinda figured that out about you, Arnold… 😉
One of the most memorable biz meetings I’ve ever been in was when the startup I was VP marketing at brought in a new COO. He assembled all of the marketing and sales folks in a conference room (about 8-12 of us), and asked the sales people what they needed to hit X number; what they didn’t have to get the job done.The list ended up being 10-15 things long — whitepapers, a certain script, a webinar, a product orientation shit, etc.He then turned to marketing at got a timeline on everything (about 10 days).He then turned back to sales, “Okay, you have 10 days to make excuses. After that, you’ll have everything you told me you need to sell and hit the numbers. Your job begins at NO – otherwise, you’re an order taker and better go get a job at McDonald’s.”That expectation (sell, or don’t work here) coupled with a straight forward commission plan got it done.
where “shit” = “shift” 😉
I’m gonna steal this, often: “Your job begins at NO – otherwise, you’re an order taker and better go get a job at McDonald’s.”
Amen!Order taking is not sales, that’s account management. Different skill set, different incentives, different expectations.
If this guy comes across your desk, HIRE HIM!
“Your job begins at NO” is definitely the most tweetable thing I’ve heard in a few weeks 🙂
I always thought it was “all negotiations start at no” either way it does the trick.
“all plans must have accelerators” and no caps…. this is true. A first it was counterintuitive for a finance guy like me to understand. I want to pay less at the high end.However you are paying less. If you had two sales people with all of their salary and overhead selling as much as one great salesperson with accelerators the one person costs less.
Best MBA post yet
and the first guest postguess that tells me somethingget more guests posting on mondays!
Great post.Would add one thing: EMBRACE the idea of salespeople making more than you do!You would not believe how many times I’ve seen a CEO or founder decide he needed to “adjust” the commission structure because his top salesperson was making more than him.Pure idiocy and ego. I always react the same “What, you want him to get LESS sales?” But it does happen, a lot.Align incentives and hope that a LOT of people get very rich from your business. Remember, Hyman Roth 🙂
Good point. In general, you never want to punish someone for being successful at meeting the goals you give them, but some CEOs do that anyway. There are different variations of this, but they’re all disheartening. E.g., a salesman brings in a huge relationship that keeps on giving, and someone else gets the ongoing commissions from doing the easier work of farming (to use Keenan’s term) that account.
Should at least do a kickback to the initial referrer!
Circuit City sure learned this the hard way.
I worked at Circuit City in our heyday. After I left, the top management made some really, really stupid decisions on staffing. They tried to out-Best-Buy Best Buy. Good luck with that!! .
One of the great stories from the Kauffman Foundation is how Ewing Kauffman started Marion Laboratories (became Marion Merrill Dow). He was a great sales guy and the President kept shrinking his territory because he was making too much. So he quit to start Marion Labs.
some of the best VC firms have been started by VCs for the very same reasons
Great story! No one has a monopoly; if you get jealous of your best producers – engineers, sales, marketing, whatever – they will just leave.There is an old Talmudic saying: a teacher is never jealous of his/her student, and a parent is never jealous of his/her child. Would be nice if a CEO were never jealous of his/her employees. 🙂
the best CEOs want their sales team to make more cash comp than they doand they know that their equity comp is getting more valuable when that happens
EXACTLY!!!If you have a CEO worried about their cash comp, you’ve got the wrong CEO.
cash is only valuable now
not true. you can’t get wealthy on cash comp. i see people getting rich on equity comp all the time
that would agree with you. All of this MBA monday is about pr4esent moneyversus future money- the money really only is worth something long term ifyou invest it- equity should be a better buy.
Perfect.I keep arguing with other directors who tell me “how come the vendor and sales guy is making more than our profit”. I tell them… let the market decide and why do you want to decide that in the board room?.Secondly “Until you establish your brand name” you have to listen to everyone who brings revenue.
