I spent over 25 years analyzing, writing, and optimizing comp plans. Along the way, I picked up a lot of best practices. Let’s explore these and how you can write an effective sales comp plan. 

NOTE: this blog uses the word incentive to refer generically to both commissions and/or bonuses.

Comp Plan Types

There are many different kinds of sales jobs and therefore different incentive structures. The most common comp plans include:  

• Salary + Commission: salesperson is paid a base salary and earns commissions on each deal. Most account executives have this kind of plan.
• Commission-only: salesperson is paid only commissions, no salary. These may include a draw on future commissions.
• Salary + Bonus: salesperson is paid a base salary and earns bonuses on meeting specific sales goals. Sales engineers and customer success roles often have this kind of plan.
• Territory / Team Volume: salesperson is paid a base salary plus commissions based on the performance of an entire team or territory. Most sales managers have this kind of plan.

While these plans may have different ways to compute incentives, they share a common set of components. Let’s take a look at those elements and how they build a reliable incentive structure.  

Comp Plan Elements

There are five critical elements to a comp plan:

1. Opportunity Types
2. Incentive Basis
3. Incentive Rate
4. Accelerators
5. Payout Process

Let’s examine each of these and why they are important. 

1. Opportunity Type

Not all customers are the same. Some deals are more difficult to close, and some customers are more desirable. Opportunity Types provide a way to differentiate, categorize, and scale incentives appropriately to the desirability and complexity of each customer type.

For example, let’s say your company wants to break into the healthcare industry. Using opportunity types, you can create a category named “Target Accounts.” Then provide each salesperson with a list of healthcare companies. Any deal a salesperson closes with an account on the list receives an increased incentive payment. This encourages the sales team to focus their efforts on these target accounts, thus driving the business you want.

Ideally, your plan should have three to five opportunity types. Too many types and your plan will become convoluted and difficult to enforce.

Here is a suggested structure:

Type	Incentive	Description
Standard	5%	An opportunity that was given to the salesperson. This includes in-bound leads, existing customers, renewals, and referrals from partners.
Organic	10%	An opportunity the salesperson generated independently without help from marketing, partners, or other employees.
Target	15%	An opportunity closed from a customer listed on the salesperson’s Target List.

The definition of each type is important. If there is confusion about what constitutes each type, this may lead to arguments and disillusioned salespeople.

2. Incentive Basis

This is the starting value to compute an incentive payment. For many companies, this is the gross profit (GP) on a deal. For example, a salesperson closes a deal classified as organic for $50,000 and it has $15,000 in costs. The incentive basis (GP) would be $35,000.  Based on the opportunity types listed in the previous section, the commission would be 10% of $35,000 or $3,500.

The key to incentive basis is an ultra-clear definition. A good comp plan never creates ambiguous incentive calculations. Therefore, when you write your plan, make sure to precisely explain how you compute incentive basis. If direct costs are included, but not indirect ones, then you need to describe what constitutes a direct cost. Always provide examples, to ensure there are no misunderstandings.

3. Incentive Rate

This is how much the salesperson earns on a sale. Typically, this is expressed as a percentage of the incentive basis value and scaled to each opportunity type. Percentages are always preferable as they scale up and down based on the size of the deal. Fixed commission payments are only effective when you want to reward specific, non-income-generating accomplishments, such as setting up meetings.

Be careful with incentive rates. They need to be high enough to motivate results, but not so high they hurt your overall profitability.  Moreover, you may need to alter the rates based on margin. Low margin sales will naturally create smaller incentives. This may discourage salespeople from selling low-margin items.

4. Accelerators

Accelerators reward salespeople with additional compensation when they exceed quota.  For example, if a salesperson hit 125% of quota for a quarter, their incentive rate could go up 1%, increasing all their incentive payments.

Here is a suggested quarterly accelerator schedule:

Accelerators can have a huge impact on a salesperson’s income and motivation. However, if the accelerators are too aggressive, they might hurt profitability.

