Previously I discussed how organizational structure impacts the philosophy that drives sales compensation. Another major variable is the type of business you are in. What this really means is the alignment of shareholder/owner goals to the goals of sales people and sales management. Let me use an example to illustrate. If the owners primary goal is revenue growth, the compensation plan should be structured towards top line revenue growth, and this should trump any sub goals such as cost of sales, gross margin, etc. Many business owners believe you can create incentive programs that pull multiple levers. In my experience while this is possible it is extremely difficult. Sales people like water seek the path of least resistance and it is nearly impossible to close every possible loop hole to make sure all your levers are working properly. As an owner or sales manager identify what the primary lever you want to use is and then use it to move the sales organization.

What levers should you consider? Well it depends on what business you are in, and what stage of business you are in (start up, growth, maturity, decline). Organizations in a start up or growth phase should really be focused on revenue growth, and as such the compensation plan should be tied to top line revenue. Some organizations might want to add a secondary lever for gross margin so they can quickly identify good customers from bad as to not bankrupt the business in this fast moving stage. How would this look? The industry standard for software is 6-8% commission for every dollar sold.

>80% of quota    4%
80%-99%          5%
100%-125%        8%
126%+                  10%

A structure like this heavily motivates reps to get to 80%, because if they arent there, they are taking a disproportionate hit on commissions. The accelerators post 100% encourage reps to over achieve. The question of gross margin can be addressed in a couple of ways:

1. You can structure approval levels where reps can only sell deals that achieve X gross margin before pushing it up the flag pole. Or if you don't want to expose the gross margin set dollar or percentage discount points. An example would be  reps have flexibility of up to 20% off of list, managers can move to 35% of list, <35% requires executive approval. This will guarantee that management is making the call on lower margin deals and you wont have reps having a fire sale to hit quota.

2. You can set a commission modifier based on GM (or price point) and tie it to the months revenue. An example might be (again industry specific):
Average sales price of rep
>50% of target ASP    -2% eligible commission rate
51%-75%                     -1%
76%-100%                    no modifier
101%-125%                +2%
126%+                           +4%

The great thing about this structure is that you are going to push reps to sell not only at quota but sell for the highest price possible. As a rep at 126% of quota and selling at 126% of target asp would be looking at 14% commission on a dollar sold. Too rich? Well it comes back to alignment-the organization is making at the top level 9x what the rep makes. As long as your goals are aligned with the compensation plan, giving reps the ability to make big dough will ultimately result in over achieving reps at big gross margin.

Next week input variables-how do you build your compensation plan such that reps build your business long term as opposed to a month at a time.

Moment of Zen

"A dog is not considered a good dog because he is a good barker. A man is not considered a good man because he is a good talker." -Buddha

P.S. If you are interested in leveraging the karmic philosophy to accelerate your career or business please check out my website http://www.karmiccoach.com , and get Karma working for you!