Spot on, Andy.The successful companies I have worked with have understood that.The unsuccessful ones? Well …. 😉
AMEN! CAN I GET A WITNESS?True sales driven companies get this, finance or technical driven companies don’t.The impact can be seen in the results.
Great post Jerry!
You’re right Andy. As a big-box retail store manager many years ago in the commission days, I had a couple of sales people making more than me. It IS a hit to your ego on one respect, especially when you compare your workload to theirs. However, I just smiled and took credit for hiring and training those guys, and remembered that THEY made ME look good.
Good comp plans are critical to individual sales performance, and I think this post hits the key points. The other critical success factor of sales performance is a sales culture. Turn the org chart on its head: the entire organization works for the sales team. If a sales person needs something to make a sale, then the organization’s top priority is to provide it.This is another way of saying that the entire organization works for the customer, but in a way that is concrete and actionable internally. Then the sales person becomes a truly empowered “CEO of his/her patch,” and able to pull resources from anywhere in the company to satisfy a customer, even time of (real) CEO, or CTO, etc.
Pete, I agree 100% that organizations should be sales driven – but with one caveat: sometimes what one key propect needs might not be what the rest of the market wants. Be careful not to derail product plans for the sake of one deal. Listen to your salespeople, provide the resources and be responsive, but sometimes a datapoint is just a datapoint.
Yes, Jud, good point of clarification, thanks. I don’t mean to imply an individual salesperson dictates what the entire company does. To your point, the unique needs of a single large prospect (e.g., the Dept of Defense) could sink a small company or take it way off track, even before producing revenue. My comment assumes sales and executive management have a hand in this! The point applies as a general rule, as does the original post.
I could tell some very interesting stories on this one but suffice to say (and this may be my shortest post ever) An executives job is to remove barriers to sales.
Agreed!
The book “Drive: The Surprising Truth About What Motivates Us” has been brought up so I thought I’d post the 10 min, illustrated talk by the author that is essentially the Cliff Notes for the book.Definitely worth watching over lunch… http://www.youtube.com/watc…We already discussed it at our NYC Entrepreneur’s Book Club [ http://meetup.com/NYCEBC ], but I’d recommend it for any startup/organization who wants to figure out how to motivate.
Any insight on how to structure what base pay should be?Obviously, there’s an inverse relationship, with lower base pay correlating to higher commission rates…But how is one to determine which mix is right or better in which situations?
Another depends,Some things to think about. Complexity of the sale, which impacts the level of sales skill required, Size of the deal, the length of the sales cycle, the level of margin etc.Lot’s goes into it.Traditionally, if its a complex sale requiring high-level talent then higher base salaries with higher commissions 50/50 60/40.If it’s a churn and burn, less complex sale, lower base with higher commissions. 30/70 100% commissionRegardless of split, start with Total Comp. What do yo want to pay “all in” or at quota. 50k, 100k, 250k? Then go from there.If you want to get more specific feel free to reach out keenan(at)asalesguy.com
Hi Keenan,Thanks for responding. Very helpful.Just subscribed to your blog- love the freedom post!-Gabe
Thanks, this is very useful.Question both for Jim Keenan and Fred:This sounds like an after Product-Market-Fit (PMF) model. How does this picture change before PMF for a startup? By the lean startup school of thought, “before” you need the sales experimentalists and innovators who are good at tweaking and discovering what sales pitch works, but get bored once they find the magic formula. After, you need the competitive ABC (always-be-closing) Glengarry Glen Ross types who like to top the sales leaderboards and just really go to work with a proven sales script.Is it possible to apply commission psychology to the pre-PMF phase?Can you “crowdsource” market discovery by offering a broad affiliate program with bonuses for those who discover the magic formula if they help you document it as a repeatable sales roadmap for use in the post-PMF stage, when you’ll be looking to grow with competitive ABC types?Finding good “customer development” type sales people who can help discover a market for a new product seems to be a huge talent management challenge.Venkat
i think the first sales hire needs to be a “maverick/hunter” type that loves cold calling and knocking on doorsand that person needs to be paid a decent base and equity package because it might take him or her a while to figure out who the customer is and what they want to buythen you can move them into a more traditional base + bonus situationit is also true that this person is not likely to your VP Sales longterm and you should not promise that to them that when you hire them
(I’m answering this with B2B software in mind) I would add that they need to love “product”, and working closely with the product teams during a period of uncertainty and flux.They also need to have a strong marketing sense because they will be the one figuring out messaging and story, and creating and adjusting their own materials to fit what works.During this period, the more games of “telephone” that happen between different roles, and the more people or layers you have insulated from actual direct contact with the customer, the slower and more ineffective things will be. It’s a reason why you shouldn’t scale up before things start looking “repeatable”, as Steve Blank puts it, even if your investors are anxious for growth.This type of person might not fit in your sales organization once things are fully up and running — sometimes they shift to a bizdev type of role or lead charges into new markets.
