Joe Clarkson interviewed Mark Flavin and Donya Rose recently on the fascinating topic of picking a selling model, choosing between “Sales Stars” or a “Sales Machine.” As the tag line says, it’s a choice between autonomous sales superstars vs. team-oriented process-driven sellers.
There’s no one perfect answer for every business, but there are better and worse answers depending on the nature of the sale, the market position of the company, and the coverage model.
Click through for a good read on a perennial challenge.
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.
A threshold is a level of performance below which no variable pay is earned. If a plan has no threshold, then earnings start with the first sale (sometimes referred to as “first dollar plans”). If there is a threshold, then some level of performance must be attained before any variable pay is earned.
The question of whether or not to have a threshold is largely philosophical, though one could make a case that there is some relation to pay mix, in that a higher base salary would pair with a (relatively) high threshold and a lower base salary would pair with a lower (or no) threshold. For plans without a threshold, it is likely that a substantial portion of the incentive that is paid from the first dollar is actually a “phantom base salary,” acting much like fixed compensation, and therefore not truly variable (or motivational).
It makes good sense to consider no-threshold plans for…
- Roles with low base pay as a percent of total compensation at target
- New business roles without any existing book of business to manage
- Roles in which compensation is calculated by transaction or deal (not aggregate results)
- Roles in which it is important for the sales person to have a clear understanding of the comp value of any proposed deal.
Is makes good sense to consider a plan with a threshold for…
- Account manager / territory manager roles with an existing book to manage
- Established/mature markets where growth is a priority
- Roles with good historical performance data enabling management to confidently set the threshold so that 90% of sales people are likely to exceed it
- Roles measured on aggregate performance measures (e.g., total sales, or total margin value) vs. deal/transaction-level measures.
Tips for picking the right threshold if you’re going to use one
If a plan does include a threshold, we generally recommend that the threshold be set so that no more than 10% of reps are performing below threshold. Some organizations tie the level of the threshold to a base salary, or the fully loaded cost of an employee to the organization (which is often a multiple of the salary in the range of 2-2.5x times to account for benefits, overhead, etc.), expecting the sales person to “fully recover” their cost before additional (incentive/variable) compensation is earned. However, this approach leaves little flexibility for times when the company needs to deploy a resource to sell a new product or service, or to build a new customer market.
While calculating the marginal cost of the next sale, or the next sales person, can yield good insights, it’s better to think about the overall cost of compensation as a system (total employee cost divided by total productivity) than at the person by person level. This will enable you to set a threshold (or not) based on the minimum productivity that is acceptable given the different key accountabilities, and goal-setting confidence, for the different selling roles.