Tag Archives: Annuity sales

If a sales person is retiring do we “buy out” their future commission stream?

This one is tricky, and we’ll provide an answer based on comp design principles and what we’ve seen in practice. But please know that there are laws governing commission payments in some countries, and in some states in the US. Please confirm your intentions with legal counsel for your local jurisdiction. We are not lawyers and cannot give legal advice.

First place to look is your plans document

If you don’t have one, then there’s probably no legally binding obligation so you’re free to think about what you should do (not what you must do). If you do have a plan document (which you should), you will need to follow your own commitments. If the plan documents it includes a “management discretion clause” or beginning and ending effective dates (which it should), then you are under no obligation for future years (in most jurisdictions); however, your choices here will be watched carefully by current staff – so be sure your choices are consistent with the type of selling your people are doing. And that’s where we’ll focus for the rest of this discussion, on…

What type of sales role do you have

  • Independent operators who build their own books of business with a high rate of renewal or repeat business
  • New business sales people who sell multi-year deals into an assigned territory
  • Account managers who manage and grow an assigned book of named accounts

There are many other sales roles, but these are the three for which the question of the future commission buy-out would be most likely to arise. (And if you’ve got another type you’re wondering about, please post a comment below or send me an email, and we’ll add it in if we’ve overlooked something!) We’ll take each of these one at a time.

Independent operators who build their own books of business with a high rate of renewal or repeat business

This would be typical of someone selling a subscription service (software as a service or business class internet services), or an ongoing agreement (insurance), investment management, etc. In these businesses, sales people work hard to land new accounts and make a modest amount of money in their first year, but make the more meaningful income as they grow their “book” based on the annuity stream it provides in the out-years. If the product or service being sold is available from other very similar competitors, then these sales people may be able to go to another competing company and have much of their book of business transfer with them. They are often on 100% commission plans (no base, or perhaps a modest recoverable draw against commissions).

These people are truly running their own business inside of their employer’s business. There are often arrangements at retirement for the successful sales person to “sell” their book of business to a younger sales person because that annuity stream has substantial value; and their employer may accept, or even encourage, this practice because it enhances the chance that those valuable customers will remain with them after the retirement of the long-time sales person. In these cases, there is often a buy-out in some sense, but it’s not the employer who buys out the future commission stream – it’s a fellow sales person.

New business sales people who sell multi-year deals into an assigned territory

This type of role is often found in large systems sales (software with implementation services, utility infrastructure, large scale construction). Deals are large, often with very long (multi-year) sales cycles. And the company recognizes revenue from these sales over a long period of time, typically several year. Sales people who lead the selling effort for these deals are often paid over the deployment period as revenue is recognized (sometimes with an up-front “win bonus” or other mechanics – but payment triggers is a whole separate topic). These sales people typically have a more substantial base pay, enough to live on (perhaps not comfortably) in the “building” years before the first deal is closed. Their compensation on the large deals may eventually make up 40% – 60% of their total compensation, but far short of all of it.

If a sales person who has been successful selling several of these large deals leaves the company before full payment is made, a few different approaches could make sense:

  • Continue to pay the commissions under the standard compensation plans, even after the sales person has retired. This would be appropriate if the deals include substantial anticipated revenue that is not a full commitment (e.g., up to 1000 hours of professional services at $200/hour). In this case, the reason for the delayed payment may be that it’s not absolutely clear what the full value of the contract will be by the time it’s over – so the most sensible approach is to just pay it out as it would otherwise have been paid.
  • Pay commission only up to the time of retirement. This would be especially sensible if there is an ongoing responsibility for managing the customer relationship through the deployment, and this responsibility will need to be assigned to another sales person when sales person retires. That newly assigned sales person will need to be paid for their contributions, so they would likely pick up the commission stream from that point. (Alternatively, there could be some sharing of the future commission stream if a good handoff is important to incentivize.)
  • Buy out the future commission stream at retirement. If the full value of the deal is known at signing, and the comp value is also known, it may just be simpler for all concerned to calculate the expected value of the future commissions, perhaps discounting the out-years a bit based on the time value of money, and end the tracking and accounting with a check at retirement.

