This is the fourth in a series of posts about managed services sales compensation models
I call this one “The Ideal” managed services sales model because I really do think it does the best job of getting all of the right incentives in place and it allows you to grow your sales team pretty quickly.
Here are the critical components to create this model:
1. Base, then draw
As I mentioned in the previous compensation plan models, I think it’s very important to give your salespeople a base to work from while they get up to speed. In The Ideal plan, they get a true base salary, but only for the first three months.
After three months, it becomes a recoverable draw. We still give them the option of taking up to the same amount each month to help them with cash flow, but this is recovered by the company as a deduction from commissions they earn when they make a sale.
This model protects you to some degree against paying base salaries to unproductive salespeople because they will start to pile up a big I.O.U. to the company that will be very tough to dig out from underneath if they don’t start selling deals quickly. You and they will realize pretty quickly that it’s time for them to go.
2. Big up-front commission payments
Under this model, when a deal is signed we pay all of the commission up front. We still pay 12.5% of the annual value of the recurring fees, but they get it right away – as soon as the company pays us.
The beauty of this is that it’s exciting! Your sales reps get a big check – which fires them up – and you get to make a big deal about it to the other sales reps, spreading the energy to the whole team. This is much more fun than the smaller recurring payments.
What happens if they sign a dud client that leaves after six months? The portion of the commission they received that they didn’t actually earn (because the deal didn’t last the full year) is recoverable by the company – taking it out of future commissions earned.
It really is ideal, but there are always downsides
This model allows you to recruit new salespeople faster because it is much more pay-for-performance than the original compensation model we suggested. It also really encourages your sales reps to hunt constantly – because of the energy created by big up-front commissions, and because they don’t build up any recurring income over time. With this model they have to get a deal each month to get a good income for that month.
The downsides are critical to understand:
1. You’ve got to be prepared to cash flow it. Those up-front payments can be large if someone signs a good deal. The key is that you should only pay the salesperson when the client pays you, so it should be a cash flow neutral event. This really encourages the salespeople to find good clients that pay on time!
2. You have to be aware of the dynamic created when a salesperson goes for a few months without signing a deal and be prepared to deal with it quickly. Think about it: if your rep is taking $4000/month in base and doesn’t sign a deal for three months, they are in a pretty big hole. This can really sap their motivation and lead to a death spiral.
As soon as you see this start to happen, you need to make a quick decision. Either cut the rep under the premise that the model worked – this was a non-performing sales rep and they need to go – or give the sales rep a “break” on what is owed by converting all or some of their draw to a true base for the period of time that has passed.
I would suggest that you only want to give them a break if you truly feel that some unusual circumstances led them to not sign any business (such as the economy tanking like it is now, or a personal matter, etc.) and that their performance should improve in the very near future. Otherwise, you are just wasting your money when you really should be bringing fresh sales blood into your organization.
MRC