Real Estate company RedFin.com pays its salespeople a commission not on the amount of sales – but on a customer satisfaction rating per sales person.I suppose by shifting the focus from just ‘sealing the deal’ to ‘how can I help these people as best as I can’ has worked for them and produced a substantially high amount of deals for the top producer agents in that business.Maybe what the commission is ‘paid on’ can be adjusted to make sure that the sales person is not burning customers as a result.
i love that idea
How do they over achieve?
I think 100% satisfaction (assuming the survey only goes to 100% satisfied) is as satisfied as people can be. 🙂
Auto dealers have been paying salespeople based on performance evaluations that are mailed to the consumer a few weeks after the sale. It has resulted in a lot of begging for a 100% score – based on the last three new vehicles I have purchased. Three for three I was point blank asked to give 100%, with follow up calls to boot. They seemed to work harder at convincing me to give a good review than from the initial deal.In short, every pay system gets gamed.
Does this change any when it’s salary + commission? Thanks for any responses.
No, I say it makes it that much more important. If it’s all commission there is much more to lose if it’s not right.
Do you have specific examples with real numbers for base salaries, commissions, i.e. the plan itself, based on a hypothetical or real situation for a typical start-up. I just wanted to calibrate some ranges.
Great post. Simple. Simple. It’s refreshing.Why terms sheets have to be so complicated?A question – When is the right time to involve a professional sales guy in a start-up?
we are working to make term sheets simpler
Jim here have a very good definition of “simple”: You can figure the outcome without a spreadsheet.
Aviah,This is a great question. One I have been asked lot. I have been putting off doing a post on it. But will do this week.The short answer is . . . it depends.It depends on, the quality of your existing sales force, the readiness of your product and market demand.
I will wait for the post! thanks
I’m not certain I agree. A sub-par or poor/inexperienced sales hire does more damage to a company, especially a start-up…..than if you had no sales effort. In my experience, you need to go to market – not wait for scale or to get out of beta – with at least one seasoned contributor to mentor, guide, and lead by example your younger, less-experienced (i.e. cheaper) hires.
How would commission for subscription services work?Great post too. Thanks.
Keep it simple.Just calculate the present value of an infinite payments: PV.now we multiple each payment by the probability that the startup will fail. This probability decreases overtime, so it converge to zero on infinity.Than discount for competitors who will come with cheaper service over time x the probability that competitors will show up. This probability, mind you, is negatively correlated to the probability that the startup fail.Than, you take exogenous factors like PR etc which drive subscription rate. Add for changes in product and service over time.Multiply by the % commission which is the equi point of the following factor: The minimum motivation for employees with maximum costs for company. This is easy to figure out, many corporate plans intuitively cut the least costly benefits which maximize de-motivation.There you have it!
Set the quota and the % tiers so reps make a competitive OTE, based on either Year 1 or full contract value. Pay reps upfront, either on signing, or when the Year 1 payment is made assuming it is due up front. This isn’t good for company cash flow, but nothing about SAAS is good for company cash flow, at least until scale is achieved. I’m seeing channel programs work similarly.