Account managers who manage and grow an assigned book of named accounts

These sales people are responsible for important accounts, often the largest and most important accounts in the company. They may have been the original seller, or they may have “inherited” the accounts from others who came before them. Either way, their job is to maintain and grow these account on behalf of the company. Typically they are coordinating multiple resources inside the company to serve the needs of their assigned customers. They generally have a substantial base pay, and a stated target incentive amount, perhaps in a 60/40 to 70/30 mix (%base / % incentive at target), with the ability to earn about twice the incentive target in a great year with great results.

These people are team players who are doing an important job inside the company as part of a larger group. Their incentive pay is really for this year’s results given the book and opportunities that came their way. No buyout of future commission payment would really make sense for them. In fact, their compensation plan is likely to be a bonus type plan and not a commission plan anyway.

Looking Ahead: Should We Make a Change?

From July 2010 Sales Compensation Focus, a Publication of World at Work.

By Beth Carroll and Donya Rose

The economy appears to have taken a positive turn and many companies are starting to think about growth:  hiring more sales reps, launching a new product, or breaking into a new market segment.  One of the first questions that is raised when a company returns to growth mode, especially if there has been significant retrenching, is, “What should we do with our sales compensation plans?” Odds are high that the right focus for the recession is not going to be the best focus for the company’s growth phase. It may be time to take a hard look at your sales incentive plans.  There are some key indicators you can check to determine if it’s time to make a change, and if it is, if you can afford to wait until January 1 (or the start of your next fiscal year) to implement the new plans.

    1. You scaled back (or perhaps eliminated) incentive compensation during the recession, and now you see that your people are not engaged fully to capitalize on sales opportunities.You need to act as quickly as possible to regain momentum and re-energize your sales staff. While this is not a situation that should be left in place until the start of the next fiscal year, a full redesign of the plans may not be the only alternative. First, consider SPIFFs, contests and recognition programs. Are there things that can be done that will quickly drive new sales and create increased enthusiasm in a cost-effective manner? Second, consider adding a small “bounty” type incentive that provides additional income tied directly to the performance you need most right now (e.g., new customer acquisition), but that limits your exposure if sales opportunity radically exceeds or falls short of your expectations. Third, if you can, consider a stub-year plan that will shift people in the direction you will want to go at the start of the next fiscal year. If you filled in an incentive gap by increasing base salaries, you can start to move them back down again. If your employees have been earning 60% of what they earned in better years, you can start to bring that number back up again by developing a more modest incentive program with less leverage than was appropriate in more stable market conditions. In addition, you should consider the culture that has been enforced (or created) by your sales compensation program. Should you add a team-based element to keep the focus on working togethe
    2. You scaled back your expectations in terms of goals or volume production, and now you are starting to see payouts that are far higher than you expected. This is also a situation that has the potential for serious negative consequences on two fronts. First, your company’s financial performance could be adversely affected by overpayment in the incentive program. Second, your employees’ sense of their own value in the market place could be inflated beyond reasonable expectations. It is remarkable how quickly salespeople come to expect a higher level of earnings on an on-going basis once they have experienced it for a few months or quarters. It can be very hard for them to accept the adjustment that will inevitably be required. Quick action is needed to recalibrate expectations, supported by thorough modeling to make sure that pay levels return to appropriate levels without damage to morale, and while still providing significant upside earnings potential for true top performance.
    3. You are finding it difficult to hire top talent, and the reason cited is the lack of a competitive compensation package. You can take a two-pronged approach on this and develop a plan for new hires that would be a lead-in to next year’s plan for the existing staff. Because many companies provide a guarantee for new hires, such an arrangement is possible for a few months before any significant discrepancies in the two versions of the incentive plan are felt. However, you will want to make the transition strategy clear for the incumbents so they know that at a specific future date they will be moved onto the new incentive plan as well. Many salespeople have become leery of 100% variable plans, as they’ve seen what can happen when they fail to cover their draw month after month. Even top salespeople in industries that are highly risk-tolerant may be more interested in finding programs with at least a modest base salary. A 40/60 to 60/40 pay mix is reasonably aggressive, and yet either option allows some degree of control from an employer/employee perspective while providing salespeople with a greater sense of security. Of course, the less variability in the plan, the less leverage on the upside, as this is a necessary trade-off. But it is one that can be designed to provide very attractive earnings opportunities to true top performers.

