Tag Archives: New hires

What types of draws are typically offered to sales representatives when joining a company with a long sales cycle (9-12 months)? How many months and at what % of target?

You have a long sales cycle, and you know that even your best new hire won’t sell much in first quarter or two. There are several ways to address this, some more and some less effective. Your basic options are explained below,  listed from the least to the most effective in a long sales cycle role.

Recoverable draw

A recoverable draw is an advance against future earnings. So if a person were paid a $10,000 draw for each of the first three quarters of work (typically in addition to a base salary), and if their performance for those three quarters were worth $5,000 based on the standard plan, then they would go into their fourth quarter owing the company $25,000 (3 x $10,000 – $5,000).  And since the sales cycle is 9-12 months, there are more substantial sales in the fourth quarter, earning $12,000 that quarter based on the standard plan. In this case the sales person would finish their fourth quarter owing the company $13,000 ($25,000 – $12,000).

Non-recoverable draw

A non-recoverable draw is an advance against earnings in a specific time period which will not be owed back at the end of that period if earnings on the standard plan are less than the non-recoverable draw amount. So consider a new sales person who is paid paid a $10,000 non-recoverable draw per quarter for the first three quarters, with earnings under the standard plan of $0 for the first quarter, $1,000 for the second quarter, and $4,000 for the third quarter, The sales person would receive payments of $10,000 each of the first three quarters since earnings are less than the draw. The fourth quarter would then start with no arrears position for the sales person, and the earnings of $12,000 in that fourth quarter would be paid to the sales person.

A declining guarantee

A guarantee is an amount that will be paid regardless of performance, and it is often structured to decline over time. For our example sales person, the guarantee might be structured as $12,000 for the first quarter, $10,000 for the second quarter, $8,000 for the third quarter, and then $0 going forward. In this case, the sales person would be paid the $10,000 for the first quarter (no earnings under the standard plan) + $11,000 for the second quarter ($10,000 guarantee + $1,000 earned) + $12,000 for the third quarter ($8,000 guarantee + $4,000 earned) for a total of $33,000.

The problem with the comparison of these three situations in the example is, of course, that we are assuming the same performance with different incentive plans. Many companies find that the recoverable draw results in an accumulation of fear and resentment, and if often eventually forgiven if the sales person is showing promise, but in an arrears position as the draw period comes to an end. The draw may result in the sales person holding opportunities, “saving them up” until the end of the draw period, so there may be a reduced rate of ramp-up in sales. Whereas the declining guarantee makes for the fastest start since the sales person is protected in the early period, but there is no reason to hold back sales resulting in a quicker increase in selling since all sales result in earnings.

Key sales objectives

For long sales cycle jobs, it is also reasonable to expect certain activities, training, and progress in creating account strategies and moving opportunities along in the pipeline in order to earn the full guarantee amount. So instead of a no-strings guarantee, the declining payment stream shown above might be made contingent on developing and executing a territory or account development strategy.

How many months, what % target?

A good approach is to offer a guarantee which, when combined with the earnings under the standard plan in the early quarters, will yield 2/3 to 3/4 of the target amount. You want the sales person to invest along with you in this time period – you are paying something even though sales aren’t coming in, and they are earning less than their market value as they make progress towards closed sales. If the sales cycle is 9-12 months, there may need to be some accommodation for up to a year, but diminishing in value over time.

For an additional discussion of these ideas see another post about onboarding for a shorter sales cycle all-commission role, but many of the principles and examples will apply here in an obvious way.

Hiring your first sales person

For early stage businesses, your first sales hire is hard to do well. You don’t have a sales leader to help you confirm that your candidate has the right skills and temperament for the job. You’re not sure what to expect in terms of productivity. And you don’t have a pay structure or comp plan to tell you how much this person should earn, what kinds of special arrangements are needed (car, expense account), etc.

We’ll leave a lot of that to your other advisors and focus here on the compensation piece with the basic steps you need to complete to arrive at the right comp plan for your new hire:

  1. Your first step is to determine a reasonable level of total compensation for a sales person in your business — in the U. S., that’s what their W-2 says at the end of the year. This is undoubtedly tied, in the thoughts of company management at least, to how much the person will sell in that first year — the cost needs to be associated with a reasonable return. You’ll get better at that as time goes by, but you’ll have to start with some kind of working assumption based on others in your industry, leadership’s experience in selling your products or services, even to a certain degree the perspective of your top candidates for the role and/or a recruiter who may be helping you to fill it.
  2. Next you need to decide how the risk will be shared — how much of that target total compensation will be in a fixed base salary and how much in the incentive at target. For early stage companies, the fixed portion may be relatively low, even non-existent. 30% to 50% of the target total compensation is a good starting place. However, if you are trying to attract a well-established resource to bring their network, skills and experience to your company, you may have to offer a higher base since their choices include many with less risk.
  3. Since you know the target total cash and the base, you can subtract to determine the incentive at target. Your next step is to be very clear about WHAT you expect your new sales person to PRODUCE per year. This is usually measured in revenue dollars, but may be measured in units sold or even gross margin dollars in some industries. Whatever the measure(s), you need to design a plan that delivers the target incentive amount for getting to the productivity goal. This is most typically communicated as a commission (to calculate the rate, divide the target incentive by the productivity expectation). There’s more to consider in designing the payout table than this article can address, such as threshold levels of performance (below which no incentive is earne), acceleration and deceleration in payout rates at over-goal levels of achievement, etc. You will also need to be clear about payout timing (monthly, quarterly, etc.), and measurement periods (independent or year-to-date). But many early stage companies do fine with a straight commission paid monthly – a single rate based on the incentive at target divided by the productivity expectation (e.g., x% of revenue, y% of margin, $z/unit).
  4. Your last design step is to check the plan’s appropriateness across a broad range of possible levels of productivity, and be sure you’re comfortable with both the cost to the company as it relates to results and the income level for the sales person. You will very likely make some kind of adjustment after this review, which should probably involve someone from your Finance group or the company’s owner.
  5. Once you feel you have the right design, your next step is to carefully document the plan in a Plan Document to be signed by both the sales person’s manager and the sales person. Here, you should probably ask for a review by your legal counsel.
  6. And finally, determine how you will administer the plan – where the data will reside, what reports will be run, who will do the initial calculation, who will review and approve it, and how the information will be communicated to your payroll processors.

Then after you’ve been living with the plan for a few months or quarters, have a look again to see if it’s meeting your needs. Always include a clause in the plan document claiming the right to adjust as needed, then don’t adjust during the plan year unless you’ve got a BIG problem. But do consider adjustments each new plan year. As your business grows and changes, the perfect sales comp plan will also change.