Incidentally, related to this post, this essay on salesmen by Thomas Lifson is worth reading. Here’s an excerpt:When I entered the business world and actually got to know not only some really excellent salesmen (and women) and developed an appreciation for the ways they contribute not just to the bottom line but to their customers’ operations, my respect for the sales profession grew and grew. The best sales professionals have a bit of nobility to them, doing what’s right for the customer, even if it costs them or their employers in the short run. They build trust and personal bonds and actively help their customers succeed, bringing far more than a shoeshine and a smile. The best sales professionals are all problem-solvers and dedicated to their customers. They deserve the big bucks they earn.I will never forget a conversation with a former colleague of mine at Columbia University who left teaching to take a job in business, where he was in charge of marketing certain big ticket products for a major company whose name you would instantly recognize. He spoke movingly of his deep admiration for the dealers of his company’s products, many of whom were self-made millionaires. “They created entire businesses out of nothing,” he said with awe in his voice, selling and servicing important tools that made life better for millions. We commiserated over the deeply flawed views of business and entrepreneurs (and life itself) so common in the academic world he left and from which I was departing. Both of us quite voluntarily, I might add.
Jim always has smart advice. His advice on commission plans helped me restructure a sales position I have on offer to include bonuses and other goal oriented milestones for payment.
Great post, Jim, and I totally agree with you: pay for what you want to get, and make the plan easy to understand (I love the “stupid simple” phrase). Do those two things, and you’re on your way to a successful quarter/year/etc..Thanks for sharing!Jerry
Jim, this is a great post. Fred, love the MBA Monday, keep the coming.As for simplicity, couldn’t agree more. I’ve always tried to build the 80 / 280 comp plan. I should be able to drive 80 MPH down 280 and figure out how much I’m going to make. If it is more complicated than that, it is too complex.
Couldn’t agree more with this post. As a sales person myself, I’ve experienced both the extreme motivation of a great commission plan, and also felt my motivation completely disappear by a bad one.
This is great – I’d call it beyond an MBA – thanks Jim.
The ‘interesting’ challenges really develop when one is trying to nurture – and reward – variants of pure sales: ie, those focused on new business development (in relatively unproven markets, for example), strategic account management, etc.Also, the pros/cons of sharing collaborative team success (ie, a sharing of commission across a team) vs. the emphasis being solely on the individual, regardless of the team performance and the support a successful sales person requires.Also, let’s never forget the cost – and profitability – of a sale; commission on what is ultimately a non-profitable bit of business (eg, crazy pre-sales cost cycle that has not been analysed/understood).
Great discussion, but I’d like to know where startups can find great salespeople who understand the “startup mentality” and don’t expect huge base salaries?Most of the salespeople we’ve interviewed recently with good track records expect 150-200K base, plus commission. Seriously? If that’s what the market has decided a great sales guy needs to be paid, I feel like a lot of startups will be priced out. Is there a middle ground where great salespeople work for 80-120K, get aggressive commissions and enjoy the startup spirit? Where are they all hiding?(I’m specifically talking about enterprise/software sales here, not ad sales)
You can get a great salesperson for that amount of money. In fact, it used to be said that if you paid more than $100K base, that was a marketing job. ;>)Keep in mind that was when we had good %’s of the back end (nice options package, forward vesting on change of control, plus very attractive commissions, no caps and accelerators). We had dedicated support engineers to get products properly configured and installed. We got great trips when we were top performers…anybody remember President’s Club?Probably recruiters “resume scan technology” can’t pick out professional sales people, I can’t imagine one that can capture the nuance of experience. And I don’t think there is an algorithm that figures in for the challenges that life throws out that keeps one persons paper from looking like you think it should. The ones that did not have to off-ramp and could keep working, retired already. That means no role models for new sales to learn from. In fact, they may be the “new angels” who are flooding the micro funding market…because they made theirs. And good for them…leaves more room for me! ;>)
