In larger more mature businesses the sales role may be “split” so that there are new business-focused “hunters” and existing business focused account managers (“farmers”). This helps ensure appropriate focus on both of the important sales tasks of acquiring new accounts and nurturing existing accounts. It often helps as well with filling the sales jobs since fewer people are comfortable in both the more aggressive high-risk hunting role and the more nurturing and service-oriented farming role. And it makes sales compensation design more straightforward since the compensation arrangements for these different activities are usually different.
Typical Hunter and Farmer plans
A typical Hunter plan is a first dollar commission on the sales (top line) value of new business won. Sales credit and payment may be given once the business is fully secured (e.g., contract signed), or under way (e.g., shipped, or implementation started). A typical Farmer plan is goal-based with the goal size reflecting the assigned “book” of accounts. The measure may be the sales value of renewals, recognized revenue in-year, or even the margin value of the recognized revenue in-year. And the plan is most likely a goal-based incentive with a threshold and meaningful acceleration over goal.
So how do I pay someone to do both?
There are several possible approaches here:
- Split the plan into New and Existing incentive components
Pay a first dollar commission on New and a goal-based incentive on Existing. Think about how much time the sales person should spend in each type of sale, and split their incentive at target accordingly. For example, if 40% of their time should be focused on New, then 40% of their incentive target should also be focused on New, with the remaining 60% on Existing accounts.
- Single component plan that requires both retention/growth and New
Assign a goal for Total Sales that will only be achieved if an acceptable level of business is attained AND an acceptable level of New is also achieved. A threshold level of performance may be established below which no incentive is earned in order to focus the variable compensation dollars on the range over which performance should move; this makes each added increment of sales in the performance range more valuable to the sales person. Provide meaningful acceleration for over-goal performance since this only going to happen if things go well for both new and existing accounts, a valuable outcome for the business.
- Pay on Net New
In a fast-growing business in which the question is not, “Will we grow?” but “How much will we grow?” this can be very effective. Assign a book of existing account and new business opportunities, then pay a commission on the growth (generally over the prior year). Clearly the commission rate on the growth will need to be much higher than a commission on total sales would be. WARNING: If there is any chance at all that “growth” could be negative, this is not a good choice.
While many established sales organizations use the hunter-farmer model as their sales force organization model, there are inevitably geographic territories or customer segments that do not justify a dedicated team of new business sellers (“hunters”) and account managers (“farmers”).
New business sales jobs focus primarily on acquiring new accounts. The incentive plan rewards for new revenue or profit margin brought to the company. In contrast, account managers often are assigned a book of business that includes several new business sellers’ territories. Their focus is on retaining and growing established accounts (so new business sellers can continue to bring in new customers).
The territory manager we will discuss is a hybrid of the two with the expectation to not only acquire new customers but also retain these customers (and grow revenue or profit margin). The compensation plan that results is often is a hybrid of the hunter and farmer plans’ key components that may let the territory manager decide whether hunting or farming will maximize the incentive pay regardless of sales management’s preference for a more balanced approach.
An alternative approach that has been more successful in achieving sales management’s objective is to measure performance and pay incentive pay based on net new business revenue or profit margin. This approach communicates to territory managers that any lost business must be offset by new customer acquisition or selling additional products or services to current customers.
The key is that the net new business goal is set based on historical territory performance plus the desired growth. The goal will not usually be as great as for a direct seller since the lost business goal for account managers is an offset to the growth. In addition, there is often real work involved in servicing and maintaining the established book at historical levels before any growth is achieved. However, the net new business goal should always be a positive number – new business exceed anticipated losses to keep the territory manager focused on growing the business by at least the overall percent the company is expecting revenue or profit margin to grow.
When goal setting is a challenge for this job and results may be volatile, and effective compensation arrangement may be a mix of bonus and commission. For example a prorated bonus is paid for performance above threshold to excellence (e.g., 80% to 120%) then a commission is paid for above excellence performance (over 120% in this example). This approach retains the needed linkage between pay and performance while ensuring that the additional incentive dollars are self-funded.
The first question about the multi-year maintenance contracts is whether the role for which you’re compensating is a new business role or an account management role. If its primary focus is gaining new business (new name accounts, or as some say “new logos”), and if there is a capable account/project manager to take the relationship once it’s established, then you’d like to pay the sales person relatively close to the time of the signing of the contract for the new business. A typical arrangement might be 50% paid once the contract is signed + 50% paid once the service is stable and the monthly/quarterly fees are coming in (perhaps 3 – 6 months later, or based on achievement of a specific milestone). The sales credit which forms the basis for the payment should take into account the annual value of the contract and the contract term. One common approach is to credit 100% of the first year value + 50% of the 2nd and 3rd years, with less or no credit for terms beyond 3 years. In addition, the expected profitability of the deal may also affect sales credit to the extent that the sales person controls pricing and the profit can be reliably predicted. This doesn’t address all the issues around upsells, renewals, contract extensions, etc., which would also have to be addressed.
If the role to which you refer is more of an account manager who lands the business only to manage the account and grow the relationship over time, then the ideal measure is recognized margin (the margin value of the revenue recognized). If margin is controversial or hard to measure or calculate on an account by account basis, then revenue may be the better measure (and it is certainly the more common measure for this reason). In this case, the person may be paid based on attainment of a quota customized for their book, or based on growth in the value of the assigned book over prior years (through more volume to existing accounts or addition of new accounts).