Work with your finance manager or bookkeeper to run financial models on different accelerator structures based on historical values. You may need to implement flat-rate accelerators or limit the total amount that can be paid.

5. Payout Process

For sales incentives to work effectively, salespeople must be able to quickly and reliably compute their incentive payments. Documenting the exact process the company follows to pay incentives reassures salespeople they will get paid.

Documenting the process also creates consistency and a check-and-balance process. Here are suggested steps for a payout process:

1. Sales manager submits incentive payout request to Controller (bookkeeper, CFO, finance team member, etc.) This request details each deal closed as well as the expected incentive payment.
2. Controller reviews and validates the requests are correct and eligible to be paid. Controller works with sales manger to make any corrections or adjustments.
3. Controller obtains approval to pay incentives from CEO (COO, etc.)
4. Controller returns payout request to Sales Manager indicating which incentives are approved to be paid in the next payroll cycle.
5. Sales Manager communicates this approval to appropriate salesperson.
6. Controller processes incentive payments in payroll

Additional Guidelines

Ultra Precise Language

Among all the challenges of developing a comp plan, the most insidious is the words themselves. The language of a comp plan must be simultaneously extremely precise and easy to read. One confusing word or ambiguous definition could land you in court with an angry employee demanding more compensation than you intended.

Consider these two examples:

BAD: Account executives (AE) earn 10% commission on gross profit for all consulting sales.

BETTER: Account executives are eligible to earn 10% incentive based on the gross profit of deals the AE was assigned and closed.

The first item is too vague and lacks key qualifiers. An employee could interpret this as they earn 10% on all sales, regardless of whether they closed the deal or not.

The second item uses some important qualifiers. For example, rather than “earning” a commission, the salesperson is merely “eligible.” This gives you more room to control what is or is not a legitimate commission. Moreover, the word “commission” is replaced with “incentive.” Commission is a loaded word with a specific, legal meaning. Incentive is more generic, giving you more freedom to define what an incentive is (or is not).

If you are not familiar with writing a comp plan, hire an expert (like me) or use well-vetted template. Furthermore, have your legal counsel review the plan to ensure it is defensible in court or arbitration.

Different Plans for Different Roles

One comp plan does not fit all. Depending on the sales roles you have, you will likely need as many as five different plans. For example, the most common roles are:

1. Business Development Representatives (BDR): work on in-bound leads, set appoints, and so forth.
2. Hunters / Account Executives: actively work to drive new business.
3. Farmers / Account Managers: manage existing customers
4. Subject Matter Experts / Sales Engineers: provide subject matter expertise to close deals
5. Managers: oversee the team, set quotas, etc.

Each of these jobs is different and likewise must be compensated differently. For example, closing new business is more difficult than managing existing customers. Use the same plan template, but alter the Opportunity Types, Basis, and Rates to match the relevant effort for each role.

Reward Results, Not Effort

I spent countless sales meetings listening to struggling salespeople complaining about the effort they were pouring into sales. While I empathized with their struggle, effort without results is meaningless.

Comp plans must focus on rewarding the results of hard work, not the work itself. Moreover, do not reward “almost” results. Accelerators or bonuses should only kick in when quota is exceeded.

Everything Must Be Public

Finally, the entire sales process, comp plan, and quota attainment must be open and public to the entire company. This ensures that everybody in the company can trust the sales process and see overall performance. This also ensures the sales team is accountable to their quota.

Final Thoughts

An effective comp plan can supercharge your sales efforts and attract top talent. Most importantly, it rewards both the company and the salespeople. This is an important part of being a salesperson – the ability to make a lot of money when you are successful. 

Skilled salespeople, armed with a good product, effective sales tools, and a generous well-defined comp plan equals a successful company.

Always be closing!

Need help with your comp plan? Zenaciti offers comp plan analysis, development, and optimization services. Contact us to setup an introductory discussion. 

The post How to Write an Effective Sales Compensation Plan appeared first on Zenaciti.

These are all reasonable explanations, yet they ignore the most obvious one: outlandish valuations. Is a startup with $5M in revenue worth a billion?