Shafqat – $100K base and $230K-ish OTE, plus options, should bring in the candidates. The question a good salesperson will ask themselves is: how likely is it that I can beat quota? Be ready to tell your candidates about the reps on your team who are making good money selling your product.If people are asking for a high base, then chances are, they aren’t buying your story. Most enterprise software reps are paid $100K base +/-.Pete
I’m a real estate developer and I struggle with how best to compensate agents for bringing us clients. At times we build and sell, and in this case it’s pretty straight-forward. We also can build our homes for clients – and in this market the risk profile makes this more attractive than normal. Most builders in the area don’t compensate Realtors for referring them business – which I find both surprising and to be an opportunity for us. Obviously the Realtors are on the front lines in dealing with clients daily. I need them to be suggesting us as an option and I need to offer them the tools and incentive to do so. I am working on this program – both in terms of marketing material for them and the financial incentives. I am open to suggestions on how best to create incentive for the Realtors to suggest us. My thought right now is to:1.) create an email marketing campaign to all local Realttors to build brand awareness and suggest us as a solution to their clients that they are having a hard time satisfying (what we offer is unique to the market). — This is being done2.) Get nice marketing material in the offices of many Realtors – especially top producers — Should be accomplished within 2-3 weeks.3.) Offer specific financial incentives for referrals and/or referrals that lead to sales. I have not done this yet other than to say in the emails that they would be compensated. Not good enough, I know. Also not clear to me if I should offer small incentive for any referral, even if it doesn’t lead to a sale. Clearly this would be full with risk that they game the system – but for say $50 per it may be enough to help us build the brand as we get started in a new market. Thoughts?4.) Offer an incentive for multiple referrals and sales in a given year – say $50 per referral and @10 a bonus of $500? 5.) Create a social rewards type program – dinners or happy hour or whatever for our top partner Realtors.The challenge is that none of these folks work for us and we are breaking in to the area. We need to get them on our team as much as possible. It helps, I think, that we have a unique product for specific types of clients, so we stand alone in that sense as an option for some (maybe 15-20%) of their clients. Generally speaking all of them know all the local builders and developers and have for years, but most of the developers do not have a specific program for any of this.Any thoughts or suggestions for motivating this type of sales person are appreciated and may be implemented.
Not all sales guys are created equal. This is a plan for top flight earners and performers who make up a very small slice of the sales universe. Most “sales people” are in sales because they have no where else to go and have to eat.That portion of your team needs motivation and all of the above but with some tweaking and education. I still find it amazing after seeing many sales teams over the years just who is productive and why. There is a certain element of unknown and luck in this process that is very hard to define.
Terrific post Jim. I could not agree more with all your points. It might be deviating from the topic a bit but I would love your thoughts on how to create competitive dynamics within sales teams. While money is a terrific motivator peer pressure and ego can support the cause as well.
Measure everything and make it public.If you want to create competitive dynamics, measure things then publish and share in a public fashion.Highlight the highest revenue for the week, month, quarter, the highest margins, the most new customers, the fewest returns, the most accurate forecasts, etc.You’d be amazed at how competitive things get when everything is measure in public. No one wants to be on the bottom of list.
Jerry I totally agree. Make the performance transparent to all and let them compete. Otherwise they have no idea how far they can go.
Fantastic post, Keenan. Love the wisdom, here. (For much of my career, my recruiting focus has been sales and marketing — so I’ve had a lot of opportunity to observe how companies have done it right and unfortunately how some have not — which impacts their ability to attract and retain top sales talent — and therefore, MY ability to attract on their behalf. And in the end there is a lot of “sales” in recruiting, so this hits close to home on more than one level.)Like Arnold, appreciate the mention of marketing…all the more meaningful given the context.