    Payment timing for multi-year deals

      Question

      Our sales people sell long-term deals, most of which span several years. When should they be paid for these – upon signing, as invoiced, when revenue is recognized, at completion, or a combination of these?

      Answer

      We have seen several different compensation arrangements for long-term deals, which are often found in subscription businesses (e.g., SaaS, phone/internet service, online test delivery), and complex multi-year implementations requiring installation/configuration (e.g., enterprise software, utility infrastructure). Some businesses pay the sales people who sell these long-term deals all at once, and others stage the payment over time. The most common arrangements we have seen are listed below, along with some idea of when they are most valuable:

      Pay upon contract execution

      This is most common when the sales person is a pure “hunter” and there are project management or account management people in place to take the hand off after the contract is signed. The sales person has “done their job” when the contract is signed. And the value of the contract to the company is very likely to be exactly as expected at the time of signing.

      Pay as invoiced

      In this case, the customer may pay a portion of the agreed price at signing, then pay over the course of the contract, perhaps as milestones are attained, or perhaps on a regularly monthly schedule. Often the sales person will receive payment after each invoice is created. In many types of business this will also align with revenue recognition (when goods are shipped), but may not (especially in the case of software sales or professional services for installation). This type of payment policy will keep the sales person focused on ensuring the contract is executed as planned, and invoices are generated. It will also allow the company to better align the cost of the sales compensation with the income received. And in cases in which the contract is for a rate (e.g., for bandwidth used, hours of professional services, or tests delivered), it will ensure that the sales people is paid fairly for actual realized sales.

      Pay when cash is received

      If collection is often an issue, or if sales compensation cost must be funded directly out of cash receipts, a cash-based payment policy may be used. This will have the effect of focusing the sales person on seeing the transaction all the way through to collection. This is most commonly used in cash-flow-constrained early-stage businesses. Most more mature businesses find that well-written contracts and careful negotiation of terms, combined with customer-pleasing delivery and a capable accounts receivable function ensure the cash comes in; and they would rather have their sales people focused on selling than on collections.

      Pay when revenue is recognized

      Especially in the sales of licensed software, software as a service, and professional services associated with software implementations, revenue recognition rules come into play. It is possible for contract to be signed, and even for substantial cash to be received, and yet for the company to not be able to recognize significant revenue until a later quarter or year. When revenue recognition that is potentially out of alignment with order acceptance, invoice generation, and cash receipt is an important business goal, sales people may be paid based on recognized revenue.

      Pay portions of the compensation on a deal based on a combination of the above “triggers”

      In some cases, several of the objectives cited above may be in play. For example, there are new business “hunter” sales roles for which the “handoff” to the project management team happens over a six month period while implementation is under way. In such a case, 50% 0f the payment for the deal may be made following contract signing, and 50% following completion of implementation.

      Key principles
      1. Finish paying the sales person at the point at which you would like them to disengage and focus on the next deal for the typical deal.
      2. It’s reasonable and appropriate to include charge-back provisions so that sales credit and payment will be reversed if deals fail to materialize as anticipated. This should only be used as a fail-safe when such reversals are rare (well under10% of deals).
      3. The payout arrangement has to work for the sales person and the company – so if the company is cash-strapped, payment aligned with cash collection may need to be considered.
      4. Beware annuity “tails” – they create plan administration complexity, encumber the company years from now based on a plan designed today, and, over time, may create a situation in which current year pay is not tied to current year success for sales people.