This is a common question, especially for smaller companies, whose resources are limited. It’s certainly understandable for a manager to want to develop an incentive plan that only pays out of the company profits (if there are any). The first problem with this approach is it neglects to consider that for employees who are instrumental in generating revenue and margin for the company, individual performance-based incentive compensation should be an essential part of their compensation package (often as much as 50%) and not just a “nice add-on” to payout only when the company can afford it. You would not opt to skip their base salary payments if the company is below its goal, likewise you cannot “skip” their incentive payments. The second reason serves management’s self-interest. When employees believe that it’s possible to earn incentives for their individual performance, they will be motivated (assuming your plan has been well-designed) to work to earn those incentives and then earn even more. If you make it a requirement that the overall company must hit its goal before any individual incentives are earned, then you’ve created a hurdle that may feel unattainable and certainly will feel uncontrollable to the individual employee. When this happens, the employees are more likely to “just give up”, making attainment of the company goal even more difficult, and the short-fall even worse. It’s perfectly appropriate, however, to include a secondary or tertiary plan component based on company goal attainment, but even then the payout should begin at a level of performance that is somewhat below goal as this encourages more growth towards goal.
For people selling IT outsourcing services (the primary offering), the sales people would normally earn variable pay based on bringing in deals. The question revolves around both the right measure to be used and payment timing, so I’ll address those separately:
The right measure(s):
The ideal measure for this type of business is the margin on the deal. Margin rewards sales people for selling profitable business. However, very few companies use this as it is hard to agree on the deal margin, and if cost overruns are frequent you can end up with sales people “helping” you manage the cost side of profitability rather than the price and value side. For these reasons, most use deal value, either total contract value (often abbreviated TCV) or annual contract value (ACV) to measure sales productivity. And generally you do want to pay more for larger deals, which would argue for a payout rate table (typically communicated as a commission). The actual amount of the payout per deal is a function of how much compensation you intend to deliver for at-goal performance and how big the goal is (comp / goal = rate).
Sales credit trigger (timing):
The principle here is that you want to finish paying the sales person for a deal at the point at which you want them to disengage and move on to focus on the next opportunity. So if you just want closed deals, you’d pay after signing. If you want closed deals with nurturing and attention through initial implementation, you might pay 50% at signing and 50% after the first check comes in for under-way monthly service. If you want the sales person staying in touch, finding ways to grow the relationship, etc., then you could pay some (20-25%?) at signing, and the rest over the life of the contract based on recognized revenue.
Question and Answer Format
I need benchmark data on what percentage of annual gross revenue should come from new business and should be allocated to sales force compensation. For example, if in insurance or other annuities there is a commission on first year premiums only and not on renewal business or a reduced rate on renewals. I assume that the 1st year budget for acquisition is higher than maintaining existing customers, but I am curious is that is really the case or if there are any good benchmarks to use as a reference.
I believe your question is about sales roles with a new business focus when the acquired business generally turns into a long-term annuity type relationship. Examples from my experience include insurance policies, ASP software offerings, software leasing, online test delivery contracts, EDI services, data and voice communication subscriptions. In all these cases, the company most values the acquisition of new business, and counts on the quality of the service delivered to retain it.
In these business models, new business sold earlier in the year contributes more to in-year revenue than that sold later in the year as the revenue is generally recognized monthly. For this reason, much of the incentive design effort may be aimed at rewarding those who acquire significant new business early in the year by measuring “in-year new revenue.” Retention is sometimes the job of the new business sales person, but is often assigned to a different Account Manager or Client Services role. If the same person is doing both new business and account management, the total revenue from new business may be very small compared to the total revenue from the existing assigned book (5% – 20% of the total). Often the new business is commissioned (based on new in-year revenue or total contract value), and the retained business is handled more as a quota bonus, with the weight on each component proportional to the expected time allocation.
But to get to your specific question, the budgeted sales comp % revenue is likely all over the place, depending on industry and company stage of growth. In very high margin businesses (software, data services), you are likely to see a higher comp % revenue. Similarly, large deal sellers (deals in the millions, tens of millions and more) would see a smaller percent of revenue as their comp; and small deal sellers (I’ve seen deal sizes in the thousands of dollars) would earn a larger percent of revenue. And in earlier stage companies you are also likely to see higher comp % revenue. The right comp % revenue is really based on the market value of the job (numerator) and the selling model, which generates a reasonable sales productivity expectation per person (denominator).