Thanks Donna
Fred you said “The key is to sit down with finance, product and marketing with the budget in hand and ask the questions; what do we need to sell by the end of the year? Where do we need the business to be? How much revenue do we need? How much margin do we want? How many new customers do we need? How much growth are we looking for? How do we define success at the end of the year? Once these questions are answered, incent the sales team to do exactly that. What ever you pay for you will get. ” that is all valid but I think the third key element to a killer commission plan is that the targets are realistic and that a bottom up approach is incorporated also. Nothing kills motivation more than targets that are based more on optimism than reality.Also with so many firms on SaaS models these days the timing of commission payments (versus revenue receipts) is becoming key to creating a competitive plan. Salespeople want to get paid upfront of course and companies want to wait till they get paid before paying out but the best plans incorporate some element of risk sharing on the company’s part.Finally, I see a lot of comments about creating plans that allow handing off accounts from hunters to farmers (account managers). My own experience is that most hunters can farm (and appreciate the ability to farm their accounts for extra (and easier) commissions and sales after the initial sale) yet most farmers cannot hunt. I think creating a plan where the default is to hand off accounts from hunters to farmers is wrong. I think that should be done on an exceptional basis and, when it happens, the hunter needs to be eased out of earning commissions for the clients they opened over a prolonged period.
Great posting Jim. I’ve managed commissioned sales staffs in both B2B and B2C environments, and I too am amazed at how often management (above me, that is) screwed up comm plans. One thing that always pissed me off was tiered plans, which always cause salespeople to play games with the timing of sales closings, and ultimately cost the company more money, and put some closings at risk. Unlike Jim, I don’t like accelerators – but if you must have them, keep them extremely simple, and make sure they’re designed so that 20% of your staff will make them!! The other problem with tiered systems is the bottom tier – when salespeople are having a crappy month, and won’t even hit the bottom tier, and don’t get paid at all, it’s bad for morale, bad for retention (you DO NOT want your B2B customers getting to know a new rep every six months, or you’ll be sorry!), bad for customer service, and further exacerbates the above-mentioned sales-closings timing problems. And team goals? Forget about it. Having part of a commission reps comp plan based on team attainment is as stupid as fighting a war on two fronts. Simplicity is good. If the sales manager can’t explain the comp structure to the sales team in one minute, it’s too friggin’ complicated.
DSO/timing of collections should also probably play at least a part of the commission and incentive conversation. Salespeople shouldn’t have to babysit and actually be responsible for collections, but keeping customers (new customers in particular) paying within reasonable time frames is critical for venture-stage companies. You can’t sustain a burn rate with booked revenue; it is all about managing cash flow, and your sales people are the front lines facing the customer. A once or twice-a-month (at least) conversation on account status also keeps the CFO, credit person, and sales people on the same page.
Most killer salespeople burn out eventually because in the end it is not about the money, it is always about being top of the particular game there are in. The money will keep them primed for years but as they close every different type of deal at different levels in different settings the buzz dies. The clever CEO figures out when they hit that wall and if they have the potential steers them to the next level of their career. Good article could have been written in the 70s – these things don’t really change – but the level of subtlety in the sales process has changed, gone are the days of kicking the doors in and demanding at reception to see the telecoms manager for a demo. Is it time for Glengarry Glen Ross yet ? http://www.imdb.com/video/s…
Well-said. When I was out selling, of course compensation was rewarding, but more so was the challenge and novelty and learning. Once I got bored, the money was not enough to keep me. If opportunity or ability to greater impact the company was not made available, I’d move on to the next opportunity to learn a new niche of the industry, tackle a new set of challenges, and develop.That’s how I grew breadth and depth of experience. Some call it job-hopping, others call it knowing when you’re becoming intellectually stagnant.
