Last post I talked about the variables that need to be considered in the development of a sales compensation plan. The structure of your sales organization was the first of those variables.  Why do you have to consider the structure of your sales organization when developing your comp plan? Well the compensation plan is the primary lever to change behavior. How your organization is structured will determine what behaviors are important to you.

1. Salaried sales people- Many manager scoff at the idea of a sales organization predominately staffed by salaried sales people. Yet for many organizations this is the perfect model. Why would you consider having your compensation mostly in salary?
    a) You have a very long sales cycle (measured in years) where multiple reps might be involved in the selling process.  Good examples of this are defense industries, or selling large ticket items like aircraft. It is tough to measure and reward such sales on a commission  basis as there are many people involved in the sale, the sale may take a long time to complete and ultimately bill and collect on,  and the contract size might be so large that it would blow out the sales compensation budget requiring earning caps etc.

  b) You have a brand new product in a new market that has not been tested. In this case you don't know what you don't know, and sales people's function is reconnaissance. They might be able to take down a few deals in the process of their intelligence gathering but their primary focus is to educate the organization on the market, understand where the land mines are, and build the case for greater investment or expansion.

2.  100% commission sales people- This is the classic you eat what you kill view of the world. On a first glance this seems like the ideal model for sales compensation. But a look under the hood often reveals a lemon. 100% commission sales people are concerned about their paycheck not your company's revenue. This means that they will make decisions that make them money first, often at the expense of your company or your customers. They are also predominately self managed. Try to get them to do anything that doesn't pass the test of making them money and they wont-justifiably. If you aren't interested in investing in them why should they invest in you?  Often sales people will take these positions because they don't have any alternative, and as soon as they find an alternative they will jump ship.  100% commission positions are really best suited for folks who want to run their own business.  If your organization is structured this way you want to ensure that your sales reps are viewing their relationship with you as their own business and you align your goals with theirs.

3. Some sort of hybrid of the above- This is where most sales organizations sit. The ratio's may vary but most sales organizations include some salary and some commission. The million dollar question is what is the right ratio.

The secret of the right ratio is in what percentage of the job function of sales in your organization sits in either of the two above camps.  Are you in a market leader in a mature market with a long sales cycle and high dollar value products? In this case perhaps you want to have a 70/30 split with 70% of compensation tied to salary and MBO(management by objectives). The MBO's should be the key input variables in your business as discussed in an earlier post. 30% might be tied to commissions on deals closed on an annual quota.  For an organization with a new product in an existing market, in a price leadership position the break down might be more 50/50. Where as an organization in a market leadership position with a price leadership position might be 30/70. 

The key in understanding this variable is to  understand what are the behaviors that characterize your market/product, and what do you want your sales people to be compensated for doing. Understanding this will get you started on how you need to build your commission plan. Next week variable two- the structure of your revenue model/business model's impact on your sales compensation plan.

Moment of zen
"The world is indeed a mixture of truth and make believe. Discard the make believe and take the truth"-Shri Ramakrishna Paramahamsa

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