No…and to think otherwise is outright delusional insanity. However, I do not fully understand the absurd valuation math of Silicon Valley. It seems that if an investor believes a valuation is true, then it is.

Keep in mind, this is the place that minted valuation absurdities like Theranos, Webvan, and (here is an oldie but a goodie) Cue Cat. Yes, that Cue Cat. In fairness, for every Cue Cat that Silicon Valley funded, there are dozens of genuinely innovative companies that contribute to the forward progress of humanity.

Whether it is absurd valuations or the lack of baby formula, a reset for startups seems inevitable. So, what kind of evasive maneuvers can startups take to weather the coming dark times?

Vision

To paraphrase the great philosopher Freewheelin’ Franklin: vision will get you through times of no customers better than customers will get you through times of no vision.

Vision is a description of the future. A well-defined, well-articulated bright future inspires hope. Hope that the company will successfully navigate through the darkness. Hope that rewards are attainable. Hope that all the struggle, toil, and stress will be worth it and have meaning.

To paraphrase Jyn Erso, startups are built on hope.

To promote a brighter future, startup leaders must emphatically promote the company’s vision. To do that, answer four questions:

1. Why does the company exist?
2. What problem(s) does the company solve?
3. What are the values of the company and its people?
4. How can people find meaning and relate to those values?
5. Where is the company going?

Do not make your vision about money — ever. Money is a weak motivator. Moreover, nobody cares about making money for the investors or founders. Vision must be about something people can genuinely care about. Money must be the result of staying true to the company’s vision, values, and mission.

Vision gives people purpose. Without purpose, employees invariably ask themselves “why am I here?” It does not matter how smart you are, or how many big shots you know, or how much money you have in the bank, without purpose people have no reason to stick with the company.

Vision will get you through the downturn. However, words alone will not solve everything. There are some other ways to stay on target.

Automate

One of the many ways we sap meaning from people is to put them into roles with repetitive, boring work. Automate repetitive tasks and promote the people into more meaningful work.

The mere act of shifting people’s focus from performing a repetitive task to automating that task, provides a more satisfying job. Moreover, one a task is automated, your products and services become more reliable, scalable, and valuable.

Put that Coffee Down

Maybe you need Alec Baldwin to yell this at you: Always Be Closing. You need to sell, sell, and sell some more. To do this, you must arm your sales team with the resources they need to effortlessly demonstrate your company’s value.

For example, all salespersons must be able to expertly demo your products at a moment’s notice. If you sell services, you must have a library of sample output (reports, content, etc.) that demonstrate your capabilities and expertise. Demos and samples are effective ways to communicate your company’s competitive advantages.

In my experience, the only way out of a hole, is to sell your way out. There are only so many cuts you can make to staff or spending before the company becomes ruined. Investing in sales and marketing is the ticket out of the dark times.

However, before you charge ahead, be clear with your sales and marketing teams that results are the only metric that truly matters. Effort is expected, but results are what they are measured on.

Product Improvements

You know the next valuation is going to be low(er). So why not actually improve your app and have something more valuable? Downturns are an excellent time to clean up all the crap in your app that is holding you back. Quit dickering around with every dumb customer feature request and go back and fix the big stuff.

Emerge from the darkness with products and services that are more valuable, and therefore can command reasonable valuations.

Repackage

When times are tight, buyers go bargain hunting. They expect every app, service agreement, and subscription to go farther, offer more, and solve more problems. If you are a special little unicorn app that only works in a narrowly defined set of requirements, then it is time to repackage yourself and broaden your appeal.

Build packages that solve entire business problems all in one. Moreover, reprice everything into monthly subscriptions, usage-based billing, or extended terms to make payment easier on customers.

Partner Up

Rather than be a lone sinking ship, partner up with other sinking ships. This also can help with repackaging. If you can bring partners to the table that fill gaps in your offerings, then you have more to offer.

However, before you sign up a bunch of partners, make sure you understand how each partner makes money. Each partner must be able to see how they can benefit, otherwise it is not a real partership.