Jim,Great blog… well done, simple explanation of a process for the CEO’s and their team to build a proper commission plan.As you stated most people over complicate comp plans and try to use them as a management tool versus an incentive tool to drive sales behavior and alignment with the goals of the company.Ghttp://www.openviewpartners…
Mostly, Jim gets it dead right. Over my 40 years of work experience, I’ve been a salesperson, a sales manager, and then the founder of my own sales consulting practice, which has kept me busy these past 30 years.The “mostly” part is that not every sales compensation plan should be commission-based. As a general rule, the higher incentives are relative to over-all base-bay, the less management control there is, and sometimes one wants a *lot* of management control.OTOH, I’m hugging myself in delight about Jim’s comments re: simplicity and never-changing in mid-stream. Complexity and/or changing plans midway is a management nightmare. By the time one has quieted things down, half the year might be lost, as well as several valuable salespeople. Beyond that, complexity and finagling breeds mistrust, and selling is hard enough without adding additional emotional stress
This is so good I’m sending it to someone now who will like it as much as I do. Common sense. Good sense.
The biggest issue I had dealing with sales team was having sales people closing deals that were extremely difficult to deliver profitably by the dev team. The company I used to work for ended up either delivering suboptimal quality (staying polite here) or taking a loss to make good on what the sales person promised the client. Getting good estimates on client requests is hard and sales people were putting a lot of pressure on lowering these estimates (and sometimes simply fudging numbers) in order to close the sale and get their commission.Lesson learned for me was to align commission with profitable delivery of the project sold. That definitively goes against your point of making commissions on a deal straightforward and easily quantified in advanced. Any thoughts on how to handle these cases (aside from firing the sales person once damage is done)?
In agreement with Jim; a good salesperson is one who contributes to and gets paid on top-line revenue. Uncapped commission plans are a must. If you’re hiring and a prospective salesperson quibbles over the base, end of convo.So many managers and upper-management have a preconceived notion that salespeople should not make more money than someone “more senior”, or that wildly successful salespeople are “makingt too much”.Disagree. You can’t argue with the numbers, and cash on the table should be justly rewarded.As well some thought should be placed on compensating long-term relationship growth over churn and burn – so many plans reward client count or initial deposit or 30-day ramp, when in actuality it costs (if I remember correctly) 9-10x more to replace a burned/churned client than to satisfy and incrementally grow an existing one, when you factor in brand damage, one fewer fish out there to act as a hero for your company, and the time it takes to run through another sales cycle to land a replacement. Contrary to popular belief by some management I’ve encountered, there *are* a finite number of consumers out there, and a plan rewarding primarily efforts that encourage churn will come back to haunt the organization.
Great post and great comments. Couple more thoughts…If rep is involved in the pricing, better to pay commission on gross profit than top-line. Makes the “keep it simple” rule harder, but keeps them from dropping the price just to get the business and commo. (Note: most relevant to professional service sales).Also, an old mentor once gave me good advice. Even startups should hire sales people two at a time. High chance that sales people won’t work out so you double your chances of being “right.” Plus there will be built in comparison and motivation as they smile-and-dial and watch their points on the board.
Excellent and valuable article
In one channel where my family’s business operates, they pay commission as a percentage of profit instead of sales. It seems to work wonders in terms of aligning incentives.
In response to the post and the comments, my reaction is as follows. Yes, the “coin” is motivation for the salesperson but to sustain that salesperson and grow the business beyond the one trade into recurring revenue, successful salespeople are much more complicated.Speaking from my own experience as a salesperson in finance for over 15 years here’s what makes me very good at what I do and I suspect it may be similar for my colleagues. Its all in the “kill” and I mean this in the broadest sense: identifying potential clients; developing that relationship: selling the product but perhaps most important, sustaining the relationship. Sheer unadulterated motivation for me has come when I feel passionate about an idea/investment/product, and yes, sell it, but the real power is felt when the idea works. You feel the adrenaline and are motivated to create that success over and over again. The “coin” is a natural byproduct not a motivator in and of itself. At least not for this salesperson. So the commission plan has to pay for the whole process, not a trade but a relationship.