Question and answer format
Our sales force’s compensation is 38% of total company compensation. Is that appropriate?
There’s not really any useful benchmark I know for sales compensation % total compensation. It depends very much on your industry, company stage and basic competitive strategy (technology driven, operations driven, market driven).
The right place to focus is on the value of the sales force and how that relates to the cost. Even if what they are paid is market-competitive, it could be that you don’t have a sustainable selling model if the rest of the economics of the company (marginal profitability of the next sale, cost of supporting the sale, overhead structure, other channel costs, etc.) don’t align to create value for the owners.
There are useful ratios that hold within industries like total sales compensation should stay below xx% of revenue — but even these are useful guidelines at best.
One key idea to keep in mind is that, as a company matures, the sales people should continue to earn more money each year. But their productivity should go up even faster than their earnings so that sales compensation as a percent of revenue declines gradually over the very long run. This is because the company is adding to the sales person’s ability to be productive every year by building their product line, cost efficiency, market presence, selling tools, etc.
Question and answer format
We need a comp plan for the first year for a new experienced sales person.
My suggestion is that you first be clear about the long-term nature of the role, the expected level of productivity (e.g., sales/year), and the amount of total compensation you feel would be appropriate for that level of productivity. You can then design the “steady state” comp plan for the longer run.
Once you have designed the long-term comp plan, you will be able to clearly state the base pay amount as the base for that long-term plan. Let’s assume it’s $60k base with a target total compensation of $100k. Then you would offer a non-recoverable first year draw of $40k with the expectation that the second year, any pay in addition to the base would have to be earned based on the mechanics of the incentive plan.
In comp design, the possibilities are endless, but the principles are few:
- Ensure that the incentive offered is meaningful enough to drive desired results (but no so “meaningful” that problems arise with quality, integrity, etc.).
- Make the goals/ criteria for earning the incentive clear and explicit — and achievable. If goals aren’t seen as achievable, no one is going to reach for them.
- Align measures with top priorities for the company — remember that your incentive plan is a powerful communication medium. If you pay for activities, you will get activities. If you pay for results, you will get results.
- Document and communicate the plans well. Track and report more frequently than you pay. Publish the reports in an understandable format.
- Keep it as simple as it can be and still reflect the requirements of the business. In the tradeoff between Simple and Fair (meaning perfect reflection of value created by the employee), err on the side of Simple.
- Keep your eye on these principles, and consider revising the plan every few years. Your business priorities change, your messages to employees change — so should your plans.