However, be honest with your scale. A $5M startup is not going to have the market reach of a titan like Cisco or Microsoft. If you partner with a bigger player, then you need to accept the inherent unequalness of the partnership.

Be Brutally Honest

Unfortunately, tough times mean doing more with less people, resources, and time. Layoffs, cutbacks, and delays always feel bad.

Do not sugar coat the unwelcome news. This only makes you look foolish and desperate. Also do not make it about you. Be honest about the changes. Show remorse but show resolve as well.

The intent is to show you care about people, but you are committed to staying the course and seeing the bad times through. This is why vision is so desperately important in bad times. Layoffs and lost deals are the ideal time to double down on the company vision, values, and mission. It pulls everybody back together and recenters them on why the company exists.

Conclusion

Do not give up. Downturns are inevitable. Yet, nothing bad lasts forever. Startups can survive (even thrive) in bad times. Moreover, as the Wired article points out, troubled times can mint stronger companies. The key to coming out of this storm is keeping your eyes on the prize.

To quote one of the greatest philosophers I knew: perseverance furthers.

The post Surviving the Startup Crash appeared first on Zenaciti.

The posts typically sound like this:

“Hey vendors, here is a sure-fire way to wind up in my ‘never do business’ list,’ send me an unsolicited email asking for a meeting. BAM! I am never working with you!!!” You need to understand what it’s like to be a CISO. You’re not in my chair!

or maybe this one…

“I got email from a salesperson who did not take the time to do their homework. My time is too precious and important to be wasting with all these salespeople!” 

Yeah, how dare anybody want to talk to you.

This article in Forbes from a while back makes the same complaints, although in a less passive aggressive manner. It is not a bad article, but it still perpetuates the notion that salespeople need to be put in their place.

Why all the rage and disgust directed at people who are merely doing their jobs?

Insecure Leadership

I believe this is a variation on Imposter Syndrome. These “leaders” feel insecure about being leaders. They believe the only way to demonstrate their authority and importance is to lash out at people they deem beneath them. They conflate cruelty and aggression with being in charge.

There are so many things wrong with this behavior it is difficult to itemize them all. However, the most ironic aspect of this is that it contradicts itself. Leaders who post these rants claim they do not have time to waste on irritating salespeople. Yet, they are wasting time on irritating salespeople posting these rants. All this ranting about salespeople hide the truth: they suck at leading. They do not properly prioritize their time or treat people with respect. Two critical skills for any leader.

Unfortunately, this ranting works to some extent. While it does nothing to stop the salespeople, it does attract other weak leaders who share a similar need to berate people. Consequently, the weak leaders get what they really want: validation.

In the end, nothing good comes of this. Nobody gets anything, nothing is better, and nothing of value was created. A petty person feels better about themselves, we all feel worse.

Ugh.

No Sales, No Job

For better or worse, sales is a fundamental component of business. Without sales, there is no money. No money, no job. Indirectly, you and everybody at your organization, owes your job to one (or more) salespeople who bring in business to pay your salary. Salespeople have an important and difficult job. Ranting about them solves nothing, does nothing, and you are not going to stop them, ever.

Furthermore, innovative ideas can arise from anywhere, even annoying salespeople. Perhaps the product they are selling is excellent, they simply lack effective communication skills. A good leader can see through this and focus on the message, not the messenger.

Admittedly, harassing marketing is irritating (See Harassment Marketing). There are simple (and respectful) ways to respond. You can say “no thank you” or delete the message. This takes seconds to accomplish, costs nothing, and hurts nobody. Anybody who has done sales for more than an hour knows that rejection is part of the game.

Being a leader means respecting all people, even the irritating ones. You do not need to give annoying salespeople your time. However, posting self-indulgent rants about salespeople solves nothing. All it does is telegraph to the world that you do not know what you are doing.

Now, will sales ever be sane again? I wonder to myself.

For culture reference, the title of this blog comes from Panic from the Smiths. This blog was originally published February 2, 2018 and has been revised a few times since then. 

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